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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2019
OR
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 0-18415
Isabella Bank Corporation
(Exact name of registrant as specified in its charter)
Michigan
(State or other jurisdiction of
incorporation or organization)
38-2830092
(I.R.S. Employer
identification No.)
401 North Main Street, Mount Pleasant, Michigan 48858
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code (989) 772-9471
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
None
Trading Symbol(s)
N/A
Name of each exchange on which registered
N/A
Securities registered pursuant to Section 12(g) of the Act:
Common Stock - No Par Value
(Title of Class)
Indicated by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ¨ Yes x No
Indicated by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ¨ Yes x No
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. x Yes ¨ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). x Yes ¨ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth
company. See definition of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
¨
¨
Accelerated filer
Smaller reporting company
Emerging growth company
x
x
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial
accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes x No
The aggregate market value of the voting stock held by non-affiliates of the registrant was $170,605,000 as of the last business day of the registrant’s most recently completed
second fiscal quarter.
The number of common shares outstanding of the registrant’s Common Stock (no par value) was 7,920,186 as of March 12, 2020.
(Such documents are incorporated herein only to the extent specifically set forth in response to an item herein.)
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Isabella Bank Corporation Proxy Statement for its Annual Meeting of Shareholders to be held May 5, 2020 are incorporated by reference in this Form 10-K in
response to Part III. The Isabella Bank Corporation Proxy Statement will be mailed on or before March 27, 2020.
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PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
ISABELLA BANK CORPORATION
ANNUAL REPORT ON FORM 10-K
Table of Contents
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.
Quantitative and Qualitative Disclosures about Market Risk
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Item 15.
Item 16.
SIGNATURES
Financial Statements and Supplementary Data
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
Exhibits, Financial Statement Schedules
Form 10-K Summary
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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 Rule 175 promulgated
thereunder, and Section 21E of the Securities Exchange Act of 1934, as amended and Rule 3b-6 promulgated thereunder. 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, federal or state tax laws, monetary
and fiscal policy, the quality or composition of the loan or investment portfolio, demand for loan products, fluctuation in the value of collateral securing our loan
portfolio, deposit flows, competition, cybersecurity risk, 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 consolidated 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 Annual Report on Form 10-K or in our other SEC filings. You may find it helpful to
refer back to this page while reading this report.
ACL: Allowance for credit losses
AFS: Available-for-sale
ALLL: Allowance for loan and lease losses
AOCI: Accumulated other comprehensive income
ASC: FASB Accounting Standards Codification
ASU: FASB Accounting Standards Update
ATM: Automated teller machine
BHC Act: Bank Holding Company Act of 1956
CECL: Current expected credit losses
CFPB: Consumer Financial Protection Bureau
CIK: Central Index Key
CRA: Community Reinvestment Act
DIF: Deposit Insurance Fund
GAAP: U.S. generally accepted accounting principles
IFRS: International Financial Reporting Standards
IRR: Interest rate risk
ISDA: International Swaps and Derivatives Association
JOBS Act: Jumpstart our Business Startups Act
LIBOR: London Interbank Offered Rate
N/A: Not applicable
N/M: Not meaningful
NASDAQ: NASDAQ Stock Market Index
NASDAQ Banks: NASDAQ Bank Stock Index
NAV: Net asset value
NSF: Non-sufficient funds
OCI: Other comprehensive income (loss)
DIFS: Department of Insurance and Financial Services
OMSR: Originated mortgage servicing rights
Directors Plan: Isabella Bank Corporation and Related Companies Deferred
Compensation Plan for Directors
Dividend Reinvestment Plan: Isabella Bank Corporation Stockholder Dividend
Reinvestment Plan and Employee Stock Purchase Plan
Dodd-Frank Act: Dodd-Frank Wall Street Reform and Consumer Protection
Act of 2010
OREO: Other real estate owned
OTTI: Other-than-temporary impairment
PBO: Projected benefit obligation
Exchange Act: Securities Exchange Act of 1934
FASB: Financial Accounting Standards Board
FDI Act: Federal Deposit Insurance Act
FDIC: Federal Deposit Insurance Corporation
PCAOB: Public Company Accounting Oversight Board
Rabbi Trust: A trust established to fund our Directors Plan
SEC: U.S. Securities and Exchange Commission
SOX: Sarbanes-Oxley Act of 2002
FFIEC: Federal Financial Institutions Examinations Council
Tax Act: Tax Cuts and Jobs Act, enacted December 22, 2017
FRB: Federal Reserve Bank
FHLB: Federal Home Loan Bank
TDR: Troubled debt restructuring
XBRL: eXtensible Business Reporting Language
Freddie Mac: Federal Home Loan Mortgage Corporation
Yield Curve: U.S. Treasury Yield Curve
FTE: Fully taxable equivalent
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Item 1. Business. (Dollars in thousands)
General
PART I
Isabella Bank Corporation is a registered financial services holding company that was incorporated in September 1988 under Michigan law. The Corporation's
wholly owned subsidiary, Isabella Bank, has 30 banking offices located throughout Clare, Gratiot, Isabella, Mecosta, Midland, Montcalm, and Saginaw counties.
The area includes significant agricultural production, manufacturing, retail, gaming and tourism, and several colleges and universities.
As used in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations as well as in Item 8. Financial Statements and
Supplementary Data, references to “the Corporation”, “Isabella”, “we”, “our”, “us”, and similar terms refer to the consolidated entity consisting of Isabella Bank
Corporation and its subsidiary. References to Isabella Bank or the “Bank” refers to Isabella Bank Corporation’s subsidiary, Isabella Bank.
We are a community bank with a focus on providing high quality, personalized service at a fair price. We offer a broad array of banking and wealth management
services to businesses, institutions, individuals and their families. We compete with other commercial banks, savings and loan associations, mortgage brokers,
finance companies, credit unions, retail brokerage firms, and other companies providing financial services.
Lending activities include loans for commercial and agricultural operations and real estate purposes, residential real estate loans, and consumer loans. We limit
lending activities primarily to local markets and have not purchased any loans from the secondary market. We do not make loans to fund leveraged buyouts, have
no foreign corporate or government loans, and have limited holdings of corporate debt securities. Our general lending philosophy is to limit concentrations to
individuals and business segments. For additional information related to our lending strategies and policies, see “Note 4 – Loans and ALLL” of “Notes to
Consolidated Financial Statements” in Item 8. Financial Statements and Supplementary Data.
Deposit services offered include checking accounts, savings accounts, certificates of deposit, direct deposits, cash management services, mobile and internet
banking, electronic bill pay services, and automated teller machines. We also offer full service investment management, trust and estate services.
As of December 31, 2019, we had 358 full-time equivalent employees. We provide group life, health, accident, disability, and other insurance programs as well as
a number of other employee benefit programs. None of our workforce is subject to collective bargaining agreements.
Available Information
Our SEC filings (including our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Definitive Proxy Statements, Current Reports on Form 8-K and
amendments to those reports) are available through our website (www.isabellabank.com). We will provide paper copies of our SEC reports free of charge upon
request by a shareholder.
The SEC maintains a website (www.sec.gov) that contains reports, proxy and information statements and other information regarding Isabella Bank Corporation
(CIK #0000842517) and other issuers.
Supervision and Regulation
The earnings and growth of the banking industry are affected by the credit policies of monetary authorities, including the FRB. An important function of the FRB is
to regulate the national supply of bank credit in order to combat recessions and respond to inflationary pressures. Among the instruments of monetary policy used
by the FRB to implement these objectives are open market operations in U.S. Treasury and U.S. Government Agency securities, changes in the discount rate on
member bank borrowings, and changes in reserve requirements against member bank deposits. These methods are used in varying combinations to influence
overall growth of bank loans, investments and deposits and also affect interest rates charged on loans or paid for deposits. The monetary policies of the FRB have
had a significant effect on the operating results of commercial banks and related financial service providers in the past and are expected to continue to do so in the
future. The effect of such policies upon our future business and earnings cannot be predicted.
We, as a financial holding company, are regulated under the BHC Act, and are subject to the supervision of the FRB. We are registered as a financial services
holding company with the FRB and are subject to reporting requirements and inspections and audits. Under FRB policy, we are expected to act as a source of
financial strength to the Bank and to commit resources to support its subsidiaries. This support may be required at times when, in the absence of such FRB policy,
it would not otherwise be required to provide support.
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Under Michigan law, if the capital of a Michigan state chartered bank has become impaired by losses or otherwise, the Commissioner of the DIFS may require that
the deficiency in capital be met by assessment upon the bank’s shareholders. Each shareholder would be responsible for a pro rata share of the deficiency, based on
the amount of capital stock held by each shareholder. If an assessment is not paid by any shareholder within 30 days of the date of notice to the shareholder, sale of
their stock will occur in order to pay such assessment.
Any capital loans by a bank holding company to any of its subsidiary banks are subordinate in right of payment to deposits and to certain other indebtedness of
such subsidiary bank. In the event of a bank holding company’s bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to
maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to a priority of payment. This priority would apply to guarantees of
capital plans under the FDIC Improvement Act of 1991.
SOX contains important requirements for public companies in the area of financial disclosure and corporate governance. In accordance with Section 302(a) of
SOX, written certifications by our principal executive, financial, and accounting officers are required. These certifications attest that our quarterly and annual
reports filed with the SEC do not contain any untrue statement of a material fact (see the certifications filed as Exhibits 31 (a) and (b) to this Form 10-K for such
certification of consolidated financial statements and other information for this 2019 Form 10-K). We have also implemented a program designed to comply with
Section 404 of SOX, which included the identification of significant processes and accounts, documentation of the design effectiveness over process and entity
level controls, and testing of the operating effectiveness of key controls. See Item 9A. Controls and Procedures for our evaluation of disclosure controls and
procedures and internal control over financial reporting.
Certain additional information concerning regulatory guidelines for capital adequacy and other regulatory matters is presented herein under the caption “Capital” in
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations and in “Note 10 – Off-Balance-Sheet Activities, Commitments
and Other Matters” and “Note 11 – Minimum Regulatory Capital Requirements” of “Notes to Consolidated Financial Statements” in Item 8. Financial Statements
and Supplementary Data.
Isabella Bank
The Bank is supervised and regulated by DIFS and the FRB. These agencies and federal and state laws extensively regulate various aspects of the banking business
including, among other things, permissible types and amounts of loans, investments and other activities, capital adequacy, branching, interest rates on loans and
deposits, and the safety and soundness of banking practices.
Our deposits are insured up to applicable limits by the DIF of the FDIC and are subject to deposit insurance assessments to maintain the DIF. The FDIC assesses
insurance premiums based upon a financial ratios method that takes into account asset and capital levels and supervisory ratings.
Banking laws and regulations restrict transactions by insured banks owned by a bank holding company. These restrictions include loans to and certain purchases
from the parent holding company, non-bank and bank subsidiaries of the parent holding company. Additional restrictions apply to principal shareholders, officers,
directors and their affiliates, and investments by the subsidiary bank in the shares or securities of the parent holding company (or any of the other non-bank or bank
affiliates), or acceptance of such shares or securities as collateral security for loans to any borrower.
The Bank is subject to legal limitations on the frequency and amount of dividends that can be paid to Isabella Bank Corporation. For example, a Michigan state
chartered bank may not declare a cash dividend or a dividend in kind except out of net profits then on hand after deducting all losses and bad debts, and then only if
it will have a surplus amounting to not less than 20% of its capital after the payment of the dividend. Moreover, a Michigan state chartered bank may not declare or
pay any cash dividend or dividend in kind until the cumulative dividends on its preferred stock, if any, have been paid in full. Further, if the surplus of a Michigan
state chartered bank is at any time less than the amount of its capital, before the declaration of a cash dividend or dividend in kind, it must transfer to surplus not
less than 10% of its net profits for the preceding six months (in the case of quarterly or semi-annual dividends) or the preceding two consecutive six month periods
(in the case of annual dividends).
The payment of dividends by Isabella Bank Corporation and the Bank is also affected by various regulatory requirements and policies, such as the requirement to
keep adequate capital in compliance with regulatory guidelines. Federal laws impose further restrictions on the payment of dividends by insured banks that fail to
meet specified capital levels. The FDIC may prevent an insured bank from paying dividends if the bank is in default of payment of any assessment due to the
FDIC. In addition, payment of dividends by a bank may be prevented by the applicable federal regulatory authority if such payment is determined, by reason of the
financial condition of such bank, to be an unsafe and unsound banking practice. The FRB and the
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FDIC have issued policy statements providing that bank holding companies and insured banks should generally pay dividends only out of current operating
earnings. Additionally, the FRB Board of Governors requires a bank holding company to notify the FRB prior to increasing its cash dividend by more than 10%
over the prior year.
The aforementioned regulations and restrictions may limit our ability to obtain funds from the Bank for our cash needs, including payment of dividends and
operating expenses.
The activities and operations of the Bank are also subject to various federal and state laws and regulations.
Item 1A. Risk Factors.
In the normal course of business, we are exposed to various risks. These risks, if not managed correctly, could have a significant impact on our earnings, capital,
share price, and ability to pay dividends. In order to effectively monitor and control the following risks, we utilize an enterprise risk model. We balance our
strategic goals, including revenue and profitability objectives, with associated risks through the use of policies, systems, and procedures which have been adopted
to identify, assess, control, monitor, and manage each risk area. We continually review the adequacy and effectiveness of these policies, systems, and procedures.
Our enterprise risk process covers each of the following areas.
Changes in credit quality and required allowance for loan and lease losses
To manage the credit risk arising from lending activities, our most significant source of credit risk, we maintain sound underwriting policies and procedures. We
continuously monitor asset quality in order to manage our credit risk to determine the appropriateness of valuation allowances. These valuation allowances take
into consideration various factors including, but not limited to, local, regional, and national economic conditions.
We maintain an ALLL to reserve for estimated incurred loan losses within our loan portfolio. The level of the ALLL reflects our evaluation of industry
concentrations; specific credit risks; loan loss experience; loan portfolio quality; and economic, political and regulatory conditions. The determination of the
appropriate level of the ALLL inherently involves a high degree of subjectivity and requires us to make significant estimates, all of which may undergo material
changes.
Changes in economic conditions
An economic downturn within our local markets, as well as downturns in the state, national, or global markets, could negatively impact household and corporate
incomes. This could lead to decreased demand for both loan and deposit products and lead to an increase of customers who fail to pay interest or principal on their
loans. We continually monitor key economic indicators in an effort to anticipate the possible effects of downturns in the local, regional, and national economies.
Our success depends primarily on the general economic conditions of the State of Michigan and the specific local markets in which we operate. Unlike banks that
are more geographically diversified, we provide banking and financial services to customers located primarily in the Clare, Gratiot, Isabella, Mecosta, Midland,
Montcalm, and Saginaw counties in Michigan. The local economic conditions in these areas have a significant impact on the demand for our products and services,
as well as the ability of our customers to repay loans, the value of the collateral securing loans, and the stability of our deposit funding sources. A significant
decline in general economic conditions, caused by inflation, recession, acts of terrorism, outbreak of hostilities or other international or domestic occurrences, a
health crisis, unemployment, changes in securities markets or other factors could impact these local economic conditions and, in turn, could have a material adverse
effect on our financial condition and results of operations.
Interest rate risk
IRR results from the timing differences in the maturity or repricing frequency of a financial institution’s interest earning assets and its interest bearing liabilities.
We monitor the potential effects of changes in interest rates through simulations and gap analyses. To help mitigate the effects of changes in interest rates, we make
significant efforts to stagger projected cash flows and maturities of interest sensitive assets and liabilities.
Liquidity risk
Liquidity risk is the risk to earnings or capital arising from our inability to meet our obligations when they come due without incurring unacceptable costs.
Liquidity risk includes the inability to manage unplanned changes in funding sources, or failure to address changes in market conditions that affect the ability to
liquidate assets quickly and with minimal loss in value. We
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have significant borrowing capacity through correspondent banks and the ability to sell certain investments to fund potential cash shortages, which we may use to
help mitigate this risk.
The value of investment securities may be negatively impacted by fluctuations in the market
A volatile, illiquid market or decline in credit quality could require us to recognize an OTTI loss related to the investment securities held in our portfolio. We
consider many factors in determining whether an OTTI exists including the length of time and extent to which fair value has been less than cost, the investment
credit rating, and the probability that the issuer will be unable to pay the amount when due. The presence of these factors could lead to impairment charges. These
risks are mitigated by the fact that we do not intend to sell the security in an unrealized loss position and it is more likely than not that we will not have to sell the
security before recovery of its cost basis.
Operational risk
Operational risk is the risk of loss resulting from inadequate or failed internal processes, people, and systems, or external events and includes reputation risk and
transaction risk. Reputation risk is managed by developing and retaining marketplace confidence in handling customers’ financial transactions in an appropriate
manner and protecting our safety and soundness. Transaction risk includes losses from fraud, error, the inability to deliver products or services, and loss or theft of
information. Transaction risk also encompasses product development and delivery, transaction processing, information technology systems, and the internal control
environment.
To minimize potential losses due to operational risks, we have established a robust system of internal controls that is regularly tested by our internal audit
department in conjunction with the services of certified public accounting firms who assist in performing such internal audit work. The focus of these internal audit
procedures is to verify the validity and appropriateness of various transactions, processes, and controls. The results of these procedures are reported to our Audit
Committee.
The adoption of, violations of, or nonconformance with laws, rules, regulations, or prescribed practices
The financial services industry and public companies are extensively regulated and must meet regulatory standards set by the FDIC, DIFS, FRB, FASB, SEC,
PCAOB, CFPB, and other regulatory bodies. Federal and state laws and regulations are designed primarily to protect deposit insurance funds and consumers, and
not necessarily to benefit our shareholders. The nature, extent, and timing of the adoption of significant new laws, changes in existing laws, or repeal of existing
laws may have a material impact on our business, results of operations, and financial condition, the effect of which is impossible to predict at this time.
Our compliance department annually assesses the adequacy and effectiveness of our processes for controlling and managing our principal compliance risks.
Changes to the financial services industry as a result of regulatory changes or actions, or significant litigation
The financial services industry is extensively regulated by state and federal regulation that governs almost all aspects of our operations. Laws and regulations may
change from time to time and are primarily intended for the protection of consumers, depositors, and the deposit insurance fund. The impact of any changes to laws
and regulations or other actions by regulatory agencies may negatively impact us or our ability to increase the value of our business. Regulatory authorities have
extensive discretion in connection with their supervisory and enforcement activities, including the imposition of restrictions on the operation of an institution, the
classification of assets by the institution, and the appropriateness of an institution’s ALLL. Future regulatory changes or accounting pronouncements may increase
our regulatory capital requirements or adversely affect our regulatory capital levels. Additionally, actions by regulatory agencies or significant litigation against us
could require the dedication of significant time and resources to defend our business and may lead to penalties.
We may not adjust to changes in the financial services industry
Our financial performance depends in part on our ability to maintain and grow our core deposit customer base and expand our financial services to our existing and
new customers. The increasingly competitive environment is, in part, a result of changes in technology and product delivery systems and the accelerating pace of
consolidation among financial service providers. New competitors may emerge to increase the degree of competition for our products and services. Financial
services and products are also constantly changing. Our financial performance is dependent upon customer demand for our products and services, our ability to
develop and offer competitive financial products and services, and our ability to adapt to enhancements in financial technology.
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We may be required to recognize an impairment of goodwill
Goodwill represents the excess of the amounts paid to acquire subsidiaries over the fair value of their net assets at the date of acquisition. The majority of the
recorded goodwill is related to acquisitions of other banks, which were subsequently merged into Isabella Bank. If it is determined that the goodwill is impaired,
we must write-down the goodwill by the amount of the impairment.
We may face pressure from purchasers of our residential mortgage loans to repurchase loans sold or reimburse purchasers for losses related to such loans
We generally sell the fixed rate long-term residential mortgage loans we originate to the secondary market. The purchasers of residential mortgage loans, such as
government sponsored entities, increased their efforts to require sellers of residential mortgage loans to either repurchase loans previously sold, or reimburse the
purchasers for losses incurred on foreclosed loans due to actual or alleged failure to strictly conform to the terms of the contract.
Consumers may decide not to use banks to complete their financial transactions
Technology and other changes are allowing customers to complete financial transactions without the involvement of banks. For example, consumers can now pay
bills and transfer funds directly without banks. The process of eliminating banks as intermediaries in financial transactions could result in the loss of fee income, as
well as the loss of customer deposits and income generated from those deposits.
Unauthorized disclosure of sensitive or confidential client or customer information, whether through cyber attacks, breach of computer systems or other
means
Our products, services and systems are accessed through critical company or third-party operations. This involves the storage, processing and transmission of
sensitive data, including proprietary or confidential data, regulated data, and personal information of employees and customers. Successful breaches, employee
wrongdoing, or human or technological error could result in unauthorized access to, disclosure, modification, misuse, loss, or destruction of company, customer, or
other third party data or systems. Examples include theft of sensitive, regulated, or confidential data including personal information; loss of access to critical data
or systems through ransomware, destructive attacks or other means; and business delays, service or system disruptions or denials of service.
Cybersecurity incidents have increased in number and severity and it is expected that these trends will continue. Should we, or third parties we do business with,
fall victim to successful cyber attacks or experience other cybersecurity incidents, including the loss of personally identifiable customer or other sensitive data, the
result could severely damage our reputation, expose us to the risks of litigation and liability, disrupt our operations and increase cybersecurity or other insurance
premiums.
We have cybersecurity insurance, in the event a cybersecurity attack were to occur, covering expenses related to notification, credit monitoring, investigation, crisis
management, public relations, and legal advice. In addition, we maintain insurance to cover restoration of data, certain physical damage or third-party injuries
caused by potential cybersecurity incidents. However, damage and claims arising from such incidents may not be covered or may exceed the amount of any
insurance available. Insurance policies are reviewed annually in detail.
A strong reputation is vital and requires utmost protection. An operating incident, significant cybersecurity disruption, or other adverse event may have a negative
impact on our reputation which could make it more difficult for us to compete successfully for new opportunities, obtain necessary regulatory approvals, or
severely reduce consumer demand for our products.
Our estimates and assumptions may be incorrect
Our consolidated financial statements conform with GAAP, which require us to make estimates and assumptions that affect the amounts reported in the
consolidated financial statements. Estimates are based on information available to us at the time the estimates are made. Actual results could differ from estimates.
For further discussion regarding significant accounting estimates, see “Note 1 – Nature of Operations and Summary of Significant Accounting Policies” of “Notes
to Consolidated Financial Statements” in Item 8. Financial Statements and Supplementary Data.
Disruption of infrastructure
Our operations depend upon our technological and physical infrastructure, including our equipment and facilities. Extended disruption of our vital infrastructure by
fire, power loss, natural disaster, telecommunications failure, computer hacking and viruses, or other events outside of our control, could have a significant impact
on our operations. We have developed and tested disaster recovery plans for all significant aspects of our operations.
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Anti-takeover provisions
Our articles of incorporation include anti-takeover provisions that require a two-thirds majority vote to approve a sale of the Corporation. Additionally, changes to
our articles of incorporation must be approved by a two-thirds majority vote of our shareholders. These provisions may make our stock less attractive to potential
shareholders.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
Our executive offices are located at 401 North Main Street in Mount Pleasant, Michigan. In addition to this location, we own 29 branches, two operations centers,
our previous main office building and vacant land. We also lease property in Saginaw, Michigan which serves as a full-service branch. Our facilities' current,
planned, and best use is for conducting our current activities, with the exception of our previous main office location which is vacant. We continually monitor and
assess the need for expansion and/or improvement of all facilities. In our opinion, each facility has sufficient capacity and is in good condition.
Item 3. 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 our consolidated operations, earnings, financial condition, or cash flows.
Item 4. Mine Safety Disclosures.
Not applicable.
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Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
PART II
Common Stock and Dividend Information
Our authorized common stock consists of 15,000,000 shares, of which 7,910,804 shares are issued and outstanding as of December 31, 2019. As of that date, there
were 3,035 shareholders of record.
Our common stock is traded in the over-the-counter market. Our common stock is quoted on the OTCQX market tier of the OTC Markets Group Inc.’s ("OTC
Markets") electronic quotation system (www.otcmarkets.com) under the symbol “ISBA”. Other trades in our common stock occur in privately negotiated
transactions from time to time of which we may have little or no information.
We have reviewed the information available as to the range of reported high and low bid quotations, including high and low bid information as reported by OTC
Markets. The following table sets forth our compilation of that information for the periods indicated. Price information obtained from OTC Markets reflects inter-
dealer prices, without retail mark up, mark down, or commissions and may not necessarily represent actual transactions. The following compiled data is provided
for information purposes only and should not be viewed as indicative of the actual or market value of our common stock.
2019
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2018
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
The following table sets forth the cash dividends paid for the quarters indicated:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Total
Number of
Common Shares
Sale Price
Low
High
83,313 $
22.25 $
192,402
138,808
224,864
639,387
22.25
22.01
22.25
65,782 $
26.11 $
78,922
86,032
73,364
304,100
26.25
26.05
22.50
Per Share
2019
2018
$
$
0.26 $
0.26
0.26
0.27
1.05 $
24.50
23.75
23.45
24.80
28.25
27.25
27.65
27.00
0.26
0.26
0.26
0.26
1.04
We have adopted and publicly announced a common stock repurchase plan. The plan was last amended on December 23, 2019, to allow for the repurchase of an
additional 250,000 shares of common stock after that date. These authorizations do not have expiration dates. As shares are repurchased under this plan, they are
retired with the status of authorized, but unissued, shares.
10
Table of Contents
The following table provides information for the unaudited three month period ended December 31, 2019, with respect to our common stock repurchase plan:
Balance, September 30
October 1 - 31
November 1 - 30
December 1 - 23
Additional Authorization (250,000 shares)
December 24 - 31
Balance, December 31
Common Shares Repurchased
Number
Average Price
Per Common Share
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
5,445 $
27,796
24,011
—
20,240
77,492 $
22.59
23.89
24.32
—
24.31
24.04
5,445
27,796
24,011
—
20,240
77,492
75,398
69,953
42,157
18,146
268,146
247,906
247,906
Information concerning securities authorized for issuance under equity compensation plans appears under Item 12. Security Ownership of Certain Beneficial
Owners and Management and Related Stockholder Matters.
11
Table of Contents
Item 6. Selected Financial Data.
Results of Operations (Dollars in thousands except per share amounts)
The following table outlines the results of operations and provides certain key performance measures as of, and for the years ended, December 31:
2019
2018
2017
INCOME STATEMENT DATA
Interest income
Interest expense
Net interest income
Provision for loan losses
Noninterest income
Noninterest expenses
Federal income tax expense (1)
Net income
PER SHARE
Basic earnings
Diluted earnings
Dividends
Tangible book value
Quoted market value
High
Low
Close (2)
Common shares outstanding (2)
PERFORMANCE RATIOS
Return on average total assets
Return on average shareholders' equity
Return on average tangible shareholders' equity
Net interest margin yield (FTE) (1)
BALANCE SHEET DATA (2)
Gross loans
AFS securities
Total assets
Deposits
Borrowed funds
Shareholders' equity
Gross loans to deposits
ASSETS UNDER MANAGEMENT (2)
Loans sold with servicing retained
Assets managed by our Investment and Trust Services Department
Total assets under management
ASSET QUALITY (2)
Nonperforming loans to gross loans
Nonperforming assets to total assets
ALLL to gross loans
CAPITAL RATIOS (2)
Shareholders' equity to assets
Tier 1 leverage
Common equity tier 1 capital
Tier 1 risk-based capital
Total risk-based capital
(1) Calculations are based on a federal income tax rate of 21% in 2019 and 2018 and 34% for 2017.
(2) At end of year
12
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
67,306
$
63,864
$
17,861
49,445
30
8,039
43,050
1,380
15,631
48,233
978
10,981
42,852
1,363
13,024
$
14,021
$
1.65
1.61
1.05
20.45
24.80
22.01
24.31
$
$
$
$
$
$
$
1.78
1.74
1.04
18.68
28.25
22.50
22.56
$
$
$
$
$
$
$
58,413
12,494
45,919
253
10,840
40,253
3,016
13,237
1.69
1.65
1.02
18.63
29.95
27.60
28.25
7,910,804
7,870,969
7,857,293
0.72%
6.25%
8.17%
3.07%
1,186,570
429,839
1,814,198
1,313,851
275,999
210,182
$
$
$
$
$
$
0.77%
7.26%
9.74%
2.98%
0.75%
6.75%
9.04%
3.04%
1,128,707
494,834
1,842,502
1,292,693
340,299
195,519
$
$
$
$
$
$
1,091,519
548,730
1,813,130
1,265,258
344,878
194,905
90.31%
87.31%
86.27%
259,375
436,181
2,509,754
$
$
$
259,481
447,487
2,549,470
$
$
$
266,789
478,146
2,558,065
0.55%
0.39%
0.67%
11.59%
9.01%
12.56%
12.56%
13.18%
0.65%
0.42%
0.74%
10.64%
8.72%
12.58%
12.58%
13.26%
0.31%
0.20%
0.71%
10.75%
8.54%
12.23%
12.23%
12.86%
Table of Contents
The following table outlines our interim results of operations and key performance measures as of, and for the unaudited periods ended:
Total interest income
Total interest expense
Net interest income
Provision for loan losses
Noninterest income
Noninterest expenses
Federal income tax expense
(benefit)
Net income
PER SHARE
Basic earnings
Diluted earnings
Dividends
Quoted market value (1)
Tangible book value
(1) At end of period
December 31
2019
September 30
2019
June 30
2019
March 31
2019
December 31
2018
September 30
2018
June 30
2018
March 31
2018
$
16,849 $
17,161 $
16,815 $
16,481 $
16,611 $
16,419 $
15,713 $
15,121
Quarter to Date
4,492
12,357
(18)
(725)
4,550
4,527
4,292
4,258
4,231
3,741
12,611
12,288
12,189
12,353
12,188
11,972
193
3,274
(179)
3,011
34
2,479
10,789
342
2,865
10,870
(76)
2,878
11,087
328
2,740
10,788
10,107
10,892
10,620
10,749
3,401
11,720
384
2,498
(140)
630
541
349
476
359
263
898 $
4,442 $
4,188 $
3,496 $
3,530 $
3,696 $
3,333 $
0.12 $
0.56 $
0.53 $
0.44 $
0.45 $
0.47 $
0.42 $
$
$
0.11
0.27
24.31
20.45
0.55
0.26
22.30
20.65
0.52
0.26
23.25
20.17
13
0.43
0.26
23.75
19.47
0.44
0.26
22.56
18.68
0.46
0.26
26.75
19.44
0.41
0.26
26.65
19.36
265
3,462
0.44
0.43
0.26
27.40
19.16
Table of Contents
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
ISABELLA BANK CORPORATION FINANCIAL REVIEW
(Dollars in thousands except per share amounts)
The following is management’s discussion and analysis of our financial condition and results of operations. This discussion and analysis is intended to provide a
better understanding of the consolidated financial statements and statistical data included elsewhere in this Annual Report on Form 10-K.
Executive Summary
We reported net income of $13,024 and earnings per common share of $1.65 for the year ended December 31, 2019. Net income and earnings per common share
for the year ended December 31, 2018 were $14,021 and $1.78, respectively. Interest income for the year ended December 31, 2019 increased $3,442 when
compared to 2018 primarily as the result of a combination of improved yields and growth in our loan portfolio, which totaled $57,863 during 2019. Interest
expense on deposits and borrowings increased $2,230 for the year ended December 31, 2019 when compared to the same period in 2018 primarily due to higher
interest rates. Net interest income increased by $1,212 for the year ended December 31, 2019 in comparison to 2018. The provision for loan losses decreased by
$948, primarily as the result of improvement in credit quality. Noninterest income for the year ended December 31, 2019 decreased $2,942 when compared to 2018
primarily as a result of a $3,566 reduction in our joint venture investment in Corporate Settlement Solutions, LLC (“CSS”) due to CSS' recorded impairment of
intangible assets (see discussion below). Noninterest income in 2019 also included an increase in debit card transaction fee income, gains related to the sale of
loans, and gains related to foreclosed assets. Noninterest expenses for the year ended December 31, 2019 exceeded noninterest expenses in 2018 by $198. Expenses
related to our employee incentive plans account for a portion of the increase in noninterest expenses, which was partially offset by an FDIC assessment credit,
reduced audit and consulting fees, and ongoing cost control initiatives. These initiatives include managing capital expenditures, vendor costs, and staffing levels.
In 2008, we merged the assets of our wholly owned subsidiary, IBT Title and Insurance Agency, Inc. (“IBT Title”) into a 50/50 joint venture with Corporate Title
Agency, LLC, a third-party business based in Traverse City, Michigan, to form CSS. The purpose of the joint venture was to help IBT Title expand its service area
and to take advantage of economies of scale. As a 50% owner of the membership units of this entity, we account for our investment under the equity method of
accounting, and our share of income and loss from the joint venture is included in noninterest income. As of December 31, 2008, we had a recorded investment of
$6,905 in CSS, which was included in equity securities without readily determinable fair values on our balance sheet. During the second half of 2019, a new line
of business was proposed by the General Manager of CSS which did not interest us as it was unrelated to the Bank's core business. Subsequently, the General
Manager of CSS elected to have a company valuation performed during the fourth quarter of 2019 for purposes of investor planning, and the independent valuation
identified that CSS’ intangible assets required an impairment of $7,133. As a 50% owner of the membership units of CSS, we recognized the reduced value of our
investment which resulted in a reduction to income of $3,566 in the fourth quarter of 2019. While we continually analyze all investments, there are no current plans
to change our ownership or investment in CSS.
As of December 31, 2019, total assets and assets under management were $1,814,198 and $2,509,754, respectively. Assets under management include loans sold
and serviced of $259,375 and assets managed by our Investment and Trust Services Department of $436,181, in addition to assets on our consolidated balance
sheet. As a result of the flat yield curve that has existed for over a year, the opportunity to identify new investment securities for purchase at an acceptable yield has
been minimal. Therefore, our securities portfolio has declined $64,995 since December 31, 2018. Based on strategic objectives, we utilized this available cash flow
to reduce higher-cost funding sources and other borrowings as they mature, resulting in a decline in total assets as of December 31, 2019 when compared to
December 31, 2018. Loans outstanding as of December 31, 2019 totaled $1,186,570. During 2019, gross loans increased $57,863 which was largely driven by
growth in our commercial loan portfolio. Total deposits increased $21,158 during the year, primarily due to increases in savings and trust related deposits, and
totaled $1,313,851 as of December 31, 2019. All regulatory capital ratios for the Bank exceeded the minimum thresholds to be considered a “well capitalized”
institution.
Our net yield on interest earning assets (FTE) was 3.07% for 2019 which is an improvement from 2.98% for 2018. Management has implemented various
initiatives which, over time, are expected to continue to improve our net yield on interest earning assets. These initiatives included transitioning a larger percentage
of assets from lower yielding investment securities to higher yielding loan opportunities, continued growth of the loan portfolio, reduced reliance on borrowings
and brokered deposits, and enhanced pricing strategies related to loan and deposit products. While the current interest rate environment may slow this pace of
improvement, we are actively committed to increasing earnings and shareholder value
14
Table of Contents
through growth in our loan portfolio while maintaining strong underwriting standards, growth in our investment and trust services, increasing our presence within
our geographical footprint, and managing operating costs.
Recent Legislation
The Dodd-Frank Act of 2010 had, and is expected to continue to have, a negative impact on our operating results. The Dodd-Frank Act established the CFPB
which made significant changes in the regulation of financial institutions aimed at strengthening the oversight of the federal government over the operation of the
financial services sector and increasing the protection of consumers. Recent regulations issued by the CFPB regarding consumer lending, including residential
mortgage lending, have increased our compensation expenses and this trend is expected to continue.
On July 2, 2013, the FRB published revised BASEL III Capital standards for banks. The rules redefined what is included or deducted from equity capital, changed
risk weighting for certain on and off-balance sheet assets, increased the minimum required equity capital to be considered well capitalized, and introduced a capital
cushion buffer. The rules, which were gradually phased in between 2015 and 2019, did not have a material impact on the Corporation but does require us to hold
more capital than we have historically.
On December 22, 2017, the Tax Act was enacted. The law established a flat corporate federal statutory income tax rate of 21%, effective January 1, 2018, and
eliminated the corporate alternative minimum tax. The new tax law provided for a wide array of changes with only some having a direct impact on our federal
income tax expense. Some of these changes included, but were not limited to, the following items: limits to the deduction for net interest expense; immediate
expense (for tax purposes) for certain qualified depreciable assets; elimination or reduction of certain deductions related to meals and entertainment expenses; and
limits to the deductibility of deposit insurance premiums.
Reclassifications
Certain amounts reported in management's discussion and analysis of financial condition and results of operations for 2018 and 2017 have been reclassified to
conform with the 2019 presentation. Other assets and other liabilities on the consolidated balance sheets were increased by $5,195 as of December 31, 2018 to
reclassify pension and income tax related liabilities (pension: $3,470, income taxes: $1,725). This resulted in a $5,195 increase in total assets and total liabilities as
of December 31, 2018. All other balances and ratios were not materially impacted.
Subsequent Events
We evaluated subsequent events for potential recognition and disclosure through the date the consolidated financial statements were issued. Events or transactions
occurring after December 31, 2019, but prior to the date the consolidated financial statements were issued, include anticipated proceeds from the redemption of a
corporate owned life insurance policy. For additional information, refer to “Note 22 – Subsequent Events” of “Notes to Consolidated Financial Statements” in
Item 8. Financial Statements and Supplementary Data.
Other
We have not received any notices of regulatory actions as of March 13, 2020.
15
Table of Contents
CRITICAL ACCOUNTING POLICIES
Our significant accounting policies are set forth in “Note 1 – Nature of Operations and Summary of Significant Accounting Policies” of “Notes to Consolidated
Financial Statements” in Item 8. Financial Statements and Supplementary Data. Of these significant accounting policies, we consider our policies regarding the
ALLL, acquisition intangibles and goodwill, the determination of the fair value and assessment of OTTI of investment securities, and equity securities without
readily determinable fair values related to our joint venture investment in CSS to be our most critical accounting policies.
The ALLL requires our most subjective and complex judgment. Changes in economic conditions and other external factors can have a significant impact on the
ALLL and, therefore, the provision for loan losses and results of operations. We have developed policies and procedures for assessing the appropriateness of the
ALLL, recognizing that this process requires a number of assumptions and estimates with respect to our loan portfolio. Our assessments may be impacted in future
periods by changes in economic conditions, and the discovery of information with respect to borrowers which is not known to us at the time of the issuance of the
consolidated financial statements. For additional discussion concerning our ALLL and related matters, see “Allowance for Loan and Lease Losses” and “Note 4 –
Loans and ALLL” of “Notes to Consolidated Financial Statements” in Item 8. Financial Statements and Supplementary Data.
U.S. generally accepted accounting principles require that we determine the fair value of the assets and liabilities of an acquired entity, and record the fair value on
the date of acquisition. We employ a variety of measures in the determination of the fair value, including the use of discounted cash flow analysis, market
appraisals, and projected future revenue streams. For certain items that we believe we have the appropriate expertise to determine the fair value, we may choose to
use our own calculations of the value. In other cases, where the value is not easily determined, we consult with independent experts to determine the fair value of
the identified asset or liability. Once valuations have been adjusted, the net difference between the price paid for the acquired entity and the net value of assets
acquired on our balance sheet, including identifiable intangibles, is recorded as goodwill. Acquisition intangibles and goodwill are qualitatively evaluated to
determine if it is more likely than not that the carrying balance is impaired on at least an annual basis.
AFS securities are carried at fair value with changes in the fair value included as a component of other comprehensive income. Declines in the fair value of AFS
securities below their cost that are other-than-temporary are reflected as realized losses in the consolidated statements of income. We evaluate AFS securities for
indications of losses that are considered other-than-temporary, if any, on a regular basis. The market values for most AFS investment securities are typically
obtained from outside sources and applied to individual securities within the portfolio. Municipal securities for which no readily determinable market values are
available are priced using fair value curves which most closely match the securities' characteristics.
Our joint venture investment in CSS was made in the 1st quarter of 2008 and is included in equity securities without readily determinable fair values on our
consolidated balance sheets. We are not the managing entity of CSS but do appoint 50% of the Board of Directors of CSS. As a 50% investor of the membership
units, we account for our investment in this entity under the equity method of accounting. The General Manager of CSS, through the normal course of business,
chose to evaluate operations of the company and obtained an independent, third-party valuation of the company during the fourth quarter of 2019. As a result of
this valuation, CSS recognized an impairment related to intangible assets as of December 31, 2019. Accordingly, we reduced our investment in CSS and as such,
our recorded investment in CSS as of December 31, 2019 relied on assumptions and use of estimates pursuant to the valuation obtained.
16
Table of Contents
Average Balances, Interest Rates, and Net Interest Income
The following schedules present the daily average amount outstanding for each major category of interest earning assets, non-earning assets, interest bearing
liabilities, and noninterest bearing liabilities for the last three years. These schedules also present an analysis of interest income and interest expense for the periods
indicated. All interest income is reported on a FTE basis using a federal income tax rate of 21% in 2019 and 2018 and 34% in 2017. 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 other interest
earning assets.
2019
Tax
Equivalent
Interest
Average
Balance
Average
Yield /
Rate
Average
Balance
2018
Tax
Equivalent
Interest
Average
Yield /
Rate
Average
Balance
2017
Tax
Equivalent
Interest
Average
Yield /
Rate
Year Ended December 31
INTEREST EARNING
ASSETS
Loans
$
1,162,210 $
54,192
4.66% $
1,120,021 $
49,229
4.40% $
1,040,630 $
43,537
4.18%
296,758
7,185
2.42%
341,095
8,294
2.43%
361,783
8,564
2.37%
Taxable investment
securities (1)
Nontaxable investment
securities
Fed funds sold
Other
169,049
6,380
64
2
38,549
1,199
Total earning assets
1,666,630
68,958
NONEARNING ASSETS
Allowance for loan losses
(8,256)
20,057
27,035
108,073
$
1,813,539
3.77%
2.48%
3.11%
4.14%
191,281
7,115
4
—
28,255
1,062
1,680,656
65,700
3.72%
—%
3.76%
3.91%
202,375
9,126
663
19,423
5
737
1,624,874
61,969
4.51%
0.75%
3.79%
3.81%
(8,094)
19,770
28,349
95,359
$
1,816,040
(7,607)
19,309
28,933
106,848
$
1,772,357
$
230,570 $
388,821
429,745
304,888
305
2,572
8,731
6,253
0.13% $
229,411 $
0.66%
2.03%
2.05%
361,743
454,916
344,352
267
1,698
7,296
6,370
0.12% $
213,648 $
0.47%
1.60%
1.85%
356,963
433,562
352,400
232
1,091
5,486
5,685
0.11%
0.31%
1.27%
1.61%
1,354,024
17,861
1.32%
1,390,422
15,631
1.12%
1,356,573
12,494
0.92%
237,675
13,337
208,503
224,777
7,597
193,244
208,988
10,641
196,155
$
1,813,539
$
1,816,040
$
1,772,357
$
51,097
$
50,069
$
49,475
3.07%
2.98%
3.04%
(1) Includes taxable AFS securities and equity securities
Net interest income is the amount by which interest income on earning assets exceeds the interest expense on interest bearing liabilities. Net interest income is
influenced by changes in the balance and mix of assets and liabilities, as well as market interest rates. We exert some control over these factors; however, FRB
monetary policy and competition have a significant
17
Cash and demand
deposits due from banks
Premises and equipment
Accrued income and other
assets
Total assets
INTEREST BEARING
LIABILITIES
Interest bearing demand
deposits
Savings deposits
Time deposits
Borrowed funds
Total interest bearing
liabilities
NONINTEREST
BEARING LIABILITIES
Demand deposits
Other
Shareholders’ equity
Total liabilities and
shareholders’ equity
Net interest income (FTE)
Net yield on
interest
earning
assets (FTE)
Table of Contents
impact. For analytical purposes, net interest income is adjusted to an FTE basis by including the income tax savings from interest on tax exempt loans and
nontaxable investment securities, thus making year to year comparisons more meaningful. The FTE adjustment is based on a federal income tax rate of 21% for
2019 and 2018 and 34% for 2017.
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 FTE rate.
Rate—change in the FTE rate multiplied by the previous period's volume.
All interest income presented in the table below is reported on a FTE basis using a federal income tax rate of 21% for 2019 and 2018 and 34% for 2017. 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.
2019 Compared to 2018
Increase (Decrease) Due to
2018 Compared to 2017
Increase (Decrease) Due to
Volume
Rate
Net
Volume
Rate
Net
Changes in interest income
Loans
$
1,898 $
3,065 $
Taxable investment securities
Nontaxable investment securities
Fed Funds Sold
Other
Total changes in interest income
Changes in interest expense
Interest bearing demand deposits
Savings deposits
Time deposits
Borrowed funds
Total changes in interest expense
Net change in interest
margin (FTE)
(1,074)
(838)
—
342
328
1
135
(422)
(771)
(1,057)
(35)
103
2
(205)
2,930
37
739
1,857
654
3,287
4,963 $
(1,109)
(735)
2
137
3,258
38
874
1,435
(117)
2,230
3,423 $
2,269 $
(499)
(479)
—
332
2,777
18
15
281
(132)
182
229
(1,532)
(5)
(7)
954
17
592
1,529
817
2,955
5,692
(270)
(2,011)
(5)
325
3,731
35
607
1,810
685
3,137
594
$
1,385 $
(357) $
1,028 $
2,595 $
(2,001) $
The flattening of the yield curve and rising deposit rates continues to place pressure on our net interest margin. Despite this pressure, we experienced improvement
as a result of improved loan yields and a decline in higher-cost deposits and borrowings.
Total earning assets
Total interest bearing liabilities
Net yield on interest earning assets (FTE)
Total interest income (FTE)
Total interest expense
Net interest income (FTE)
Average Yield / Rate for the Three Month Periods Ended:
December 31
2019
September 30
2019
June 30
2019
March 31
2019
December 31
2018
4.13%
1.34%
3.06%
4.23%
1.35%
3.13%
4.15%
1.33%
3.06%
4.05%
1.25%
3.02%
4.03%
1.23%
3.02%
Quarter to Date Net Interest Income (FTE)
December 31
2019
September 30
2019
June 30
2019
March 31
2019
December 31
2018
$
$
17,245 $
17,567 $
17,231 $
16,915 $
4,492
4,550
4,527
4,292
12,753 $
13,017 $
12,704 $
12,623 $
17,005
4,258
12,747
18
Table of Contents
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
representation of other qualitative risks that reflect 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, provision for loan losses, and ALLL balances as of, and for the unaudited three month periods ended:
December 31
2019
September 30
2019
June 30
2019
March 31
2019
December 31
2018
Total charge-offs
Total recoveries
Net loan charge-offs (recoveries)
Net loan charge-offs (recoveries) to average
loans outstanding
Provision for loan losses
Provision for loan losses to average loans
outstanding
ALLL
$
$
$
334
122
212
$
143
$
82
61
0.02 %
(18)
$
0.01%
193
$
$
333
151
182
0.02 %
(179)
$
$
138
127
11
—%
34
$
— %
0.02%
(0.02)%
—%
7,939
$
8,169
$
8,037
$
8,398
$
ALLL as a % of loans at end of period
0.67 %
0.69%
0.68 %
0.73%
253
186
67
0.01%
342
0.03%
8,375
0.74%
The following table summarizes our charge-off and recovery activity for the years ended December 31:
ALLL at beginning of period
$
8,375
$
7,700
$
7,400
$
7,400
$
10,100
2019
2018
2017
2016
2015
Charge-offs
Commercial
Agricultural
Residential real estate
Consumer
Total charge-offs
Recoveries
Commercial
Agricultural
Residential real estate
Consumer
Total recoveries
Provision for loan losses
143
240
99
466
948
123
3
189
167
482
30
575
51
151
324
1,101
325
3
261
209
798
978
263
2
200
306
771
449
4
206
159
818
253
ALLL at end of period
Net loan charge-offs (recoveries)
Net loan charge-offs (recoveries) to average loans
outstanding
ALLL as a% of loans at end of period
$
$
7,939
466
$
$
8,375
303
$
$
7,700
(47)
$
$
0.04%
0.67%
0.03%
0.74%
—%
0.71%
19
57
—
574
285
916
445
95
287
224
1,051
(135)
7,400
(135)
$
$
(0.01)%
0.73 %
89
45
397
373
904
474
75
220
206
975
(2,771)
7,400
(71)
(0.01)%
0.87 %
Table of Contents
While we have experienced fluctuations in credit quality indicators in recent periods, credit quality remains strong. Overall, our level of required reserve is modest,
in comparison to peer banks, due to strong credit quality indicators, low historical loss factors, and a low amount of net charge-offs. The following table illustrates
our changes within the two main components of the ALLL as of:
ALLL
Individually evaluated for impairment
Collectively evaluated for impairment
Total
ALLL to gross loans
Individually evaluated for impairment
Collectively evaluated for impairment
Total
December 31
2019
September 30
2019
June 30
2019
March 31
2019
December 31
2018
$
$
1,114
6,825
7,939
$
$
0.09%
0.58%
0.67%
1,333
6,836
8,169
$
$
0.11%
0.58%
0.69%
1,479
6,558
8,037
$
$
0.13%
0.55%
0.68%
1,509
6,889
8,398
$
$
0.13%
0.60%
0.73%
1,938
6,437
8,375
0.17%
0.57%
0.74%
The level of the ALLL is appropriate as of December 31, 2019. We 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 an appropriate level.
For further discussion of the allocation of the ALLL, see “Note 4 – Loans and ALLL” of “Notes to Consolidated Financial Statements” in Item 8. Financial
Statements and Supplementary Data.
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 for indications of additional deterioration.
Commercial
Agricultural
Residential real estate
Consumer
Total
Total Past Due and Nonaccrual Loans as of December 31
2019
2018
2017
2016
2015
$
$
$
2,477
4,285
4,572
71
$
2,722
5,377
3,208
105
$
2,518
2,367
4,881
70
$
3,347
1,251
2,716
115
11,405
$
11,412
$
9,836
$
7,429
$
1,015
1,232
2,520
31
4,798
Total past due and nonaccrual loans to gross loans
0.96%
1.01%
0.90%
0.74%
0.56%
Past due and nonaccrual status loans, as a percentage of gross loans, have improved over the last year and continue to be at low levels as a result of strong
repayment 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 4 – Loans and ALLL” of “Notes to Consolidated Financial Statements” in Item 8. Financial Statements and Supplementary Data.
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. This approach has permitted certain borrowers to develop a payment structure that will allow them to continue making payments in lieu of foreclosure.
The modifications have been successful for us and our customers as very few of the modified loans have resulted in foreclosures. The majority of new
modifications result in terms that satisfy our criteria for continued interest accrual. TDRs that have been placed in nonaccrual status may be placed back on accrual
status after six months of continued performance and achievement of current payment status.
We restructure debt with borrowers who due to financial difficulties are unable to service their debt under the original terms. We may extend the amortization
period, reduce interest rates, allow interest only payment structures, forgive principal, forgive interest, or grant a combination of these modifications. Typically, the
modifications are for a period of three years or less. There were no TDRs that were government sponsored as of December 31, 2019 or December 31, 2018.
20
Table of Contents
Losses associated with TDRs, if any, are included in the estimation of the ALLL during the quarter in which a loan is identified as a TDR, and we review the
analysis of the ALLL estimation each reporting period thereafter to ensure its continued appropriateness.
The following table provides a roll-forward of TDRs for the years ended December 31, 2018 and 2019:
Accruing Interest
Nonaccrual
Total
January 1, 2018
New modifications
Principal advances (payments)
Loans paid off
Partial charge-offs
Balances charged-off
Transfers to OREO
Transfers to accrual status
Transfers to nonaccrual status
December 31, 2018
New modifications
Principal advances (payments)
Loans paid off
Partial charge-offs
Transfers to OREO
Transfers to accrual status
Transfers to nonaccrual status
December 31, 2019
Number
of
Loans
147 $
27
—
(35)
—
—
—
1
(7)
133
11
—
(25)
—
—
9
(6)
122 $
Balance
Number
of
Loans
Balance
23,284
6,623
(1,456)
(4,361)
—
—
—
520
(1,210)
23,400
4,491
(1,295)
(3,319)
—
—
1,219
(3,302)
21,194
$
13
18
—
(7)
—
(1)
(1)
(1)
7
28
—
—
(15)
—
(1)
(9)
6
9
$
2,913
1,733
(714)
(819)
(39)
(7)
(206)
(520)
1,210
3,551
—
(382)
(1,596)
(65)
(48)
(1,219)
3,302
3,543
Number
of
Loans
160 $
45
—
(42)
—
(1)
(1)
—
—
161
11
—
(40)
—
(1)
—
—
Balance
26,197
8,356
(2,170)
(5,180)
(39)
(7)
(206)
—
—
26,951
4,491
(1,677)
(4,915)
(65)
(48)
—
—
131 $
24,737
The following table summarizes our TDRs as of December 31:
Accruing
Interest
2019
Nonaccrual
Current
$
20,847 $
507 $
Accruing
Interest
2018
Nonaccrual
21,794 $
2,673 $
Total
21,354 $
Accruing
Interest
2017
Nonaccrual
21,234 $
— $
Total
21,234
Total
24,467 $
Past due 30-59
days
Past due 60-89
days
Past due 90 days
or more
346
1
—
—
346
899
1
707
—
—
899
1,778
805
2,583
707
219
708
927
—
3,036
3,036
—
878
878
53
1,400
1,453
Total
$
21,194 $
3,543 $
24,737 $
23,400 $
3,551 $
26,951 $
23,284 $
2,913 $
26,197
Current
Past due 30-59 days
Past due 60-89 days
Past due 90 days or more
Total
Accruing
Interest
2016
Nonaccrual
$
17,557 $
559 $
2,898
138
—
230
—
—
Accruing
Interest
2015
Nonaccrual
20,550 $
146 $
357
24
—
—
—
248
Total
18,116 $
3,128
138
—
Total
20,696
357
24
248
$
20,593 $
789 $
21,382 $
20,931 $
394 $
21,325
Additional disclosures about TDRs are included in “Note 4 – Loans and ALLL” of “Notes to Consolidated Financial Statements” in Item 8. Financial Statements
and Supplementary Data.
21
Table of Contents
Impaired Loans
The following is a summary of information pertaining to impaired loans as of December 31:
Recorded
Balance
2019
Unpaid
Principal
Balance
Valuation
Allowance
Recorded
Balance
2018
Unpaid
Principal
Balance
Valuation
Allowance
TDRs
Commercial real estate
Commercial other
Agricultural real estate
Agricultural other
Residential real estate senior liens
Residential real estate junior liens
Home equity lines of credit
Consumer secured
Total TDRs
Other impaired loans
Commercial real estate
Commercial other
Agricultural real estate
Agricultural other
Residential real estate senior liens
Home equity lines of credit
Total other impaired loans
$
5,325 $
5,643 $
15 $
6,507 $
6,840 $
1,156
9,182
4,421
4,641
—
12
—
1,156
9,181
4,421
4,923
—
312
—
24,737
25,636
153
1,231
699
538
760
73
216
1,231
750
538
907
73
3,454
3,715
—
12
14
922
—
—
—
963
—
—
—
—
151
—
151
1,713
7,452
5,288
5,923
12
47
9
1,713
7,452
5,331
6,205
12
347
9
437
—
112
—
1,181
2
—
—
26,951
27,909
1,732
256
1,423
557
1,001
911
—
4,148
318
1,530
558
1,000
1,084
—
4,490
—
6
—
20
180
—
206
Total impaired loans
$
28,191 $
29,351 $
1,114 $
31,099 $
32,399 $
1,938
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.
Additional disclosures related to impaired loans are included in “Note 4 – Loans and ALLL” of “Notes to Consolidated Financial Statements” in Item 8. Financial
Statements and Supplementary Data.
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Table of Contents
Nonperforming Assets
The following table summarizes our nonperforming assets as of December 31:
Nonaccrual status loans
Accruing loans past due 90 days or more
Total nonperforming loans
Foreclosed assets
Total nonperforming assets
Nonperforming loans as a % of total loans
Nonperforming assets as a % of total assets
$
$
2019
2018
2017
2016
2015
6,535
$
7,260
$
3,027
$
1,060
$
—
6,535
456
113
7,373
355
395
3,422
291
633
1,693
231
792
—
792
421
6,991
$
7,728
$
3,713
$
1,924
$
1,213
0.55%
0.39%
0.65%
0.42%
0.31%
0.20%
0.17%
0.11%
0.09%
0.07%
The accrual of interest on commercial and agricultural loans, as well as residential real estate loans, is discontinued at the time a loan is 90 days or more past due
unless the credit is well-secured and in the process of short-term collection. Upon transferring a loan 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 a charge-off is necessary. Consumer loans are typically charged-off
no later than 180 days past due. Loans may be placed back on accrual status after six months of continued performance and achievement of current payment status.
While the level of nonperforming loans has fluctuated in recent periods, it remains low relative to gross loans. Recent fluctuations in nonaccrual loans have been
concentrated in our agricultural portfolio as a result of the challenges facing much of the agricultural industry.
The following table summarizes nonaccrual loans as of December 31:
Commercial
Agricultural
Residential real estate
Total
2019
2018
2017
2016
2015
1,621
4,285
629
1,757
4,949
554
729
1,950
348
4
533
523
$
6,535 $
7,260 $
3,027 $
1,060 $
Included in the nonaccrual loan balances above were loans also classified as TDR as of December 31:
Commercial
Agricultural
Residential real estate
Total
2019
2018
2017
2016
2015
$
$
390 $
160 $
729 $
3,048
105
3,391
—
1,950
234
3,543 $
3,551 $
2,913 $
— $
405
384
789 $
211
146
435
792
86
146
162
394
Additional disclosures about nonaccrual status loans are included in “Note 4 – Loans and ALLL”of “Notes to Consolidated Financial Statements” in Item 8.
Financial Statements and Supplementary Data.
23
Table of Contents
Noninterest Income and Noninterest Expenses
Significant noninterest income balances are highlighted in the following table for the years ended December 31:
Service charges and fees
ATM and debit card fees
$
3,239 $
2,888 $
351
12.15 % $
2,756 $
132
4.79 %
2019
2018
$
%
2017
$
%
Change
Change
Service charges and fees on deposit
accounts
Freddie Mac servicing fee
Net OMSR income (loss)
Other fees for customer services
Total service charges and fees
Investment and Trust advisory fees
Earnings on corporate owned life insurance
policies
Net gain on sale of mortgage loans
Net gains on foreclosed assets
Net gains on sale of AFS securities
Net income (loss) on joint venture
investment
Other
2,328
2,276
626
(170)
324
6,347
2,792
764
650
162
6
(3,108)
426
651
25
370
6,210
2,836
742
525
49
—
274
345
52
(25)
(195)
(46)
137
(44)
22
125
113
6
2.28 %
(3.84)%
(780.00)%
(12.43)%
2.21 %
(1.55)%
2.96 %
23.81 %
230.61 %
N/M
(3,382)
81
N/M
23.48 %
2,203
671
103
280
6,013
2,607
756
647
50
142
164
461
Total noninterest income
$
8,039 $
10,981 $
(2,942)
(26.79)% $
10,840 $
73
(20)
(78)
90
197
229
(14)
(122)
(1)
(142)
110
(116)
141
3.31 %
(2.98)%
(75.73)%
32.14 %
3.28 %
8.78 %
(1.85)%
(18.86)%
(2.00)%
(100.00)%
67.07 %
(25.16)%
1.30 %
Significant changes in noninterest income are detailed below:
ATM and debit card fees fluctuate from period to period based primarily on usage of ATM and debit cards. While we do not anticipate significant changes to our
ATM and debit card fee structure, we do expect that fee income will continue to increase in 2020 as the usage of ATM and debit cards continues to increase.
OMSR income results are driven, in part, by changes in offering rates on residential mortgage loans, anticipated prepayments in the servicing-retained portfolio,
and the volume of loans within the servicing-retained portfolio. As a result of these factors, OMSR income during 2020 could experience fluctuations and could
vary from 2019 levels.
Net gain on sale of mortgage loans fluctuates primarily as the result of a change in the amount of loans sold, and the amount of loans sold can fluctuate based on
balance sheet management strategy. As such, net gain on sale of mortgage loans will continue to fluctuate in 2020.
Net gains on foreclosed assets fluctuate from time to time and are based on the level of activity in foreclosures, properties owned, and changes in market values of
properties owned. While we do not anticipate a significant change in activity or market values, net gains may continue to fluctuate in 2020 and may not exceed net
gains in 2019.
We are continually analyzing our AFS securities portfolio for potential sale opportunities. Securities with unrealized gains or less than desirable yields may be sold
for funding and profitability purposes. During 2017 and 2019, we identified $12,827 and $33,840, respectively, in securities that were desirable to be sold and
recognized net gains with these sales of $142 and $6, respectively. We anticipate taking this same approach of analyzing our AFS securities portfolio for potential
sale opportunities in 2020.
As a result of a valuation during the fourth quarter of 2019, CSS recognized a $7,133 impairment related to intangible assets as of December 31, 2019. Since we
account for our investment in CSS under the equity method of accounting, we reduced our investment in CSS by $3,566 during the fourth quarter of 2019.
The fluctuations in all other income are spread throughout various categories, none of which are individually significant.
24
Table of Contents
Significant noninterest expense balances are highlighted in the following table for the years ended December 31:
2019
2018
$
%
2017
$
Change
Change
Compensation and benefits
$
23,205 $
22,609 $
Furniture and equipment
Occupancy
Other
Audit, consulting, and legal fees
ATM and debit card fees
Donations and community
relations
Loan underwriting fees
Director fees
Marketing costs
FDIC insurance premiums
All other
Total other
Total noninterest
expenses
5,866
3,418
1,884
1,210
1,026
905
788
762
211
3,775
10,561
6,055
3,263
2,222
1,036
710
1,016
858
596
726
3,761
10,925
596
(189)
155
(338)
174
316
(111)
(70)
166
(515)
14
(364)
2.64 % $
21,525 $
1,084
(3.12)%
4.75 %
(15.21)%
16.80 %
44.51 %
(10.93)%
(8.16)%
27.85 %
(70.94)%
0.37 %
(3.33)%
5,407
3,133
2,017
1,181
657
556
856
568
642
3,711
10,188
648
130
205
(145)
53
460
2
28
84
50
737
%
5.04 %
11.98 %
4.15 %
10.16 %
(12.28)%
8.07 %
82.73 %
0.23 %
4.93 %
13.08 %
1.35 %
7.23 %
$
43,050 $
42,852 $
198
0.46 % $
40,253 $
2,599
6.46 %
Significant changes in noninterest expenses are detailed below:
The compensation and benefits expense increase from 2018 to 2019 is primarily related to our employee incentive plans. The increase in 2018 from 2017 resulted
significantly from a settlement with an insurance claim administrator in favor of Isabella Bank, which reduced 2017 benefits expense. Compensation and benefits
expense in 2020 may not approximate 2019 levels as expenses related to our employee incentive plans fluctuate based on financial performance.
Furniture and equipment expense consists primarily of depreciation, services contracts and computer expenses.
Computer expense increased in 2018 due to data and system upgrades, additional network security costs, and one-time implementation costs and therefore,
exceeded expenses in 2019 and 2017. Expenses in 2020 are expected to approximate 2019 levels.
Audit, consulting, and legal fees in 2018 included one-time charges related to income tax strategies. As a result, 2019 expenses were less than 2018 expenses.
Audit, consulting, and legal fees are expected to approximate 2019 levels in 2020.
In 2018, we developed initiatives to increase ATM and debit card income which resulted in increased ATM and debit card expenses during 2018 and 2019.
Expenses in 2017 included a one-time early termination fee with a card provider. ATM and debit card expenses are expected to approximate 2019 levels in 2020.
Donations and community relations increased during 2019 as a result of initiatives designed to deepen and strengthen our relationship with the communities in
which we operate and serve which includes an expanded footprint. In addition to providing monetary contributions, some of these initiatives include volunteering
our time, which is not a component of donations and community relations costs. Expenses in 2020 are expected to approximate 2019 levels.
Loan underwriting fees increased during the second half of 2018 and continued in the first quarter of 2019 as a result of new loan products, including first time
home buyer and down payment assistance programs designed to generate residential mortgage growth. Loan underwriting fees in 2019 did not exceed 2018 levels
based on the nature of products offered during 2019. Additionally, loan underwriting fees in 2020 are not expected to exceed 2019 levels.
As a result of an assessment credit of $440, received during the third quarter of 2019, FDIC insurance premiums declined in 2019 as compared to 2018 expenses.
As such, FDIC insurance premiums are expected to increase in 2020 and approximate 2018 levels.
The fluctuations in all other expenses are spread throughout various categories, none of which are individually significant.
25
Table of Contents
Analysis of Changes in Financial Condition
The following table shows the composition and changes in our balance sheet as of December 31:
ASSETS
Cash and cash equivalents
AFS securities
Amortized cost of AFS securities
Unrealized gains (losses) on AFS securities
AFS securities
Mortgage loans AFS
Loans
Gross loans
Less allowance for loan and lease losses
Net loans
Premises and equipment
Corporate owned life insurance policies
Accrued interest receivable
Equity securities without readily determinable fair values
Goodwill and other intangible assets
Other assets
TOTAL ASSETS
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities
Deposits
Borrowed funds
Accrued interest payable and other liabilities
Total liabilities
Shareholders’ equity
TOTAL LIABILITIES AND
SHAREHOLDERS’ EQUITY
2019
2018
$
%
Change
$
60,572 $
73,471 $
(12,899)
(17.56)%
423,980
5,859
429,839
904
501,245
(6,411)
494,834
358
1,186,570
1,128,707
7,939
8,375
1,178,631
1,120,332
26,242
28,455
6,501
21,629
48,379
13,046
27,815
27,733
6,928
24,948
48,451
17,632
1,814,198 $
1,842,502 $
1,313,851 $
1,292,693 $
275,999
14,166
1,604,016
210,182
340,299
13,991
1,646,983
195,519
$
$
(77,265)
12,270
(64,995)
546
57,863
(436)
58,299
(1,573)
722
(427)
(3,319)
(72)
(4,586)
(28,304)
21,158
(64,300)
175
(42,967)
14,663
(15.41)%
N/M
(13.13)%
152.51 %
5.13 %
(5.21)%
5.20 %
(5.66)%
2.60 %
(6.16)%
(13.30)%
(0.15)%
(26.01)%
(1.54)%
1.64 %
(18.90)%
1.25 %
(2.61)%
7.50 %
$
1,814,198 $
1,842,502 $
(28,304)
(1.54)%
As shown above, total assets declined $28,304 since December 31, 2018, primarily driven by a decline in cash and cash equivalents and AFS securities which was
partially offset by continued loan growth. In the current interest rate environment, we have elected to use excess funds and proceeds from the sale of AFS securities
to lend and reduce borrowed funds. As a result, the investment portfolio declined due to sales and normal calls and maturities. We experienced a $57,863 increase
in loans during 2019 which was largely driven by growth in our commercial loan portfolio.
A discussion of changes in balance sheet amounts by major categories follows:
Cash and cash equivalents
Included in cash and cash equivalents are funds held with the FRB which fluctuate from period to period. Cash levels continued to be elevated at December 31,
2019. During 2019, excess funds were used to pay maturing long-term borrowings and other short-term liabilities, which is expected to continue in 2020.
AFS securities
The primary objective of our investing activities is to provide for safety of the principal invested. Secondary considerations include providing earnings and
liquidity while managing our overall exposure to changes in interest rates. The current flat yield curve encourages using excess funds to reduce higher-cost
borrowings and therefore, AFS securities balances are not expected to rise significantly in the near term as a result of the current rate environment.
26
Table of Contents
The following is a schedule of the carrying value of AFS securities as of December 31:
Government sponsored enterprises
States and political subdivisions
Auction rate money market preferred
Mortgage-backed securities
Collateralized mortgage obligations
Total
2019
2018
2017
— $
170 $
169,752
3,119
140,204
116,764
190,866
2,554
184,484
116,760
429,839 $
494,834 $
216
208,474
3,049
208,797
128,194
548,730
$
$
Excluding those holdings in government sponsored enterprises and municipalities within the State of Michigan, there were no investments in securities of any one
issuer that exceeded 10% of shareholders’ equity during 2019, 2018, and 2017. We have a policy prohibiting investments in securities that we deem unsuitable due
to their inherent credit or market risks. Prohibited investments include stripped mortgage-backed securities, zero coupon bonds, nongovernment agency asset-
backed securities, and structured notes. Our holdings in mortgage-backed securities and collateralized mortgage obligations include only government agencies and
government sponsored agencies as we hold no investments in private label mortgage-backed securities or collateralized mortgage obligations.
The following is a schedule of maturities of AFS securities and their weighted average yields as of December 31, 2019. Weighted average yields have been
computed on an FTE basis using a tax rate of 21%. Our auction rate money market preferred investments are long-term floating rate instruments. The issuers of
auction rate securities generally have the right to redeem or refinance the debt. Because of their lack of contractual maturities, auction rate money market preferred
stocks are not reported by a specific maturity group. Mortgage-backed securities and collateralized mortgage obligations are not reported by a specific maturity
group due to their variable monthly payments. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay
obligations.
Maturing
After One
Year But
Within
Five Years
After Five
Years But
Within
Ten Years
Within
One Year
After
Ten Years
Securities with
Variable Monthly
Payments or
Noncontractual
Maturities
Amount
Yield (%)
Amount
Yield (%)
Amount
Yield (%)
Amount
Yield (%)
Amount
Yield (%)
States and
political
subdivisions
Mortgage-
backed securities
Collateralized
mortgage
obligations
Auction rate
money market
preferred
Total
$
29,091
3.09 $
72,332
3.35 $
39,875
3.75 $
28,454
4.08 $
—
—
—
—
—
—
—
—
—
—
140,204
2.28
—
—
—
—
—
—
—
—
116,764
2.38
—
—
—
—
—
—
—
—
3,119
$
29,091
3.09 $
72,332
3.35 $
39,875
3.75 $
28,454
4.08 $
260,087
6.20
2.37
27
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Loans
Loans are the largest component of earning assets. The proper management of credit and market risk inherent in the loan portfolio is critical to our financial well-
being. To control these risks, we have adopted strict underwriting standards which include lending limits to a single borrower, loan to collateral value limits, and a
defined market area. We also monitor and limit loan concentrations to specific industries. We have no foreign loans and there were no concentrations greater than
10% of total loans that are not disclosed as a separate category in the following table.
The following table presents the composition of the loan portfolio for the years ended December 31:
Commercial
Agricultural
Residential real estate
Consumer
Total
2019
2018
2017
2016
2015
$
$
700,941 $
659,529 $
634,759 $
575,664 $
116,920
298,569
70,140
127,161
275,343
66,674
128,269
272,368
56,123
126,492
266,050
42,409
1,186,570 $
1,128,707 $
1,091,519 $
1,010,615 $
448,381
115,911
251,501
34,699
850,492
The following table presents the change in the loan portfolio categories for the years ended December 31:
Commercial
Agricultural
Residential real estate
Consumer
Total
2019
2018
2017
$ Change
% Change
$ Change
% Change
$ Change
% Change
$
$
41,412
(10,241)
23,226
3,466
57,863
6.28 % $
(8.05)%
8.44 %
5.20 %
5.13 % $
24,770
(1,108)
2,975
10,551
37,188
3.90 % $
(0.86)%
1.09 %
18.80 %
3.41 % $
59,095
1,777
6,318
13,714
80,904
10.27%
1.40%
2.37%
32.34%
8.01%
While the competition for commercial loan opportunities continues to be strong, we experienced growth in this segment of the portfolio during 2019. Contributing
to our $41,412 growth in commercial loans was $23,730 in advances to mortgage brokers. We expect continued growth in the commercial loan portfolio in 2020 as
we will continue to provide attractive and competitive loan products. Over the last 12 months, agricultural loans have declined; however, we do not expect this
trend to continue into 2020. Residential real estate and consumer loans have experienced growth over the last year and continued growth is expected in 2020.
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 our joint venture investment in CSS
accounted for under the equity method of accounting. As of December 31, 2019, we reduced our investment in CSS by $3,566 as a result of an impairment
recognized by CSS during the fourth quarter of 2019. For more information related to this investment, refer to “Note 1 – Nature of Operations and Summary of
Significant Accounting Policies”, “Note 6 – Investment in Joint Venture”, and “Note 18 – Fair Value” of “Notes to Consolidated Financial Statements” in Item 8.
Financial Statements and Supplementary Data.
Other assets
Other assets consist primarily of prepaid expenses, OMSR, and net deferred tax assets. Changes in deferred taxes and income taxes receivable have largely
contributed to the $4,586 decline in other assets during 2019. For more information related to estimates and deferred taxes, refer to “Note 1 – Nature of Operations
and Summary of Significant Accounting Policies” and “Note 16 – Federal Income Taxes” of “Notes to Consolidated Financial Statements” in Item 8. Financial
Statements and Supplementary Data.
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Deposits
Deposits are our primary source of funding. The following table presents the composition of the deposit portfolio as of December 31:
Noninterest bearing demand deposits
Interest bearing demand deposits
Savings deposits
Certificates of deposit
Brokered certificates of deposit
Internet certificates of deposit
Total
2019
2018
2017
$
249,152 $
236,534 $
229,865
427,215
365,049
27,458
15,112
235,287
387,252
358,127
62,148
13,345
237,511
231,666
342,815
347,279
87,247
18,740
$
1,313,851 $
1,292,693 $
1,265,258
The following table presents the change in the deposit categories for the years ended December 31:
Noninterest bearing demand deposits
Interest bearing demand deposits
Savings deposits
Certificates of deposit
Brokered certificates of deposit
Internet certificates of deposit
Total
2019
2018
$ Change
% Change
$ Change
% Change
$
$
12,618
(5,422)
39,963
6,922
(34,690)
1,767
21,158
5.33 % $
(2.30)%
10.32 %
1.93 %
(55.82)%
13.24 %
1.64 % $
(977)
3,621
44,437
10,848
(25,099)
(5,395)
27,435
(0.41)%
1.56 %
12.96 %
3.12 %
(28.77)%
(28.79)%
2.17 %
While total deposits have fluctuated over the past year, we experienced growth in non-contractual deposits, such as noninterest bearing demand and savings
deposits. This trend is expected to continue in 2020 as we anticipate continued growth in noninterest bearing demand and savings deposits. We also experienced
marginal growth in certificates of deposit over the past year. Brokered certificates of deposit offer another source of funding and may fluctuate from period to
period based on our funding needs, including changes in assets such as loans and investments. In recent periods, we used excess funds to reduce higher-cost
deposits, such as brokered certificates of deposit and expect this trend to continue in 2020.
The remaining maturity of certificates of deposit of $250 or more as of December 31, 2019 was as follows:
Maturity
Within 3 months
Within 3 to 6 months
Within 6 to 12 months
Over 12 months
Total
Borrowed Funds
$
$
22,626
7,804
17,014
48,367
95,811
Borrowed funds include FHLB advances, securities sold under agreements to repurchase, and federal funds purchased. The balance of borrowed funds fluctuates
from period to period based on our funding needs that arise from changes in loans, investments, and deposits. To provide balance sheet growth, we may utilize
borrowings and brokered deposits to fund earning assets. We had no fed funds purchased for the years ended December 31, 2019, 2018, or 2017. The following
table presents borrowed funds balances for the years ended December 31:
FHLB advances
Securities sold under agreements to repurchase without stated maturity dates
Total
2019
2018
2017
$
$
245,000 $
300,000 $
30,999
40,299
275,999 $
340,299 $
290,000
54,878
344,878
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For additional disclosure related to borrowed funds, see “Note 9 – Borrowed Funds” of “Notes to Consolidated Financial Statements” in Item 8. Financial
Statements and Supplementary Data.
Accrued interest payable and other liabilities
Included in accrued interest payable and other liabilities are obligations related to our defined benefit pension plan and other employee benefits. For more
information on the defined benefit pension plan and other employee benefits, see “Note 13 – Benefit Plans” of “Notes to Consolidated Financial Statements” in
Item 8. Financial Statements and Supplementary Data.
Contractual Obligations and Loan Commitments
We have various financial obligations, including contractual obligations and commitments related to deposits and borrowings, which may require future cash
payments. We also have loan related commitments that may impact liquidity. The commitments include unused lines of credit, commercial and standby letters of
credit, and commitments to grant loans. These commitments to grant loans include residential mortgage loans with the majority committed to be sold to the
secondary market. Many of these commitments historically have expired without being drawn upon and do not necessarily represent our future cash requirements.
For additional disclosure related to Contractual Obligations and Loan Commitments, see “Note 10 – Off-Balance-Sheet Activities, Commitments and Other
Matters” of “Notes to Consolidated Financial Statements” in Item 8. Financial Statements and Supplementary Data.
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 209,583 shares or
$4,876 of common stock during 2019, and 261,693 shares or $6,864 of common stock in 2018. We also offer the Directors Plan in which participants purchase
stock units through deferred fees, in lieu of cash payments. Pursuant to this plan, we increased shareholders’ equity by $523 and $612 during 2019 and 2018,
respectively.
We have a publicly announced common stock repurchase plan. Pursuant to this plan, we repurchased 169,748 shares or $4,003 of common stock during 2019 and
248,017 shares or $7,007 during 2018. As of December 31, 2019, we were authorized to repurchase up to an additional 247,906 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 redefined what is included or deducted from equity capital, changed risk weighting for certain on and off-balance sheet assets,
increased the minimum required equity capital to be considered well capitalized, and introduced a capital conservation buffer. The rules, which were gradually
phased in between 2015 and 2019, did not have a material impact on the Corporation but do require us to hold more capital than we have historically.
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 is 8.00%.
Also effective January 1, 2015 was the new common equity tier 1 capital ratio which had a minimum requirement of 4.50%. Beginning on January 1, 2016, the
capital conservation buffer went into effect which increased the required levels. The following table sets forth the minimum percentages required under the Risk
Based Capital guidelines and our ratios as of December 31:
Common equity tier 1 capital
Tier 1 capital
Total capital
Tier 1 leverage
2019
2018
Actual
Minimum Required
- BASEL III
Required to be
Considered Well
Capitalized
Actual
Minimum Required -
BASEL III
Required to be
Considered Well
Capitalized
12.56%
12.56%
13.18%
9.01%
7.000%
8.500%
10.500%
4.000%
30
6.500%
8.000%
10.000%
5.000%
12.58%
12.58%
13.26%
8.72%
6.375%
7.875%
9.875%
4.000%
6.500%
8.000%
10.000%
5.000%
Table of Contents
There are no significant regulatory constraints placed on our capital. At December 31, 2019, the Bank exceeded minimum capital requirements. For further
information regarding the Bank’s capital requirements, see “Note 11 – Minimum Regulatory Capital Requirements” of “Notes to Consolidated Financial
Statements” in Item 8. Financial Statements and Supplementary Data.
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, cash
flow hedge derivative instruments 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, impaired loans, goodwill, 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 1 – Nature of Operations and Summary of Significant Accounting Policies” and “Note 18 –
Fair Value” of “Notes to Consolidated Financial Statements” in Item 8. Financial Statements and Supplementary Data.
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 unencumbered AFS securities. These categories totaled $291,190 or 16.05% of assets as of
December 31, 2019 as compared to $256,583 or 13.93% as of December 31, 2018. The increase in the percentage of primary liquidity is a direct result of an
increase in market deposits and a reduction in non-market funding which required collateralization. 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. Based on these same factors, daily liquidity could vary significantly.
Deposit accounts are our primary source of funds. Our secondary sources include the ability to borrow from the FHLB, from 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. In recent periods, we have elected to use excess funds and proceeds from the sale of AFS securities to reduce borrowings and other higher-cost
funding sources. 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 December 31, 2019, we had available lines of credit of $132,897.
The following table summarizes our sources and uses of cash for the years ended December 31:
Net cash provided by (used in) operating activities
Net cash provided by (used in) investing activities
Net cash provided by (used in) financing activities
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents January 1
Cash and cash equivalents December 31
Market Risk
2019
2018
$ Variance
23,303 $
21,963 $
15,480
(51,682)
(12,899)
73,471
6,517
14,143
42,623
30,848
60,572 $
73,471 $
1,340
8,963
(65,825)
(55,522)
42,623
(12,899)
$
$
Our primary market risks are interest rate risk and liquidity risk. 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 banks to effectively manage the various risks that can have a material impact on 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
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in long-term assets, limiting the mismatch in repricing opportunities 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, loan prepayments, and funding sources. 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 rate 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. We regularly monitor our projected net interest income sensitivity to ensure that it remains within established
limits.
Gap analysis, the secondary method to measure IRR, measures the cash flows and/or the earliest repricing of our interest bearing assets and liabilities. This analysis
is useful for measuring trends in the repricing characteristics of the balance sheet. Significant assumptions are required in this process because of the embedded
repricing options contained in assets and liabilities. Residential real estate and consumer loans allow the borrower to repay the balance prior to maturity without
penalty, while commercial and agricultural loans may have prepayment penalties. The amount of prepayments is dependent upon many factors, including the
interest rate of a given loan in comparison to the current offering rates, the level of sales of used homes, and the overall availability of credit in the market place.
Generally, a decrease in interest rates will result in an increase in cash flows from these assets. A significant portion of our securities are callable or have
prepayment options. The call and prepayment options are more likely to be exercised in a period of decreasing interest rates. Savings and demand accounts may
generally be withdrawn on request without prior notice. The timing of cash flows from these deposits is estimated based on historical experience. Certificates of
deposit have penalties that discourage early withdrawals.
We do not believe 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. 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, and
we do not expect to make material changes to our market risk methods in the near term. We may change those methods in the future to adapt to changes in
circumstances or to implement new techniques.
Gap analysis is also utilized as a method to measure interest rate sensitivity. Interest rate sensitivity is determined by the amount of earning assets and interest
bearing liabilities repricing within a specific time period, and their relative sensitivity to a change in interest rates. We strive to achieve reasonable stability in the
net interest margin through periods of changing interest rates. One specific focus of interest rate sensitivity is the loan portfolio, primarily with commercial and
agricultural loans. The following table shows the maturity of commercial and agricultural loans outstanding at December 31, 2019. Also provided are the amounts
due after one year, classified according to the sensitivity to changes in interest rates.
Commercial and agricultural
Interest sensitivity
Loans maturing after one year that have:
Fixed interest rates
Variable interest rates
Total
1 Year
or Less
1 to 5
Years
Over 5
Years
Total
$
151,183 $
426,141 $
240,537 $
817,861
$
$
354,845 $
71,296
426,141 $
137,086
103,451
240,537
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The information presented in the section captioned “Market Risk” in Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations is incorporated herein by reference.
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Table of Contents
Item 8. Financial Statements and Supplementary Data.
The following consolidated financial statements accompanied by the report of our independent registered public accounting firm are set forth beginning on the
following page of this report:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Changes in Shareholders’ Equity
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income (Loss)
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Supplementary data regarding quarterly results of operations is included in Item 6. Selected Financial Data.
33
Table of Contents
Shareholders and Board of Directors
Isabella Bank Corporation
Mount Pleasant, Michigan
Report of Independent Registered Public Accounting Firm
Opinion on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Isabella Bank Corporation as of December 31, 2019 and 2018, and the related consolidated
statements of changes in shareholders’ equity, income, comprehensive income, and cash flows for each of the years in the three-year period ended December 31,
2019, and the related notes (collectively referred to as the financial statements). We also have audited Isabella Bank Corporation’s internal control over financial
reporting as of December 31, 2019, based on criteria established in the Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (2013 framework) (the COSO criteria).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Isabella Bank
Corporation as of December 31, 2019 and 2018, and the consolidated results of their operations and their cash flows for each of the years in the three-year period
ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion Isabella Bank
Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on the COSO criteria.
Basis for Opinions
Isabella Bank Corporation’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial
reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal
Control over Financial Reporting. Our responsibility is to express opinions on Isabella Bank Corporation’s consolidated financial statements and on Isabella
Bank Corporation’s internal control over financial reporting based on our integrated audits. We are a public accounting firm registered with the Public Company
Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to Isabella Bank Corporation in accordance with the
U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable
assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal
control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence
regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial
reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material misstatement exists, and testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk. We believe that our audits provide a reasonable basis for our
opinions.
Definition and Limitations of Internal Control over Financial Reporting
A corporation’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles. A corporation’s internal
control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the corporation; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of consolidated financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the corporation
are being made only in accordance with authorizations of management and directors of the corporation; and (3) provide reasonable assurance regarding prevention
or timely detection of unauthorized acquisition, use, or disposition of the corporation’s assets that could have a material effect on the consolidated financial
statements.
34
Table of Contents
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with
the policies or procedures may deteriorate.
/s/Rehmann Robson LLC
We have served as Isabella Bank Corporation's independent auditor since 1996.
Saginaw, Michigan
March 16, 2020
35
Table of Contents
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
ASSETS
Cash and cash equivalents
Cash and demand deposits due from banks
Interest bearing balances due from banks
Total cash and cash equivalents
AFS securities, at fair value
Mortgage loans AFS
Loans
Commercial
Agricultural
Residential real estate
Consumer
Gross loans
Less allowance for loan and lease losses
Net loans
Premises and equipment
Corporate owned life insurance policies
Accrued interest receivable
Equity securities without readily determinable fair values
Goodwill and other intangible assets
Other assets
TOTAL ASSETS
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits
Noninterest bearing
Interest bearing demand deposits
Certificates of deposit under $250 and other savings
Certificates of deposit over $250
Total deposits
Borrowed funds
Accrued interest payable and other liabilities
Total liabilities
Shareholders’ equity
December 31
2019
2018
$
20,311 $
40,261
60,572
429,839
904
700,941
116,920
298,569
70,140
1,186,570
7,939
1,178,631
26,242
28,455
6,501
21,629
48,379
13,046
23,534
49,937
73,471
494,834
358
659,529
127,161
275,343
66,674
1,128,707
8,375
1,120,332
27,815
27,733
6,928
24,948
48,451
17,632
$
$
1,814,198 $
1,842,502
249,152 $
229,865
739,023
95,811
236,534
235,287
744,944
75,928
1,313,851
1,292,693
275,999
14,166
340,299
13,991
1,604,016
1,646,983
Common stock — no par value 15,000,000 shares authorized; issued and outstanding 7,910,804 shares (including
27,069 shares held in the Rabbi Trust) in 2019 and 7,870,969 shares (including 16,673 shares held in the Rabbi
Trust) in 2018
Shares to be issued for deferred compensation obligations
Retained earnings
Accumulated other comprehensive income (loss)
Total shareholders’ equity
141,069
5,043
62,099
1,971
210,182
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
$
1,814,198 $
140,416
5,431
57,357
(7,685)
195,519
1,842,502
The accompanying notes are an integral part of these consolidated financial statements.
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CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(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)
7,821,069 $
139,525 $
5,038
$
46,114 $
(2,778)
$
—
—
13,237
543
Balance, January 1, 2017
Comprehensive income (loss)
Reclassification resulting from the enactment of the
Tax Act
Issuance of common stock
Common stock transferred from the Rabbi Trust to
satisfy deferred compensation obligations
Share-based payment awards under equity
compensation plan
Common stock purchased for deferred compensation
obligations
Common stock repurchased pursuant to publicly
announced repurchase plan
Cash dividends paid ($1.02 per common share)
Balance, December 31, 2017
Comprehensive income (loss)
Adoption of ASU 2016-01
Issuance of common stock
Common stock transferred from the Rabbi Trust to
satisfy deferred compensation obligations
Share-based payment awards under equity
compensation plan
Common stock purchased for deferred compensation
obligations
Common stock repurchased pursuant to publicly
announced repurchase plan
Cash dividends paid ($1.04 per common share)
Balance, December 31, 2018
Comprehensive income (loss)
Issuance of common stock
Common stock transferred from the Rabbi Trust to
satisfy deferred compensation obligations
Share-based payment awards under equity
compensation plan
Common stock purchased for deferred compensation
obligations
Common stock repurchased pursuant to publicly
announced repurchase plan
Cash dividends paid ($1.05 per common share)
Balance, December 31, 2019
—
—
220,510
—
—
—
—
6,177
176
—
(420)
—
—
(176)
640
—
—
—
(184,286)
—
(5,181)
—
7,857,293
140,277
5,502
—
—
—
—
261,693
6,864
—
—
—
683
—
(401)
(248,017)
—
(7,007)
—
—
—
—
(683)
612
—
—
—
7,870,969
140,416
5,431
—
209,583
—
—
—
4,876
911
—
—
(1,131)
(169,748)
—
(4,003)
—
—
—
(911)
523
—
—
—
367
—
—
—
—
—
(7,990)
51,728
14,021
(223)
—
—
—
—
—
(8,169)
57,357
13,024
—
—
—
—
Totals
187,899
13,780
—
6,177
—
640
(420)
(5,181)
(7,990)
194,905
8,715
—
6,864
—
612
(401)
(7,007)
(8,169)
195,519
22,680
4,876
—
523
(367)
—
—
—
—
—
—
(2,602)
(5,306)
223
—
—
—
—
—
—
(7,685)
9,656
—
—
—
7,910,804 $
141,069 $
5,043
$
62,099 $
1,971 $
210,182
—
(1,131)
—
(8,282)
—
—
(4,003)
(8,282)
The accompanying notes are an integral part of these consolidated financial statements.
37
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands except per share amounts)
Year Ended December 31
2019
2018
2017
$
54,192 $
49,229 $
43,537
7,185
4,728
1,201
67,306
11,608
6,253
17,861
49,445
30
49,415
6,347
2,792
764
650
162
6
(3,108)
426
8,039
23,205
5,866
3,418
10,561
43,050
14,404
1,380
8,239
5,279
1,117
63,864
9,261
6,370
15,631
48,233
978
47,255
6,210
2,836
742
525
49
—
274
345
8,410
5,570
896
58,413
6,809
5,685
12,494
45,919
253
45,666
6,013
2,607
756
647
50
142
164
461
10,981
10,840
22,609
6,055
3,263
10,925
42,852
15,384
1,363
21,525
5,407
3,133
10,188
40,253
16,253
3,016
13,237
1.69
1.65
1.02
$
$
$
$
13,024 $
14,021 $
1.65 $
1.61 $
1.05 $
1.78 $
1.74 $
1.04 $
Table of Contents
Interest income
Loans, including fees
AFS securities
Taxable
Nontaxable
Federal funds sold and other
Total interest income
Interest expense
Deposits
Borrowings
Total interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Noninterest income
Service charges and fees
Investment and Trust advisory fees
Earnings on corporate owned life insurance policies
Net gain on sale of mortgage loans
Net gains on foreclosed assets
Net gains on sale of AFS securities
Net income (loss) on joint venture investment
Other
Total noninterest income
Noninterest expenses
Compensation and benefits
Furniture and equipment
Occupancy
Other
Total noninterest expenses
Income before federal income tax expense
Federal income tax expense
NET INCOME
Earnings per common share
Basic
Diluted
Cash dividends per common share
The accompanying notes are an integral part of these consolidated financial statements.
38
Table of Contents
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
Net income
Unrealized gains (losses) on AFS securities
Unrealized gains (losses) arising during the period
Reclassification adjustment for net realized (gains) losses included in net income
Comprehensive income (loss) before income tax (expense) benefit
Tax effect (1)
Unrealized gains (losses) on AFS securities, net of tax
Unrealized gains (losses) on derivative instruments
Unrealized gains (losses) on derivative instruments arising during the period
Tax effect (1)
Unrealized gains (losses) on derivative instruments, net of tax
Change in unrecognized pension cost on defined benefit pension plan
Change in unrecognized pension cost arising during the period
Reclassification adjustment for net periodic benefit cost included in net income
Net change in unrecognized pension cost
Tax effect (1)
Change in unrealized pension cost, net of tax
Year Ended December 31
2019
2018
2017
$
13,024 $
14,021 $
13,237
12,276
(6)
12,270
(2,458)
9,812
(256)
54
(202)
(210)
268
58
(12)
46
(7,229)
—
(7,229)
1,415
(5,814)
33
(7)
26
265
345
610
(128)
482
289
(142)
147
89
236
43
(15)
28
11
412
423
(144)
279
543
13,780
Other comprehensive income (loss), net of tax
Comprehensive income (loss)
$
9,656
22,680 $
(5,306)
8,715 $
(1) See “Note 17 – Accumulated Other Comprehensive Income (Loss)” in the accompanying notes to consolidated financial statements for tax effect
reconciliation.
The accompanying notes are an integral part of these consolidated financial statements.
39
Table of Contents
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
OPERATING ACTIVITIES
Net income
Reconciliation of net income to net cash provided by operating activities:
Undistributed earnings of equity securities without readily determinable fair values
Provision for loan losses
Depreciation
Amortization of OMSR
Amortization of acquisition intangibles
Net amortization of AFS securities
Net unrealized (gains) losses on equity securities, at fair value
Net (gains) losses on sale of AFS securities
Net (gains) losses on sale of equity securities, at fair value
Net gain on sale of mortgage loans
Net gains on foreclosed assets
Increase in cash value of corporate owned life insurance policies, net of expenses
Share-based payment awards under equity compensation plan
Deferred income tax expense (benefit)
Origination of loans held-for-sale
Proceeds from loan sales
Net changes in operating assets and liabilities which provided (used) cash:
Accrued interest receivable
Other assets
Accrued interest payable and other liabilities
Net cash provided by (used in) operating activities
INVESTING ACTIVITIES
Activity in AFS securities
Sales
Maturities, calls, and principal payments
Purchases
Sale of equity securities, at fair value
Net loan principal (originations) collections
Proceeds from sales of foreclosed assets
Purchases of premises and equipment
Purchases of FHLB Stock
Funding of low income housing tax credit investments
Net cash provided by (used in) investing activities
40
Year Ended December 31
2019
2018
2017
$
13,024 $
14,021 $
13,237
3,320
30
2,908
307
72
1,784
—
(6)
—
(650)
(162)
(722)
523
408
(39,937)
40,041
427
1,299
637
23,303
33,840
81,543
(39,896)
—
(58,974)
706
(1,335)
—
(404)
15,480
(144)
978
2,940
218
96
1,873
41
—
(1)
(525)
(49)
(707)
612
275
(29,242)
30,969
135
115
358
21,963
—
80,005
(35,211)
3,537
(37,958)
450
(2,305)
(1,350)
(651)
6,517
40
253
2,902
340
119
2,144
—
(142)
—
(647)
(50)
(726)
640
2,836
(36,276)
37,179
(483)
799
(2,497)
19,668
12,827
97,617
(106,510)
—
(81,188)
322
(2,038)
(1,800)
(932)
(81,702)
Table of Contents
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Dollars in thousands)
FINANCING ACTIVITIES
Net increase (decrease) in deposits
Net increase (decrease) in borrowed funds
Cash dividends paid on common stock
Proceeds from issuance of common stock
Common stock repurchased
Common stock purchased for deferred compensation obligations
Net cash provided by (used in) financing activities
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
SUPPLEMENTAL CASH FLOWS INFORMATION:
Interest paid
Income taxes paid
SUPPLEMENTAL NONCASH INFORMATION:
Transfers of loans to foreclosed assets
Year Ended December 31
2019
2018
2017
21,158 $
(64,300)
(8,282)
4,876
(4,003)
(1,131)
(51,682)
(12,899)
73,471
27,435 $
(4,579)
(8,169)
6,864
(7,007)
(401)
14,143
42,623
30,848
60,572 $
73,471 $
17,827 $
15,485 $
745
50
70,218
7,184
(7,990)
6,177
(5,181)
(420)
69,988
7,954
22,894
30,848
12,388
3,120
645 $
467 $
331
$
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
41
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share amounts)
Note 1 – Nature of Operations and Summary of Significant Accounting Policies
BASIS OF PRESENTATION AND CONSOLIDATION: The consolidated financial statements include the accounts of Isabella Bank Corporation, a financial
services holding company, and its wholly owned subsidiary, Isabella Bank. All intercompany balances and accounts have been eliminated in consolidation.
References to “the Corporation”, “Isabella”, “we”, “our”, “us”, and similar terms refer to the consolidated entity consisting of Isabella Bank Corporation and its
subsidiary. References to Isabella Bank or the “Bank” refers to Isabella Bank Corporation’s subsidiary, Isabella Bank.
For additional information, see “Note 19 – Related Party Transactions.”
NATURE OF OPERATIONS: Isabella Bank Corporation is a financial services holding company offering a wide array of financial products and services in
several mid-Michigan counties. Our banking subsidiary, Isabella Bank, offers banking services through 30 locations, 24 hour banking services locally and
nationally through shared automatic teller machines, 24 hour online banking, mobile banking, and direct deposits to businesses, institutions, individuals and their
families. Lending services offered include commercial loans, agricultural loans, residential real estate loans, and consumer loans. Deposit services include interest
and noninterest bearing checking accounts, savings accounts, money market accounts, certificates of deposit, direct deposits, cash management services, mobile
and internet banking, electronic bill pay services, and automated teller machines. Other related financial products include trust and investment services, safe deposit
box rentals, and credit life insurance. Active competition, principally from other commercial banks, savings and loan associations, mortgage brokers, finance
companies, credit unions, and retail brokerage firms exists in all of our principal markets. Our results of operations can be significantly affected by changes in
interest rates, changes in the local economic environment and changes in regulations.
USE OF ESTIMATES: In preparing consolidated financial statements in conformity with accounting principles generally accepted in the United States of
America, we make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated balance sheet and reported
amounts of revenues and expenses during the reporting year. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the ALLL, the fair value of AFS investment
securities, the valuation of goodwill and other intangible assets and equity securities without readily determinable fair values related to our ownership interest in
Corporate Settlement Solutions, LLC (“CSS”).
FAIR VALUE MEASUREMENTS: Fair value refers to the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly
transaction between market participants in the market in which the reporting entity transacts such sales or transfers based on the assumptions market participants
would use when pricing an asset or liability. Assumptions are developed based on prioritizing information within a fair value hierarchy that gives the highest
priority to quoted prices in active markets and the lowest priority to unobservable data, such as the reporting entity’s own data. We may choose to measure eligible
items at fair value at specified election dates.
For assets and liabilities recorded at fair value, it is our policy to maximize the use of observable inputs and minimize the use of unobservable inputs when
developing fair value measurements for those financial instruments for which there is an active market. In cases where the market for a financial asset or liability is
not active, we include appropriate risk adjustments that market participants would make for nonperformance and liquidity risks when developing fair value
measurements. Fair value measurements for assets and liabilities for which limited or no observable market data exists are accordingly based primarily upon
estimates, are often calculated based on the economic and competitive environment, the characteristics of the asset or liability and other factors. Therefore, the
results cannot be determined with precision and may not be realized in an actual sale or immediate settlement of the asset or liability. Additionally, there may be
inherent weaknesses in any calculation technique, and changes in the underlying assumptions used, including discount rates and estimates of future cash flows,
could significantly affect the results of current or future values.
We utilize fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Investment securities
AFS and derivative instruments are recorded at fair value on a recurring basis. Additionally, from time to time, we may be required to record other assets and
liabilities at fair value on a nonrecurring basis, such as mortgage loans AFS, impaired loans, foreclosed assets, OMSR, goodwill, and certain other assets and
liabilities. These nonrecurring fair value adjustments typically involve the application of lower of cost or market accounting or write downs of individual assets.
42
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Fair Value Hierarchy
Under fair value measurement and disclosure authoritative guidance, we group assets and liabilities measured at fair value into three levels, based on the markets in
which the assets and liabilities are traded, and the reliability of the assumptions used to determine fair value, based on the prioritization of inputs in the valuation
techniques. These levels are:
Level 1:
Valuation is based upon quoted prices for identical instruments traded in active markets.
Level 2:
Level 3:
Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are
not active and model based valuation techniques for which all significant assumptions are observable in the market.
Valuation is generated from model based techniques that use at least one significant assumption not observable in the market. These unobservable
assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability.
The asset’s or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value
measurement. Valuation techniques maximize the use of observable inputs and minimize the use of unobservable inputs. Transfers between measurement levels are
recognized at the end of reporting periods.
For further discussion of fair value considerations, refer to “Note 18 – Fair Value.”
SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK: Most of our activities are conducted with customers located within the central Michigan
area. A significant amount of our outstanding loans are secured by commercial and residential real estate. Other than these types of loans, there is no significant
concentration to any other industry or any one customer.
CASH AND CASH EQUIVALENTS: For purposes of the consolidated statements of cash flows, cash and cash equivalents include cash and balances due from
banks, federal funds sold, and other deposit accounts. Generally, federal funds sold are for a one day period. We maintain deposit accounts in various financial
institutions which generally exceed federally insured limits or are not insured. We do not believe we are exposed to any significant interest, credit or other financial
risk as a result of these deposits.
AFS SECURITIES: Purchases of investment securities are generally classified as AFS. However, we may elect to classify securities as either held to maturity or
trading. Securities classified as AFS debt securities are recorded at fair value, with unrealized gains and losses, net of the effect of deferred income taxes, excluded
from earnings and reported in other comprehensive income. Included in AFS securities are auction rate money market preferred securities. These investments, for
federal income tax purposes, have no federal income tax impact given the nature of the investments. Auction rate money market preferred securities are recorded at
fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income. Purchase premiums and discounts are recognized
in interest income using the interest method over the term of the securities. Realized gains and losses on the sale of AFS securities are determined using the specific
identification method.
AFS securities are reviewed quarterly for possible OTTI. In determining whether an OTTI exists for debt securities, we assert that: (a) we do not have the intent to
sell the security; and (b) it is more likely than not we will not have to sell the security before recovery of its cost basis. If these conditions are not met, we recognize
an OTTI charge through earnings for the difference between the debt security’s amortized cost basis and its fair value, and such amount is included in noninterest
income. For debt securities that do not meet the above criteria, and we do not expect to recover the security’s amortized cost basis, the security is considered other-
than-temporarily impaired. For these debt securities, we separate the total impairment into the credit risk loss component and the amount of the loss related to
market and other risk factors. In order to determine the amount of the credit loss for a debt security, we calculate the recovery value by performing a discounted
cash flow analysis based on the current cash flows and future cash flows we expect to recover. The amount of the total OTTI related to the credit risk is recognized
in earnings and is included in noninterest income. The amount of the total OTTI related to other risk factors is recognized as a component of other comprehensive
income. For debt securities that have recognized OTTI through earnings, if through subsequent evaluation there is a significant increase in the cash flow expected,
the difference between the amortized cost basis and the cash flows expected to be collected is accreted as interest income.
LOANS: Loans that we have the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at their outstanding principal balance
adjusted for any charge-offs, the ALLL, and any deferred fees or costs. Interest income on loans 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 appropriate yield methods.
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The accrual of interest on agricultural, commercial and mortgage 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. 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 in nonaccrual 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. Interest income on loans in nonaccrual status is not recognized until qualifying for
return to accrual status. Loans are returned to accrual status when all principal and interest amounts contractually due are brought current and future payments are
reasonably assured. For impaired loans not classified as nonaccrual, interest income continues to be accrued over the term of the loan based on the principal
amount outstanding.
ALLOWANCE FOR LOAN AND LEASE LOSSES: 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 allowance when we believe the uncollectability of the loan balance is confirmed. Subsequent recoveries, if
any, are credited to the allowance.
We evaluate the ALLL on a regular basis. Our periodic review of the collectability of loans considers 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 ALLL consists of specific, general, and unallocated components. The specific component relates to loans that are deemed to be impaired. For such loans that
are analyzed for specific allowance allocations, an allowance is established when the discounted cash flows or collateral value, less costs to sell, of the impaired
loan is lower than the carrying value of that loan. The general component covers non-impaired loans and is based on historical loss experience adjusted for current
conditions. An unallocated component is maintained to cover uncertainties that we believe affect our estimate of probable losses based on qualitative factors. The
unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating
specific and general losses in the portfolio.
Loans may be classified as impaired if they meet one or more of the following criteria:
1.
2.
3.
There has been a charge-off of its principal balance;
The loan has been classified as a TDR; or
The loan is in nonaccrual status.
Impairment is measured on a loan-by-loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate, or the fair
value of the collateral, less costs to sell, if the loan is collateral dependent. Large groups of smaller-balance, homogeneous loans are collectively evaluated for
impairment.
LOANS HELD FOR SALE: Mortgage loans held for sale on the secondary market are carried at the lower of cost or fair value as determined by aggregating
outstanding commitments from investors or current investor yield requirements. Net unrealized losses, if any, would be recognized as a component of other
noninterest expenses.
Mortgage loans held for sale are sold with the mortgage servicing rights retained by us. Gains or losses on sales of mortgage loans are recognized based on the
difference between the selling price and the carrying value of the related mortgage loans sold.
TRANSFERS OF FINANCIAL ASSETS: Transfers of financial assets, including mortgage loans and participation loans, are accounted for as sales when control
over the assets has been surrendered. Control over transferred assets is determined to be surrendered when 1) the assets have been legally isolated from us, 2) the
transferee obtains the right (free of conditions that constrain it from taking advantage of the right) to pledge or exchange the transferred assets, and 3) we do not
maintain effective control over the transferred assets through an agreement to repurchase them before their maturity. Other than servicing, we have no substantive
continuing involvement related to these loans.
SERVICING: Servicing assets are recognized as separate assets when rights are acquired through purchase or through sale of financial assets. We have no
purchased servicing rights. For sales of mortgage loans, a portion of the cost of originating the loan is allocated to the servicing right based on relative fair value.
Fair value is based on market prices for comparable mortgage servicing contracts, when available, or alternatively, is based on a valuation model that calculates the
present value of estimated future net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net
servicing income, such as the cost to service, the discount rate, the custodial earnings rate, an inflation rate, ancillary income, prepayment speeds and default rates
and losses.
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Table of Contents
Servicing assets are evaluated for impairment based upon the fair value of the rights as compared to amortized cost. Impairment is determined by stratifying rights
into tranches based on predominant risk characteristics, such as interest rate, loan type, and investor type. Impairment is recognized through a valuation allowance
for an individual tranche, to the extent that fair value is less than the capitalized amount for the tranche. If we later determine that all or a portion of the impairment
no longer exists for a particular tranche, a reduction of the valuation allowance may be recorded as an increase to income. Capitalized servicing rights are reported
in other assets and are amortized into noninterest income in proportion to, and over the period of, the estimated future net servicing income of the underlying
financial assets. The unpaid principal balance of mortgages serviced for others was $259,375 and $259,481 with capitalized servicing rights of $2,264 and $2,434
at December 31, 2019 and 2018, respectively, which are included in other assets.
Servicing fee income is recorded for fees earned for servicing loans for others. The fees are based on a contractual percentage of the outstanding principal or a
fixed amount per loan and are recorded as income when earned. We recorded servicing fee revenue of $626, $651, and $671 related to residential mortgage loans
serviced for others during 2019, 2018, and 2017, respectively, which is included in other noninterest income.
FORECLOSED ASSETS: Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at the lower of our carrying amount
or fair value less estimated selling costs at the date of transfer, establishing a new cost basis. Any write downs based on the asset’s fair value at the date of
acquisition are charged to the ALLL. After foreclosure, property held for sale is carried at the lower of the new cost basis or fair value less costs to sell. Impairment
losses on property to be held and used are measured at the amount by which the carrying amount of property exceeds its fair value. Costs relating to holding these
assets are expensed as incurred. We periodically perform valuations and any subsequent write downs are recorded as a charge to operations, if necessary, to reduce
the carrying value of a property to the lower of our carrying amount or fair value less costs to sell. Foreclosed assets of $456 and $355 as of December 31, 2019
and 2018, respectively, are included in other assets.
PREMISES AND EQUIPMENT: Land is carried at cost. Buildings and equipment are carried at cost, less accumulated depreciation which is computed
principally by the straight-line method based upon the estimated useful lives of the related assets, which range from 3 to 40 years. Major improvements are
capitalized and appropriately amortized based upon the useful lives of the related assets or the expected terms of the leases, if shorter, using the straight-line
method. Maintenance, repairs and minor alterations are charged to current operations as expenditures occur. We annually review these assets to determine whether
carrying values have been impaired.
EQUITY SECURITIES WITHOUT READILY DETERMINABLE FAIR VALUES: Included in equity securities without readily determinable fair values are
our holdings in FHLB stock and FRB stock as well as our joint venture investment in CSS. Our investment in CSS was made in 2008. We are not the managing
entity of CSS and account for our investment under the equity method of accounting.
Equity securities without readily determinable fair values consist of the following holdings as of December 31:
FHLB Stock
Investment in joint venture
FRB Stock
Other
Total
2019
2018
15,050 $
4,246
1,999
334
21,629 $
15,050
7,565
1,999
334
24,948
$
$
For further discussion of our joint venture investment, refer to “Note 6 – Investment in Joint Venture.”
EQUITY COMPENSATION PLAN: At December 31, 2019, the Directors Plan had 205,004 shares eligible to be issued to participants, for which the Rabbi
Trust held 27,069 shares. We had 220,171 shares to be issued at December 31, 2018, with 16,673 shares held in the Rabbi Trust. Compensation costs relating to
share-based payment transactions are recognized as the services are rendered, with the cost measured based on the fair value of the equity or liability instruments
issued (see “Note 13 – Benefit Plans”).
CORPORATE OWNED LIFE INSURANCE: We have purchased life insurance policies on key members of management, partially for the purpose of funding
certain post-retirement benefits. In the event of death of one of these individuals, we would receive a specified cash payment equal to the face value of the policy.
Such policies are recorded at their cash surrender value, or the amount that can be realized on the balance sheet date. Increases in cash surrender value in excess of
single premiums paid are reported as other noninterest income.
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Of the purchased life insurance policies, we hold post retirement benefits with a present value estimated to be $2,875 and $2,751 as of December 31, 2019 and
2018, respectively, which is included in accrued interest payable and other liabilities. The expenses associated with these policies totaled $125, $0, and $577 for
2019, 2018, and 2017, respectively.
ACQUISITION INTANGIBLES AND GOODWILL: We previously acquired branch facilities and related deposits in business combinations accounted for as a
purchase. The acquisitions included amounts related to the valuation of customer deposit relationships (core deposit intangibles). Core deposit intangibles arising
from acquisitions are included in goodwill and other intangible assets are being amortized over their estimated lives and evaluated for potential impairment on at
least an annual basis. Goodwill, which represents the excess of the purchase price over identifiable assets, is not amortized but is evaluated for 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 is more likely than not to be impaired, we perform a cash flow valuation to determine the extent of the
potential impairment. This valuation method requires a significant degree of our judgment. In the event the projected undiscounted net operating cash flows for
these intangible assets are less than the carrying value, the asset is recorded at fair value as determined by the valuation model.
OFF BALANCE SHEET CREDIT RELATED FINANCIAL INSTRUMENTS: In the ordinary course of business, we have entered into commitments to
extend credit, including commitments under credit card arrangements, commercial lines of credit, home equity lines of credit, commercial letters of credit, and
standby letters of credit. Such financial instruments are recorded only when funded.
REVENUE RECOGNITION: Our revenue is comprised primarily of interest income, service charges and fees, gains on the sale of loans and AFS securities,
earnings on corporate owned life insurance policies, and other noninterest income. Other noninterest income is typically service and performance driven in nature
and comprised primarily of investment and trust advisory fees. We recognize revenue, excluding interest income and other income specifically scoped out, in
accordance with ASC 606, Revenue From Contracts with Customers. Revenue is recognized when our performance obligation has been satisfied according to our
contractual obligation.
FEDERAL INCOME TAXES: Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method. Under this method, the net
deferred tax assets or liabilities are determined based on the tax effects of the temporary differences between the book and tax basis on the various balance sheet
assets and liabilities and gives current recognition to changes in tax rates and laws. Valuation allowances are established, where necessary, to reduce deferred tax
assets to the amount expected to be realized. Income tax expense is the tax payable or refundable for the year plus or minus the change during the year in deferred
tax assets and liabilities.
On December 22, 2017, the Tax Act was enacted. The law established a flat corporate federal statutory income tax rate of 21%. In accordance with ASC 740,
Income Taxes, the effect of income tax law changes on deferred taxes was recognized as a component of income tax expense related to continuing operations in the
period in which the law was enacted. As such, federal income tax expense for the year ended December 31, 2017 reflects the effect of the tax rate change on net
deferred tax assets and liabilities (see “Note 16 – Federal Income Taxes” and “Note 17 – Accumulated Other Comprehensive Income (Loss)”).
We analyze our filing positions in the jurisdictions where we are required to file income tax returns, as well as all open tax years in these jurisdictions. We also
treat interest and penalties attributable to income taxes, to the extent they arise, as a component of our noninterest expenses.
DEFINED BENEFIT PENSION PLAN: We maintain a noncontributory defined benefit pension plan, which was curtailed effective March 1, 2007. The service
cost component of the defined benefit pension plan is included in “compensation and benefits” on the consolidated statements of income and is funded consistent
with the requirements of federal laws and regulations. All other costs related to the defined benefit pension plan are included in “other” noninterest expenses on the
consolidated statements of income. The current benefit obligation is included in "accrued interest payable and other liabilities" on the consolidated balance sheets.
Inherent in the determination of defined benefit pension costs are assumptions concerning future events that will affect the amount and timing of required benefit
payments under the plan. These assumptions include demographic assumptions such as mortality, a discount rate used to determine the current benefit obligation
and a long-term expected rate of return on plan assets. Net periodic benefit cost includes the interest cost based on the assumed discount rate, an expected return on
plan assets based on an actuarially derived market-related value of assets, and amortization of unrecognized net actuarial gains or losses. Actuarial gains and losses
result from experience different from that assumed and from changes in assumptions (excluding asset gains and losses not yet reflected in market-related value).
Amortization of actuarial gains and losses is included as a component of net periodic defined benefit pension cost.
For additional information, see “Note 13 – Benefit Plans.”
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MARKETING COSTS: Marketing costs are expensed as incurred (see “Note 15 – Other Noninterest Expenses”).
RECLASSIFICATIONS: Certain amounts reported in the 2018 and 2017 consolidated financial statements have been reclassified to conform with the 2019
presentation. Other assets and other liabilities on the consolidated balance sheets were increased by $5,195 as of December 31, 2018 to reclassify pension and
income tax related liabilities (pension: $3,470, income taxes: $1,725). This resulted in a $5,195 increase in total assets and total liabilities as of December 31, 2018.
All other balances and ratios were not materially impacted.
Note 2 – Accounting Standards Updates
Recently Adopted Accounting Standards Updates
ASU No. 2016-02: “Leases (Topic 842)”
In February 2016, ASU No. 2016-02 was issued to create Topic 842 - Leases which requires recognition of lease assets and lease liabilities on the balance sheet for
leases previously classified as operating leases. Accounting guidance is for both lessee and lessor accounting. Under lessee accounting, a lessee should recognize in
the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for
the lease term.
For finance leases, a lessee is required to do the following: 1) recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease
payments, in the statement of financial position; 2) recognize interest on the lease liability separately from amortization of the right-of-use asset in the statement of
comprehensive income; and 3) classify repayments of the principal portion of the lease liability within financing activities and payments of interest on the lease
liability and variable lease payments within operating activities in the statement of cash flows. For operating leases, a lessee is required to do the following: 1)
recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, in the statement of financial position; 2) recognize
a single lease cost, calculated so that the cost of the lease is allocated over the lease term on a generally straight-line basis; and 3) classify all cash payments within
operating activities in the statement of cash flows.
The accounting applied by a lessor is largely unchanged from that applied under previous GAAP. The new authoritative guidance was effective on January 1, 2019.
We reviewed our lease agreements to determine the appropriate treatment under this guidance. These changes resulted in the recognition of a $72 operating lease
asset and liability on the consolidated balance sheet as of January 1, 2019 which was restated prospectively. Given the current insignificant impact to our operating
results, further financial statement disclosures were not considered necessary as of December 31, 2019.
Pending Accounting Standards Updates
ASU No. 2016-13: “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”
In June 2016, ASU No. 2016-13 was issued and updated the measurement for credit losses for AFS debt securities and assets measured at amortized cost which
include loans, trade receivables, and any other financial assets with the contractual right to receive cash. Current GAAP requires an “incurred loss” methodology
for recognizing credit losses that delays recognition until it is probable a loss has been incurred. Under the incurred loss approach, entities are limited to a probable
initial recognition threshold when credit losses are measured under GAAP; an entity generally only considers past events and current conditions in measuring the
incurred loss.
Under the new guidance, the incurred loss impairment methodology in current GAAP is replaced with a methodology that reflects current expected credit losses
(CECL). This methodology requires consideration of a broader range of reasonable and supportable information to calculate credit loss estimates. The
measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and
supportable forecasts that affect the collectability of the reported amount. An entity must use judgment in determining the relevant information and estimation
methods that are appropriate in its circumstances which applies to assets measured either collectively or individually.
The update allows an entity to revert to historical loss information that is reflective of the contractual term (considering the effect of prepayments) for periods that
are beyond the time frame for which the entity is able to develop reasonable and supportable forecasts. In addition, the disclosures of credit quality indicators in
relation to the amortized cost of financing receivables, a current disclosure requirement, are further disaggregated by year of origination (or vintage). The vintage
information will be useful for financial statement users to better assess changes in underwriting standards and credit quality trends in asset portfolios over time and
the effect of those changes on credit losses.
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Overall, the update will allow entities the ability to measure expected credit losses without the restriction of incurred or probable losses that exist under current
GAAP. For users of the financial statements, the update requires disclosure of decision-useful information about the expected credit losses on financial instruments
and other commitments to extend credit held by a reporting entity at each reporting date. The new authoritative guidance was effective for interim and annual
periods beginning after December 15, 2019 for select filers. Effective October 16, 2019, the FASB approved changes to the implementation date of this guidance
for some filers. As a small reporting company, as defined by the SEC, our implementation date was delayed from January 1, 2020 to January 1, 2023. Early
adoption continues to be permissible under the revised implementation date; currently we have no plans for early adoption. This guidance may have a significant
impact on our operations and financial statement disclosures as well as that of the banking industry as a whole.
We have invested a considerable amount of effort toward this guidance and will continue to invest considerable effort until our implementation date. A committee
was formed and is accountable for timely and accurate adoption of the guidance. A service provider that has focused on the ALLL for more than 10 years and
serves hundreds of financial institutions has been engaged to provide us with education, advisory, and software solutions exclusively related to the ACL. We will
run parallel processes which will help to ensure we are ready to calculate, review, and report the ACL by the required implementation date.
ASU No. 2018-13: “Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement”
In August 2018, ASU No. 2018-13 was issued and provided an updated framework related to fair value disclosures. For entities required to make disclosures about
recurring or nonrecurring fair value measurements, the update provides disclosure modifications which include the removal, modification and addition of specific
disclosure requirements.
The new authoritative guidance is effective for interim and annual periods beginning after December 15, 2019 and will impact our financial statement disclosures.
ASU No. 2018-14: “Compensation - Retirement Benefits - Defined Pension Plans - General (Subtopic 715-20): Disclosure Framework - Changes to the Disclosure
Requirements for Defined Benefit Plans”
In August 2018, ASU No. 2018-14 was issued and provided an updated framework related to defined benefit plans. For employers that sponsor defined benefit
pension or other postretirement plans, the update provides disclosure modifications which include the removal of six specific requirements, the addition of two
specific requirements and clarification to existing requirements.
Disclosure additions include 1) the weighted-average interest crediting rates for cash balance plans and other plans with promised interest crediting rates; 2) an
explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period. Clarification items relate to 1) the projected
benefit obligation (PBO) and fair value of plan assets for plans with PBOs in excess of plan assets; and 2) the accumulated benefit obligation (ABO) and fair value
of plan assets for plans with ABOs in excess of plan assets.
The new authoritative guidance is effective for fiscal years ending after December 15, 2020, with early adoption permitted, and will likely impact our financial
statement disclosures.
ASU No. 2018-15: “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a
Cloud Computing Arrangement That Is a Service Contract”
In August 2018, ASU No. 2018-15 was issued and provided guidance on the accounting for implementation, setup, and other upfront costs (collectively referred to
as implementation costs) for entities that are a customer in a hosting arrangement that is a service contract. The guidance also provides clarification on
requirements to capitalize implementation costs and the required accounting for expenses related to capitalization of implementation costs.
The new authoritative guidance is effective for interim and annual periods beginning after December 15, 2019. Based on prospective approach, we will review
future arrangements to determine the appropriate treatment under this guidance. These changes are not expected to have a significant impact on our operating
results or financial statement disclosures upon adoption.
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Note 3 – AFS Securities
The amortized cost and fair value of AFS securities, with gross unrealized gains and losses, are as follows as of December 31:
States and political subdivisions
Auction rate money market preferred
Mortgage-backed securities
Collateralized mortgage obligations
Total
Government sponsored enterprises
States and political subdivisions
Auction rate money market preferred
Mortgage-backed securities
Collateralized mortgage obligations
Total
Amortized
Cost
2019
Gross
Unrealized
Gains
Gross
Unrealized
Losses
165,005 $
4,747 $
3,200
139,831
115,944
423,980 $
—
933
1,007
6,687 $
2018
Fair
Value
169,752
3,119
140,204
116,764
429,839
— $
81
560
187
828 $
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
172 $
188,992
3,200
189,688
119,193
— $
2,125
—
76
71
2 $
251
646
5,280
2,504
501,245 $
2,272 $
8,683 $
170
190,866
2,554
184,484
116,760
494,834
$
$
$
$
The amortized cost and fair value of AFS securities by contractual maturity at December 31, 2019 are as follows:
States and political subdivisions
Auction rate money market preferred
Mortgage-backed securities
Collateralized mortgage obligations
Total amortized cost
Fair value
Due in
One Year
or Less
Maturing
After One
Year But
Within
Five Years
After Five
Years But
Within
Ten Years
Securities with
Variable Monthly
Payments or
Noncontractual
Maturities
After
Ten Years
Total
$
$
$
28,932 $
70,795 $
38,342 $
26,936 $
— $
165,005
—
—
—
—
—
—
—
—
—
—
—
—
3,200
139,831
115,944
28,932 $
29,091 $
70,795 $
72,332 $
38,342 $
39,875 $
26,936 $
258,975 $
28,454 $
260,087 $
3,200
139,831
115,944
423,980
429,839
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 investments 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 during the years ended December 31 is displayed in the following table.
Proceeds from sales of AFS securities
Realized gains (losses)
Applicable income tax expense (benefit) (1)
2019
2018
2017
$
$
$
33,840 $
6 $
1 $
— $
— $
— $
12,827
142
48
(1) Calculations are based on a federal income tax rate of 21% in 2019 and 2018 and 34% in 2017.
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The following information pertains to AFS securities with gross unrealized losses at December 31 aggregated by investment category and length of time that
individual securities have been in a continuous loss position.
States and political subdivisions
Auction rate money market preferred
Mortgage-backed securities
Collateralized mortgage obligations
Total
Number of securities in an unrealized loss position:
Government sponsored enterprises
States and political subdivisions
Auction rate money market preferred
Mortgage-backed securities
Collateralized mortgage obligations
Total
Number of securities in an unrealized loss position:
2019
Less Than Twelve Months
Twelve Months or More
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Total
Unrealized
Losses
— $
—
3
43
— $
—
3,974
20,262
— $
— $
81
557
144
3,119
49,701
13,309
46 $
24,236 $
782 $
66,129 $
9
19
—
81
560
187
828
28
2018
Less Than Twelve Months
Twelve Months or More
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Total
Unrealized
Losses
— $
— $
2 $
170 $
83
—
896
199
14,732
—
43,485
21,886
168
646
4,384
2,305
15,090
2,554
124,253
87,929
1,178 $
80,103 $
7,505 $
229,996 $
66
102
2
251
646
5,280
2,504
8,683
168
$
$
$
$
The reduction in unrealized losses on our AFS securities portfolio resulted from recent decreases in intermediate-term and long-term benchmark interest rates.
As of December 31, 2019 and 2018, we conducted an analysis to determine whether any AFS securities currently in an unrealized loss position should be identified
as 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 analysis, which included the criteria outlined above and the fact that we have asserted that we do not have to sell any AFS securities in an unrealized
loss position, we do not believe that the values of any AFS securities are other-than-temporarily impaired as of December 31, 2019 and 2018, with the exception of
one municipal bond previously identified which had no activity during the period.
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Note 4 – 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, 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 appropriate amortization methods.
The accrual of interest on commercial and agricultural loans, as well as residential real estate loans, is discontinued at the time a loan is 90 days or more past due
unless the credit is well-secured and in the process of short-term collection. Upon transferring a loan 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 a charge-off is necessary. Consumer loans are typically charged-off
no later than 180 days past due. Past due status is based on the contractual term of the loan. In all cases, a loan is placed in nonaccrual status or charged-off at an
earlier date if collection of principal or interest is considered doubtful.
When a loan is placed in 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 and achievement of current payment status.
Commercial and agricultural loans include loans for commercial real estate, commercial operating loans, advances to mortgage brokers, farmland and agricultural
production, and loans to 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 may
be serviced through the use of loan participations with other commercial banks. Commercial and agricultural real estate loans commonly require loan-to-value
limits of 80% or less. Depending upon the type of loan, past credit history, and current operating results, we may require the borrower to pledge accounts
receivable, inventory, property, or equipment. Personal guarantees are generally required from the owners of closely held corporations, partnerships, and sole
proprietorships. In addition, we may require annual financial statements, prepare cash flow analyses, and review credit reports.
We entered into a mortgage purchase program in 2016 with a financial institution where we participate in advances to mortgage brokers (“advances”). The
mortgage brokers originate residential mortgage loans with the intent to sell them on the secondary market. We participate in the advance to the mortgage broker,
which is secured by the underlying mortgage loan, until it is ultimately sold on the secondary market. As such, the average life of each participated advance is
approximately 20-30 days. Funds from the sale of the loan are used to pay off our participation in the advance to the mortgage broker. We classify these advances
as commercial loans and include the outstanding balance in commercial loans on our consolidated balance sheets. Under the participation agreement, we
committed to a maximum outstanding aggregate amount of $50,000. The difference between our outstanding balance and the maximum outstanding aggregate
amount is classified as “Unfunded commitments under lines of credit” in the “Contractual Obligations and Loan Commitments” section of the Management's
Discussion and Analysis of Financial Condition and Results of Operations of this report.
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, our liquidity needs,
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 100% of the lower of the appraised value of the property or
the purchase price. Private mortgage insurance is typically required on loans with loan-to-value ratios in excess of 80% unless the loan qualifies for government
guarantees.
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Underwriting criteria for residential real estate loans generally 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 40% of income.
Verification of acceptable credit reports.
Verification of employment, income, and financial information.
Appraisals are performed by independent appraisers and are reviewed for appropriateness. Generally, mortgage loan requests are reviewed by our mortgage loan
committee or through a secondary market underwriting system; loans in excess of $1,000 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 15 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 probable. Subsequent recoveries, if any, are credited to the ALLL.
The ALLL is evaluated on a regular basis for appropriateness. Our periodic review of the collectability of a loan considers 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 and the present value
of expected future cash flows discounted at the loan’s effective interest rate, or the fair value of the collateral, less costs to sell, if the loan is collateral dependent.
Historical loss allocations are calculated at the loan class and segment levels based on a migration analysis of the loan portfolio, with the exception of advances to
mortgage brokers, over the preceding five years. With no historical losses on advances to mortgage brokers, there is no allocation in the commercial segment
displayed in the following tables. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in
the methodologies for estimating specific and general losses in the portfolio.
A summary of changes in the ALLL and the recorded investment in loans by segments follows:
January 1, 2019
Charge-offs
Recoveries
Provision for loan losses
December 31, 2019
January 1, 2018
Charge-offs
Recoveries
Provision for loan losses
December 31, 2018
Allowance for Loan Losses
Year Ended December 31, 2019
$
$
$
$
Commercial
Agricultural
Residential
Real Estate
Consumer
Unallocated
Total
2,563 $
775
$
1,992 $
857 $
2,188 $
(143)
123
(629)
(240)
3
96
(99)
189
(35)
(466)
167
364
—
—
234
1,914 $
634
$
2,047 $
922 $
2,422 $
8,375
(948)
482
30
7,939
Commercial
Agricultural
Residential
Real Estate
Consumer
Unallocated
Total
Allowance for Loan Losses
Year Ended December 31, 2018
1,706 $
611
$
2,563 $
900 $
1,920 $
(575)
325
1,107
2,563 $
(51)
3
212
775
52
(151)
261
(681)
(324)
209
72
—
—
268
$
1,992 $
857 $
2,188 $
7,700
(1,101)
798
978
8,375
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ALLL
Individually evaluated for impairment
Collectively evaluated for impairment
Total
Loans
Individually evaluated for impairment
Collectively evaluated for impairment
Total
ALLL
Individually evaluated for impairment
Collectively evaluated for impairment
Total
Loans
Individually evaluated for impairment
Collectively evaluated for impairment
Total
Allowance for Loan Losses and Recorded Investment in Loans
As of December 31, 2019
Commercial
Agricultural
Residential
Real Estate
Consumer
Unallocated
Total
$
$
$
$
$
$
$
$
15 $
1,899
1,914 $
26 $
608
634 $
1,073 $
974
2,047 $
— $
922
922 $
— $
2,422
2,422 $
1,114
6,825
7,939
7,865 $
14,840 $
5,486 $
693,076
102,080
293,083
700,941 $
116,920 $
298,569 $
—
70,140
70,140
$
28,191
1,158,379
$
1,186,570
Allowance for Loan Losses and Recorded Investment in Loans
As of December 31, 2018
Commercial
Agricultural
Residential
Real Estate
Consumer
Unallocated
Total
443 $
2,120
2,563 $
132 $
643
775 $
1,363 $
629
1,992 $
— $
857
857 $
— $
2,188
2,188 $
1,938
6,437
8,375
9,899 $
14,298 $
6,893 $
649,630
112,863
268,450
659,529 $
127,161 $
275,343 $
9
66,665
66,674
$
31,099
1,097,608
$
1,128,707
The following tables display the credit quality indicators for commercial and agricultural credit exposures based on internally assigned credit risk ratings as of
December 31:
Real Estate
Other
Commercial
Advances to
Mortgage
Brokers
2019
Agricultural
Total
Real Estate
Other
Total
Total
Rating
1 - Excellent
2 - High quality
3 - High satisfactory
4 - Low satisfactory
5 - Special mention
6 - Substandard
7 - Vulnerable
8 - Doubtful
9 - Loss
$
— $
390 $
2,582
109,737
377,198
15,372
4,874
390
—
—
8,844
42,858
94,847
3,470
3,625
1,231
—
—
— $
—
11,426
390 $
— $
35,523
188,118
—
—
—
—
—
—
472,045
18,842
8,499
1,621
—
—
1,452
16,765
42,798
7,165
9,136
2,711
—
—
— $
99
6,769
20,861
3,754
3,836
1,574
—
—
— $
390
1,551
23,534
63,659
10,919
12,972
4,285
—
—
12,977
211,652
535,704
29,761
21,471
5,906
—
—
Total
$
510,153 $
155,265 $
35,523 $
700,941 $
80,027 $
36,893 $
116,920 $
817,861
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Real Estate
Other
Commercial
Advances to
Mortgage
Brokers
Rating
1 - Excellent
2 - High quality
3 - High satisfactory
4 - Low satisfactory
5 - Special mention
6 - Substandard
7 - Vulnerable
8 - Doubtful
9 - Loss
$
21 $
31 $
4,564
127,573
344,920
12,847
7,428
334
—
—
13,473
43,199
84,634
5,287
2,002
1,423
—
—
— $
—
18,037
11,793
182,565
—
—
—
—
—
—
429,554
18,134
9,430
1,757
—
—
2018
Agricultural
Total
Real Estate
Other
Total
Total
52 $
51 $
28 $
79 $
131
2,729
18,325
46,636
10,520
6,343
2,716
—
—
613
7,039
19,344
5,624
4,960
2,233
—
—
3,342
25,364
65,980
16,144
11,303
4,949
—
—
21,379
207,929
495,534
34,278
20,733
6,706
—
—
Total
$
497,687 $
150,049 $
11,793 $
659,529 $
87,320 $
39,841 $
127,161 $
786,690
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.
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 constitutes 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.
Loan may need to be restructured to improve collateral position or reduce payments.
Collateral or guaranty offers limited protection.
Negative debt service coverage, however the credit is well collateralized and payments are current.
6. SUBSTANDARD – Classified
Credit is inadequately protected by the current net worth and paying capacity of the borrower or of the collateral pledged. There is a distinct possibility we will
implement collection procedures if the loan deficiencies are not corrected. Any commercial loan placed in nonaccrual status will be rated “7” or worse. 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.
Interest non-accrual may be warranted.
Collateral provides little or no value.
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•
•
Requires excessive attention of the loan officer.
Borrower is uncooperative with loan officer.
7. VULNERABLE – Classified
Credit is considered “Substandard” and warrants placing in nonaccrual status. Risk of loss is being evaluated and exit strategy options are under review. Other
characteristics that may apply:
•
Insufficient cash flow to service debt.
• Minimal or no payments being received.
•
•
Limited options available to avoid the collection process.
Transition status, expect action will take place to collect loan without immediate progress being made.
8. DOUBTFUL – Workout
Credit has all the weaknesses inherent in a “Substandard” loan with the added characteristic that collection and/or liquidation is pending. The possibility of a
loss is extremely high, but its classification as a loss is deferred until liquidation procedures are completed, or reasonably estimable. Other characteristics that
may apply:
•
•
•
•
•
•
•
•
•
Normal operations are severely diminished or have ceased.
Seriously impaired cash flow.
Original repayment terms materially altered.
Secondary source of repayment is inadequate.
Survivability as a “going concern” is impossible.
Collection process has begun.
Bankruptcy petition has been filed.
Judgments have been filed.
Portion of the loan balance has been charged-off.
9. LOSS – Charge-off
Credit is considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification is for charged-off loans
but does not mean that the asset has absolutely no recovery or salvage value. These loans are further characterized by:
•
•
•
•
•
Liquidation or reorganization under Bankruptcy, with poor prospects of collection.
Fraudulently overstated assets and/or earnings.
Collateral has marginal or no value.
Debtor cannot be located.
Over 120 days delinquent.
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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 for the entire loan portfolio as of December 31:
Accruing Interest
and Past Due:
2019
30-59
Days
60-89
Days
90 Days
or More
Nonaccrual
Total Past Due
and Nonaccrual
Current
Total
Commercial
Commercial real estate
$
139 $
30 $
— $
390 $
559 $
509,594 $
Commercial other
Advances to mortgage brokers
Total commercial
Agricultural
Agricultural real estate
Agricultural other
Total agricultural
Residential real estate
Senior liens
Junior liens
Home equity lines of credit
Total residential real estate
Consumer
Secured
Unsecured
Total consumer
Total
531
—
670
—
—
—
3,463
65
157
3,685
68
3
71
156
—
186
—
—
—
258
—
—
258
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
1,231
—
1,621
2,711
1,574
4,285
557
—
72
629
—
—
—
1,918
—
2,477
2,711
1,574
4,285
153,347
35,523
698,464
77,316
35,319
510,153
155,265
35,523
700,941
80,027
36,893
112,635
116,920
4,278
253,894
258,172
65
229
5,766
34,337
5,831
34,566
4,572
293,997
298,569
68
3
71
66,547
3,522
70,069
66,615
3,525
70,140
$
4,426 $
444 $
— $
6,535 $
11,405 $
1,175,165 $
1,186,570
57
Table of Contents
Commercial
Accruing Interest
and Past Due:
2018
30-59
Days
60-89
Days
90 Days
or More
Nonaccrual
Total Past Due
and Nonaccrual
Current
Total
Commercial real estate
$
60 $
— $
— $
334 $
394 $
497,293 $
Commercial other
Advances to mortgage brokers
Total commercial
Agricultural
Agricultural real estate
Agricultural other
Total agricultural
Residential real estate
Senior liens
Junior liens
Home equity lines of credit
Total residential real estate
Consumer
Secured
Unsecured
Total consumer
Total
Impaired Loans
277
—
337
428
—
428
2,254
2
76
2,332
95
10
105
628
—
628
—
—
—
203
6
—
209
—
—
—
—
—
—
—
—
—
113
—
—
113
—
—
—
1,423
—
1,757
2,716
2,233
4,949
554
—
—
554
—
—
—
2,328
—
2,722
3,144
2,233
5,377
147,721
11,793
656,807
84,176
37,608
497,687
150,049
11,793
659,529
87,320
39,841
121,784
127,161
3,124
233,438
236,562
8
76
6,001
32,696
6,009
32,772
3,208
272,135
275,343
95
10
105
62,721
3,848
66,569
62,816
3,858
66,674
$
3,202 $
837 $
113 $
7,260 $
11,412 $
1,117,295 $
1,128,707
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, or the fair value of the collateral, less costs to sell, if the loan is collateral dependent.
Large groups of smaller-balance, homogeneous residential real estate and consumer loans are collectively evaluated for impairment 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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Table of Contents
We do not recognize interest income on impaired loans in nonaccrual status. For impaired loans not classified as nonaccrual, interest income is recognized daily, as
earned, according to the terms of the loan agreement and the principal amount outstanding. The following summarizes information pertaining to impaired loans as
of, and for the years ended, December 31:
Recorded Balance
Unpaid Principal
Balance
Valuation Allowance
Average Recorded
Balance
Interest Income
Recognized
2019
Impaired loans with a valuation allowance
Commercial real estate
Commercial other
Agricultural real estate
Agricultural other
Residential real estate senior liens
Residential real estate junior liens
Total impaired loans with a valuation
allowance
Impaired loans without a valuation allowance
Commercial real estate
Commercial other
Agricultural real estate
Agricultural other
Home equity lines of credit
Consumer secured
Total impaired loans without a valuation
allowance
Impaired loans
Commercial
Agricultural
Residential real estate
Consumer
Total impaired loans
$
517 $
635 $
15 $
2,044 $
—
1,509
1,355
5,401
—
—
1,509
1,355
5,830
—
—
12
14
1,073
—
10
1,091
832
6,210
11
8,782
9,329
1,114
10,198
4,961
2,387
8,372
3,604
85
—
5,224
2,387
8,422
3,604
385
—
19,409
20,022
7,865
14,840
5,486
—
8,246
14,890
6,215
—
4,247
2,697
7,404
4,623
58
5
19,034
8,998
13,950
6,279
5
15
26
1,073
—
$
28,191 $
29,351 $
1,114 $
29,232 $
59
61
—
100
55
114
—
330
91
46
171
258
6
—
572
198
584
120
—
902
Table of Contents
Impaired loans with a valuation allowance
Commercial real estate
Commercial other
Agricultural real estate
Agricultural other
Residential real estate senior liens
Residential real estate junior liens
Total impaired loans with a valuation
allowance
Impaired loans without a valuation allowance
Commercial real estate
Commercial other
Agricultural real estate
Agricultural other
Home equity lines of credit
Consumer secured
Impaired loans
Commercial
Agricultural
Residential real estate
Consumer
Total impaired loans
Recorded Balance
Unpaid Principal
Balance
Valuation Allowance
Average Recorded
Balance
Interest Income
Recognized
2018
$
3,969 $
4,211 $
437 $
12
392
44
6,834
12
12
392
44
7,289
12
6
112
20
1,361
2
4,589 $
1,040
606
168
7,545
25
11,263
11,960
1,938
13,973
129
55
50
46
126
—
406
74
43
585
279
5
—
986
301
960
131
—
2,728
1,533
7,559
4,636
64
12
16,532
9,890
12,969
7,634
12
2,794
3,124
7,618
6,244
47
9
2,947
3,231
7,618
6,287
347
9
Total impaired loans without a valuation
allowance
19,836
20,439
9,899
14,298
6,893
9
10,401
14,341
7,648
9
443
132
1,363
—
$
31,099 $
32,399 $
1,938 $
30,505 $
1,392
We had committed to advance $175 and $542 in additional funds to be disbursed in connection with impaired loans, which includes TDRs, as of December 31,
2019 and 2018, respectively.
Troubled Debt Restructurings
A loan modification is considered to be a TDR 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. Agreeing to an interest only payment structure and delaying principal payments.
4. Forgiving principal.
5. 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 is not granted.
3. The borrower’s cash flow is insufficient to service all of their debt if the concession is 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 in the years ended December 31:
Number of Loans
Pre-Modification
Recorded Investment
Post-Modification
Recorded Investment
Number of Loans
Pre-Modification
Recorded Investment
2019
2018
Commercial other
Agricultural other
Residential real estate
Total
3 $
7
1
11 $
1,188 $
3,286
17
4,491 $
1,188
3,286
17
4,491
4 $
31
10
45 $
Post-Modification
Recorded Investment
1,360
1,360 $
6,318
701
8,379 $
6,295
701
8,356
The following table summarizes the nature of the concessions we granted to borrowers in financial difficulty in the years ended December 31:
2019
2018
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
— $
2
—
—
1,189
—
3 $
5
1
1,188
2,097
17
2 $
1,189
9 $
3,302
1 $
18
3
22 $
174
2,625
203
3,002
3 $
13
7
23 $
1,186
3,693
498
5,377
Commercial other
Agricultural other
Residential real estate
Total
We did not restructure any loans by forgiving principal or accrued interest during 2019 or 2018.
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.
We had no loans that defaulted in the years ended December 31, 2019 and 2018, which were modified within 12 months prior to the default date.
The following is a summary of TDR loan balances as of December 31:
TDRs
Note 5 – Premises and Equipment
A summary of premises and equipment at December 31 follows:
Land
Buildings and improvements
Furniture and equipment
Total
Less: accumulated depreciation
Premises and equipment, net
Depreciation expense amounted to $2,908, $2,940, and $2,902 in 2019, 2018, and 2017, respectively.
61
2019
2018
$
24,737 $
26,951
2019
2018
6,336 $
30,257
35,121
71,714
45,472
26,242 $
6,336
30,100
34,825
71,261
43,446
27,815
$
$
Table of Contents
Note 6 – Investment in Joint Venture
In 2008, we merged the assets of our wholly owned subsidiary, IBT Title and Insurance Agency, Inc. (“IBT Title”) into a 50/50 joint venture with Corporate Title
Agency, LLC, a third-party business based in Traverse City, Michigan, to form CSS. The purpose of the joint venture was to help IBT Title expand its service area
and to take advantage of economies of scale. As a 50% owner of the membership units of this entity, we account for our investment under the equity method of
accounting, and our share of income and loss from the joint venture is included in noninterest income.
The following tables provide financial information for CSS.
Condensed Balance Sheets
ASSETS
Cash and cash equivalents
Escrow funds
Accounts receivable
Premises and equipment
Goodwill
Title plants
Other assets
TOTAL ASSETS
LIABILITIES AND SHAREHOLDERS’ EQUITY
Escrow funds payable
Notes payable
Other liabilities
Members' equity
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
$
$
$
$
December 31
2019
2018
2,054 $
1,659
1,823
562
2,010
132
878
1,844
3,337
1,629
466
3,063
6,212
1,010
9,118 $
17,561
1,659 $
416
200
6,843
9,118 $
Income
Title premiums and other fees
Property reports
Appraisals
Other income
Total income
Expenses
Cost of services
Property reports
Appraisals
Other
Compensation and benefits
Occupancy and equipment
Impairment of goodwill and title plants
Other
Total expenses
Net (loss) income
Condensed Statements of Income
Year Ended December 31
2019
2018
2017
$
$
$
3,645 $
3,013 $
2,046
9,370
2,898
17,959
1,822
9,526
2,871
17,232
1,101 $
1,029 $
7,372
2,607
4,203
836
7,133
988
24,240
(6,281) $
7,466
2,307
4,138
804
—
1,024
16,768
464 $
62
3,337
465
211
13,548
17,561
3,533
1,425
9,121
2,318
16,397
821
7,152
2,029
4,391
739
—
960
16,092
305
Table of Contents
CSS is a limited liability company. Therefore, federal taxable income and deductions are passed through to the members, and no provision for federal income
taxes is reflected in the condensed statements of income. During the second half of 2019, a new line of business was proposed by the CSS General Manager which
did not interest us as it was unrelated to the Bank's core business. Subsequently, the General Manager of CSS chose to have a company valuation performed during
the fourth quarter of 2019 for purposes of investor planning, and the independent, third-party valuation identified that CSS’ intangible assets required an
impairment of $7,133. As a 50% owner of the membership units of CSS, we recognized the reduced value of our investment which resulted in a reduction to
income of $3,566 in the fourth quarter of 2019. While we continually analyze all investments, there are no current plans to change our ownership or investment in
CSS.
Note 7 – Goodwill and Other Intangible Assets
The carrying amount of goodwill was $48,282 at December 31, 2019 and 2018.
Identifiable intangible assets were as follows as of December 31:
Core deposit premium resulting from acquisitions
Core deposit premium resulting from acquisitions
Gross
Intangible
Assets
2019
Accumulated
Amortization
Net
Intangible
Assets
5,579 $
5,482 $
97
Gross
Intangible
Assets
2018
Accumulated
Amortization
Net
Intangible
Assets
5,579 $
5,410 $
169
$
$
Amortization expense associated with identifiable intangible assets was $72, $96, and $119 in 2019, 2018, and 2017, respectively.
Estimated amortization expense associated with identifiable intangibles for each of the next five years succeeding December 31, 2019, and thereafter is as follows:
2020
2021
2022
2023
2024
Thereafter
Total
Note 8 – Deposits
Scheduled annual maturities of time deposits for each of the next five years, and thereafter, are as follows:
2020
2021
2022
2023
2024
Thereafter
Total
Interest expense on time deposits greater than $250 was $2,001 in 2019, $1,280 in 2018 and $825 in 2017.
63
Estimated Amortization Expense
48
$
29
15
2
2
1
97
$
Scheduled Maturities of Time
Deposits
$
$
173,677
114,036
68,950
30,805
18,314
1,837
407,619
Table of Contents
Note 9 – Borrowed Funds
Borrowed funds consist of the following obligations at December 31:
FHLB advances
Securities sold under agreements to repurchase without stated maturity
dates
Total
$
$
2019
2018
Amount
Rate
Amount
Rate
245,000
2.32% $
300,000
30,999
275,999
0.09%
2.07% $
40,299
340,299
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 December 31:
Fixed rate due 2019
Fixed rate due 2020
Fixed rate due 2021
Variable rate due 2021 (1)
Fixed rate due 2022
Fixed rate due 2023
Fixed rate due 2024
Fixed rate due 2026
Total
2019
2018
Amount
Rate
Amount
Rate
$
—
55,000
50,000
10,000
20,000
45,000
55,000
10,000
—% $
100,000
2.18%
1.91%
2.20%
1.97%
2.97%
2.68%
1.17%
55,000
50,000
10,000
20,000
35,000
20,000
10,000
$
245,000
2.32% $
300,000
2.20%
0.11%
1.95%
1.94%
2.18%
1.91%
2.93%
1.97%
3.17%
2.96%
1.17%
2.20%
(1) Hedged advance (see “Derivative Instruments” section below)
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 $31,020 and $40,316 at December 31, 2019 and 2018, respectively.
Such securities remain under our control. We may be required to provide additional collateral based on the fair value of underlying securities.
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. We had no FRB Discount Window advances for the years ended December 31, 2019 and 2018. The following table
provides a summary of securities sold under repurchase agreements without stated maturity dates and federal funds purchased at December 31:
Maximum
Month End
Balance
2019
Average
Balance
Weighted Average
Interest Rate
During the Period
Maximum
Month End
Balance
2018
Average
Balance
Weighted Average
Interest Rate
During the Period
Securities sold under agreements to repurchase without stated
maturity dates
$
37,441 $
31,406
0.10% $
63,133 $
38,036
Federal funds purchased
7,070
687
2.60%
16,200
3,741
0.10%
1.90%
We had pledged AFS securities and 1-4 family residential real estate loans in the following amounts at December 31:
Pledged to secure borrowed funds
Pledged to secure repurchase agreements
Pledged for public deposits and for other purposes necessary or required by law
Total
64
2019
2018
368,310 $
31,020
59,537
458,867 $
431,430
40,316
58,107
529,853
$
$
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AFS securities pledged to repurchase agreements without stated maturity dates consisted of the following at December 31:
States and political subdivisions
Mortgage-backed securities
Collateralized mortgage obligations
Total
2019
2018
31,020 $
—
—
31,020 $
23,268
10,736
6,312
40,316
$
$
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 an adequate level of AFS securities available to pledge to satisfy required collateral.
As of December 31, 2019, we had the ability to borrow up to an additional $132,897, based on assets pledged as collateral. We had no investment securities that
were restricted to be pledged for specific purposes.
Derivative Instruments
We have entered into interest rate swaps to manage exposure to interest rate risk and variability in cash flows. The interest rate swaps, associated with our variable
rate borrowings, are designated upon inception as cash flow hedges of forecasted interest payments. We have entered into LIBOR-based interest rate swaps that
involve the receipt of variable amounts in exchange for fixed rate payments, in effect converting variable rate debt to fixed rate debt.
Cash flow hedges are assessed for effectiveness using regression analysis. The effective portion of changes in fair value are recorded in OCI and subsequently
reclassified into interest expense in the same period in which the related interest on the variable rate borrowings affects earnings. In the event that a portion of the
changes in fair value were determined to be ineffective, the ineffective amount would be recorded in earnings.
The following tables provide information on derivatives related to variable rate borrowings as of December 31:
Pay Rate
Receive Rate
Remaining Life (Years)
Notional Amount
Balance Sheet Location
Fair Value
2019
Derivatives designated as
hedging instruments
Cash Flow Hedges:
Interest rate swaps
1.56%
3-Month LIBOR
1.3
10,000
Other Assets
$
67
$
2018
Pay Rate
Receive Rate
Remaining Life (Years)
Notional Amount
Balance Sheet Location
Fair Value
Derivatives designated as
hedging instruments
Cash Flow Hedges:
Interest rate swaps
1.56%
3-Month LIBOR
2.3
$
10,000
Other Assets
$
323
Derivatives contain an element of credit risk which arises from the possibility that we will incur a loss as a result of a counterparty failing to meet its contractual
obligations. Credit risk is minimized through counterparty collateral, transaction limits and monitoring procedures. We also manage dealer credit risk by entering
into interest rate derivatives only with primary and highly rated counterparties, the use of ISDA master agreements, and the use of counterparty limits. We do not
anticipate any losses from failure of interest rate derivative counterparties to honor their obligations.
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Note 10 – Off-Balance-Sheet Activities, Commitments and Other Matters
Credit-Related Financial Instruments
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 IRR in excess of the amounts recognized
in the consolidated balance sheets. The contractual 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 December 31:
Unfunded commitments under lines of credit
Commercial and standby letters of credit
Commitments to grant loans
Total
2019
2018
202,871 $
4,575
20,778
228,224 $
199,652
1,723
13,225
214,600
$
$
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. Advances to mortgage brokers are also included in unfunded commitments
under lines of credit. The unfunded commitment amount is the difference between our outstanding balances and maximum outstanding aggregate amount.
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 that may be committed to be sold to the
secondary market.
Commercial and standby letters of credit are conditional commitments we 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 our 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.
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.
Derivative Loan Commitments
Mortgage loan commitments are referred to as derivative loan commitments if the loan that will result from exercise of the commitment will be held for sale upon
funding. We enter into commitments to fund residential mortgage loans at specific times in the future, with the intention that these loans will subsequently be sold
in the secondary market. A mortgage loan commitment binds us to lend funds to a potential borrower at a specified interest rate within a specified period of time,
generally up to 60 days after inception of the rate lock.
Outstanding derivative loan commitments expose us to the risk that the price of the loans arising from the exercise of the loan commitment might decline from the
inception of the rate lock to funding of the loan due to increases in mortgage interest rates. If interest rates increase, the value of these loan commitments decreases.
Conversely, if interest rates decrease, the value of these loan commitments increase. The notional amount of undesignated interest rate lock commitments was $618
and $1,088 at December 31, 2019 and 2018, respectively.
Forward Loan Sale Commitments
To protect against the price risk inherent in derivative loan commitments, we utilize both “mandatory delivery” and “best efforts” forward loan sale commitments
to mitigate the risk of potential decreases in the values of loan that would result from the exercise of the derivative loan commitments.
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With a “mandatory delivery” contract, we commit to deliver a certain principal amount of mortgage loans to an investor at a specified price on or before a specified
date. If we fail to deliver the amount of mortgages necessary to fulfill the commitment by the specified date, we are obligated to pay a “pair-off” fee, based on then
current market prices, to the investor to compensate the investor for the shortfall.
With a “best efforts” contract, we commit to deliver an individual mortgage loan of a specified principal amount and quality to an investor if the loan to the
underlying borrower closes. Generally, the price the investor will pay the seller for an individual loan is specified prior to the loan being funded (e.g. on the same
day the lender commits to lend funds to a potential borrower).
We expect that these forward loan sale commitments will experience changes in fair value opposite to the change in fair value of derivative loan commitments. The
notional amount of undesignated forward loan sale commitments was $1,332 and $1,089 at December 31, 2019 and 2018, respectively. The fair value of these
forward loan sale commitments was $1,353 and $1,109 at December 31, 2019 and 2018, respectively.
The fair values of the rate lock loan commitments related to the origination of mortgage loans that will be held for sale and the forward loan sale commitments are
deemed insignificant by management and, accordingly, are not recorded in our consolidated financial statements.
Other Matters
Banking regulations require us to maintain cash reserve balances in currency or deposits with the FRB. At December 31, 2019 and 2018, the reserve balances
amounted to $1,341 and $1,220, respectively. Additionally, correspondent banks may require us to maintain minimum cash reserve balances. At December 31,
2019 and 2018, the reserve balances related to correspondent banks amounted to $400.
Banking regulations limit the transfer of assets in the form of dividends, loans, or advances from the Bank to the Corporation. At December 31, 2019, substantially
all of the Bank’s assets were restricted from transfer to the Corporation in the form of loans or advances. Bank dividends are the principal source of funds for the
Corporation. Payment of dividends without regulatory approval is limited to the current year’s retained net income plus retained net income for the preceding two
years, less any required transfers to common stock. At January 1, 2020, the amount available to the Corporation for dividends from the Bank, without regulatory
approval, was approximately $20,300.
Note 11 – Minimum Regulatory Capital Requirements
The Corporation (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by the FRB and the FDIC. Failure to
meet minimum capital requirements can initiate mandatory and possibly additional discretionary actions by the FRB and the FDIC that, if undertaken, could have a
material effect on our financial statements. Under regulatory capital adequacy guidelines and the regulatory framework for prompt corrective action, we must meet
specific capital guidelines that include quantitative measures of assets, liabilities, capital, and certain off-balance-sheet items, as calculated under regulatory
accounting standards. Our capital amounts and classifications are also subject to qualitative judgments by the FRB and the FDIC about components, risk
weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding companies.
Quantitative measures established by regulation to ensure capital adequacy require us to maintain minimum amounts and ratios (set forth in the following table) of
total capital, tier 1 capital, and common equity tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined) and tier 1 capital to average assets
(as defined). We believe, as of December 31, 2019 and 2018, that we met all capital adequacy requirements.
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 were gradually phased in
between 2015 and 2019, did not have a material impact on the Corporation but does require us to hold more capital than we have historically.
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 is 8.00%.
Also effective January 1, 2015 was the new common equity tier 1 capital ratio which had a minimum requirement of 4.50%. Beginning on January 1, 2016 the
capital conservation buffer went into effect which increased the required levels each year through 2019.
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As of December 31, 2019 and 2018, the most recent notifications from the FRB and the FDIC categorized us as well capitalized under the regulatory framework
for prompt corrective action. To be categorized as well capitalized, an institution must maintain total risk-based, Tier 1 risk-based, Common Equity Tier 1, and Tier
1 leverage ratios as set forth in the following tables. There were no conditions or events since the notifications that we believe have changed our categories. Our
actual capital amounts and ratios are also presented in the table.
Actual
Minimum
Capital
Requirement
Minimum To Be Well
Capitalized Under Prompt
Corrective Action Provisions
Amount
Ratio
Amount
Ratio
Amount
Ratio
December 31, 2019
Common equity Tier 1 capital to risk
weighted assets
Isabella Bank
Consolidated
$
150,093
159,794
11.86% $
12.56%
88,587
89,090
7.000% $
7.000%
82,260
N/A
Tier 1 capital to risk weighted assets
Isabella Bank
Consolidated
Total capital to risk weighted assets
Isabella Bank
Consolidated
Tier 1 capital to average assets
Isabella Bank
Consolidated
150,093
159,794
158,032
167,733
150,093
159,794
Actual
11.86%
12.56%
12.49%
13.18%
8.54%
9.01%
107,570
108,180
132,881
133,635
70,288
70,945
8.500%
8.500%
10.500%
10.500%
4.00%
4.00%
101,243
N/A
126,554
N/A
87,861
N/A
Minimum
Capital
Requirement
Minimum To Be Well
Capitalized Under Prompt Corrective
Action Provisions
6.50%
N/A
8.00%
N/A
10.00%
N/A
5.00%
N/A
Amount
Ratio
Amount
Ratio
Amount
Ratio
December 31, 2018
Common equity Tier 1 capital to risk
weighted assets
Isabella Bank
Consolidated
$
143,429
154,705
11.75% $
12.58%
Tier 1 capital to risk weighted assets
Isabella Bank
Consolidated
Total capital to risk weighted assets
Isabella Bank
Consolidated
Tier 1 capital to average assets
Isabella Bank
Consolidated
143,429
154,705
151,804
163,080
143,429
154,705
11.75%
12.58%
12.43%
13.26%
8.07%
8.72%
68
77,826
78,431
96,138
96,885
120,554
121,491
71,085
70,996
6.375% $
6.375%
7.875%
7.875%
9.875%
9.875%
4.000%
4.000%
79,352
N/A
97,664
N/A
122,080
N/A
88,856
N/A
6.50%
N/A
8.00%
N/A
10.00%
N/A
5.00%
N/A
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Note 12 – 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 includes 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, see "Note 13 – Benefit Plans."
Earnings per common share have been computed based on the following for the years ended December 31:
Average number of common shares outstanding for basic calculation
Average potential effect of common shares in the Directors Plan (1)
Average number of common shares outstanding used to calculate diluted earnings per common
share
Net income
Earnings per common share
Basic
Diluted
(1) Exclusive of shares held in the Rabbi Trust
Note 13 – Benefit Plans
401(k) Plan
2019
7,909,794
185,248
2018
7,872,077
200,771
8,095,042
8,072,848
13,024 $
14,021 $
2017
7,841,451
192,286
8,033,737
13,237
1.65 $
1.61 $
1.78 $
1.74 $
1.69
1.65
$
$
$
We have a 401(k) plan in which substantially all employees are eligible to participate. Employees may contribute up to 100% of their compensation subject to
certain limits based on federal tax laws. The plan was amended in 2013 to provide a matching safe harbor contribution for all eligible employees equal to 100% of
the first 5.0% of an employee's compensation contributed to the Plan during the year. Employees are 100% vested in the safe harbor matching contributions.
For 2019, 2018 and 2017, expenses attributable to the Plan were $764, $743, and $713, respectively.
Defined Benefit Pension Plan
We maintain a noncontributory defined benefit pension plan, which was curtailed effective March 1, 2007. As a result of the curtailment, future salary increases are
no longer considered (the projected benefit obligation is equal to the accumulated benefit obligation), and plan benefits are based on years of service and the
individual employee’s five highest consecutive years of compensation out of the last ten years of service through March 1, 2007.
Changes in the projected benefit obligation and plan assets during each year, the funded status of the plan, and the net amount recognized in our consolidated
balance sheets using an actuarial measurement date of December 31, are summarized as follows during the years ended December 31:
Change in benefit obligation
Benefit obligation, January 1
Interest cost
Actuarial loss (gain)
Benefits paid, including plan expenses
Benefit obligation, December 31
Change in plan assets
Fair value of plan assets, January 1
Investment return (loss)
Contributions
Benefits paid, including plan expenses
Fair value of plan assets, December 31
2019
2018
$
9,412 $
378
1,216
(797)
10,209
7,765
1,384
—
(797)
8,352
Deficiency in funded status at December 31, included on the consolidated balance sheets in accrued interest
payable and other liabilities
$
(1,857) $
69
11,381
388
(1,194)
(1,163)
9,412
9,469
(541)
—
(1,163)
7,765
(1,647)
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Change in accrued pension benefit costs
Accrued benefit cost at January 1
Contributions
Net periodic benefit cost
Net change in unrecognized actuarial loss and prior service cost
Accrued pension benefit cost at December 31
2019
2018
$
$
(1,647) $
(1,912)
—
(268)
58
(1,857) $
—
(345)
610
(1,647)
We have recorded the funded status of the plan in our consolidated balance sheets. We adjust the underfunded status in a liability account to reflect the current
funded status of the plan. Any gains or losses that arise during the year but are not recognized as components of net periodic benefit cost are recognized as a
component of other comprehensive income (loss). The components of net periodic benefit cost are as follows for the years ended December 31:
Interest cost on benefit obligation
Expected return on plan assets
Amortization of unrecognized actuarial net loss
Settlement loss
Net periodic benefit cost
2019
2018
2017
378 $
388 $
(452)
214
128
(554)
242
269
268 $
345 $
444
(546)
279
235
412
$
$
During 2019, 2018 and 2017, settlement losses of $128, $269 and $235 were recognized in connection with lump-sum benefit distributions, respectively. Many
plan participants elect to receive their retirement benefit payments in the form of lump-sum settlements. Pro rata settlement losses, which can occasionally occur as
a result of these lump-sum distributions, are recognized only in years when the total of such distributions exceed the sum of the service and interest expense
components of net periodic benefit cost.
Accumulated other comprehensive income at December 31, 2019 includes net unrecognized pension costs before income taxes of $3,412, of which $23 is expected
to be amortized into benefit cost during 2020.
The actuarial assumptions used in determining the benefit obligation are as follows for the years ended December 31:
Discount rate
Expected long-term rate of return on plan assets
2019
2018
2017
3.07%
6.00%
4.11%
6.00%
The actuarial weighted average assumptions used in determining the net periodic pension costs are as follows for the years ended December 31:
Discount rate
Expected long-term rate of return on plan assets
2019
2018
2017
4.11%
6.00%
3.48%
6.00%
3.48%
6.00%
3.96%
6.00%
As a result of the curtailment of the Plan, there is no rate of compensation increase considered in the above assumptions.
The expected long-term rate of return is an estimate of anticipated future long-term rates of return on plan assets as measured on a market value basis. Factors
considered in arriving at this assumption include:
•
•
•
•
Historical long-term rates of return for broad asset classes.
Actual past rates of return achieved by the plan.
The general mix of assets held by the plan.
The stated investment policy for the plan.
The selected rate of return is net of anticipated investment related expenses.
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Pension Plan Assets
Our overall investment strategy is to moderately grow the portfolio by investing 50% of the portfolio in equity securities and 50% in fixed income securities. This
strategy is designed to generate a long-term rate of return of 6.00%. Equity securities primarily consist of the S&P 500 Index with a smaller allocation to the Small
Cap and International Index. Fixed income securities are invested in the Bond Market Index. The Plan has appropriate assets invested in short-term investments to
meet near term benefit payments.
The asset mix and the sector weighting of the investments are determined by our benefits committee, which is comprised of members of our management. To
manage the Plan, we retain a third party investment advisor to conduct consultations. We review the performance of the advisor at least annually.
The fair values of our pension plan assets by asset category were as follows as of December 31:
Short-term investments
Common collective trusts
Fixed income
Equity investments
Total
2019
2018
Total
(Level 2)
Total
(Level 2)
$
$
218 $
218 $
98 $
3,823
4,311
8,352 $
3,823
4,311
8,352 $
2,924
4,743
7,765 $
98
2,924
4,743
7,765
The following is a description of the valuation methodologies used for assets measured at fair value. There have been no changes in the methodologies used at
December 31, 2019 and 2018:
•
•
Short-term investments: Shares of a money market portfolio valued at amortized cost, which approximates fair value.
Common collective trusts: These investments are public investment securities valued using the NAV provided by a third party investment
advisor. The NAV is quoted on a private market that is not active; however, the unit price is based on underlying investments which are traded
on an active market.
We anticipate contributions to the Plan in 2020 to approximate net contribution costs.
The components of projected net periodic benefit cost are as follows for the year ending:
Interest cost on projected benefit obligation
Expected return on plan assets
Amortization of unrecognized actuarial net loss
Net periodic benefit cost
Estimated future benefit payments are as follows for the next ten years:
2020
2021
2022
2023
2024
2025 - 2029
Directors Plan
December 31, 2020
306
(488)
205
23
$
$
Estimated Benefit Payments
466
$
459
462
460
454
2,465
Pursuant to the terms of the Directors Plan, our directors are required to invest at least 25% of their board fees in our common stock. These stock investments can
be made either through deferred fees or through the purchase of shares through the Dividend Reinvestment Plan. Deferred fees, under the Directors Plan, are
converted on a quarterly basis into stock units of our common stock based on the fair value of a share of our common stock as of the relevant valuation date. Stock
units credited to
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a participant’s account are eligible for stock and cash dividends as declared. Dividend Reinvestment Plan shares are purchased pursuant to the Dividend
Reinvestment Plan.
Distribution of deferred fees from the Directors Plan occurs when the participant retires from the Board or upon the occurrence of certain other events. The
participant is eligible to receive a distribution in the form of shares of our common stock of all of the stock units that are then in his or her account, and any
unconverted cash will be converted to and rounded up to whole shares of stock and distributed, as well. The Directors Plan does not allow for cash settlement, and
therefore, such share-based payment awards qualify for classification as equity. We may use authorized but unissued shares or purchase shares of common stock on
the open market to meet our obligations under the Directors Plan.
We maintain the Rabbi Trust to fund the Directors Plan. The Rabbi Trust is an irrevocable grantor trust to which we may contribute assets for the limited purpose
of funding a nonqualified deferred compensation plan. Although we may not use the assets of the Rabbi Trust for any purpose other than meeting our obligations
under the Directors Plan, the assets of the Rabbi Trust remain subject to the claims of our creditors and are included in the consolidated financial statements. We
may contribute cash or common stock to the Rabbi Trust from time to time for the sole purpose of funding the Directors Plan. The Rabbi Trust will use any cash
that we contribute to purchase shares of our common stock on the open market. Shares held in the Rabbi Trust are included in the calculation of earnings per share.
The components of shares eligible to be issued under the Directors Plan were as follows as of December 31:
Unissued
Shares held in Rabbi Trust
Total
Cash Incentive Plans
2019
2018
Eligible
Shares
Market
Value
Eligible
Shares
Market
Value
177,935 $
27,069
205,004 $
4,326
658
4,984
203,498 $
16,673
220,171 $
4,591
376
4,967
We provide cash incentive plans to reward employees above and beyond their base salaries when our performance and operating profitability exceed established
annual targets. Incentives are also awarded for achievement of personal performance goals. Expenses related to this plan for 2019, 2018 and 2017 were $1,070,
$500, and $454, respectively.
Stock Award Incentive Plan
We maintain an equity incentive plan for the purpose of promoting growth and operating profitability, as well as attracting and retaining executive officers of
outstanding competence, through ownership of equity. Stock may be granted to specified individuals subject to certain conditions, and transfer of shares granted
under the plan is restricted. Expenses related to this plan for 2019, 2018 and 2017 were $171, $45, and $38, respectively.
Other Employee Benefit Plans
We maintain nonqualified defined contribution retirement plans to provide supplemental retirement benefits to specified participants. Expenses related to these
programs for 2019, 2018 and 2017 were $355, $356, and $473, respectively. Expenses are recognized over the participants’ expected years of service.
We maintain a self-funded medical plan under which we are responsible for the first $75 per year of claims made by a covered family. Expenses are accrued based
on estimates of the aggregate liability for claims incurred and our experience. Expenses were $2,445 in 2019, $2,695 in 2018 and $2,324 in 2017.
Note 14 – Revenue
Our revenue is comprised primarily of interest income, service charges and fees, gains on the sale of loans and AFS securities, earnings on corporate owned life
insurance policies, and other noninterest income. Other noninterest income is typically service and performance driven in nature and comprised primarily of
investment and trust advisory fees. We recognize revenue, excluding interest income, in accordance with ASC 606, Revenue From Contracts with Customers.
Revenue is recognized when our performance obligation has been satisfied according to our contractual obligation.
We record receivables when revenue is unpaid and collectability is reasonably assured. Accounts receivable balances primarily represent amounts due from
customers for which revenue has been recognized. Accounts receivable balances are recorded in the consolidated balance sheets in accrued interest receivable and
other assets. For the years ended December 31, 2019, 2018
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and 2017, we satisfied our performance obligations pursuant to contracts with customers. As a result, we have not recorded any contract assets or liabilities. We
estimate no returns or allowances for the years ended December 31, 2019, 2018 and 2017.
Our contracts with customers define our performance obligations with clearly established pricing which did not require us to allocate or disaggregate revenue by
performance obligation. A summary of revenue recognized for each major category of contracts with customers, subject to ASC 606, is as follows for the years
ended December 31:
Debit card income
Trust service fees
Investment advisory fees
Service charges and fees related to deposit accounts
$
2019
2018
2017
2,667 $
2,269
523
317
2,487 $
2,134
702
332
2,435
1,928
679
343
A large portion of our revenue consists of interest income which is not subject to the requirements set forth in ASC 606.
Note 15 – Other Noninterest Expenses
A summary of expenses included in other noninterest expenses is as follows for the years ended December 31:
Audit, consulting, and legal fees
ATM and debit card fees
Donations and community relations
Loan underwriting fees
Director fees
Marketing costs
FDIC insurance premiums
All other
Total other
Note 16 – Federal Income Taxes
2019
2018
2017
1,884 $
1,210
1,026
905
788
762
211
3,775
10,561 $
2,222 $
1,036
710
1,016
858
596
726
3,761
10,925 $
2,017
1,181
657
556
856
568
642
3,711
10,188
$
$
Components of the consolidated provision for federal income taxes are as follows for the years ended December 31:
Currently payable
Deferred expense
Income tax expense
2019
2018
2017
$
$
972 $
408
1,380 $
1,088 $
275
1,363 $
180
2,836
3,016
In 2017, we implemented tax strategies which resulted in changes to our federal income tax components, as illustrated above. These strategies, which were
primarily related to premises and equipment, significantly decreased our taxes currently payable and led to an increase in our level of alternative minimum tax.
Changes in these deferred tax components are displayed in the deferred tax assets and liabilities table on the following page.
On December 22, 2017, the Tax Act was enacted. The law established a flat corporate federal statutory income tax rate of 21%, effective January 1, 2018, and
eliminated the corporate alternative minimum tax. The new tax law provided for a wide array of changes with only some having a direct impact on our federal
income tax expense. Some of these changes included, but were not limited to, the following items: limits to the deduction for net interest expense; immediate
expense (for tax purposes) for certain qualified depreciable assets; elimination or reduction of certain deductions related to meals and entertainment expenses; and
limits to the deductibility of deposit insurance premiums.
In accordance with ASC 740, Income Taxes, the effect of income tax law changes on deferred taxes are recognized as a component of income tax expense related
to continuing operations in the period in which the law was enacted. As such, federal income tax expense for the year ended December 31, 2017 reflects the effect
of the tax rate change on net deferred tax assets and liabilities. This requirement also applies to items initially recognized in other comprehensive income. In
January 2018, FASB issued ASU 2018-02 which allowed for the "stranded" tax effects in AOCI to be reclassified to retained earnings rather
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than income tax expense. We early adopted this guidance and applied this accounting alternative in our consolidated statements of changes in shareholders equity
as of December 31, 2017.
The reconciliation of the provision for federal income taxes and the amount computed at the federal statutory tax rate of income before federal income tax expense
is as follows for the year ended December 31:
Income taxes at statutory rate
Effect of nontaxable income
Interest income on tax exempt municipal securities
Earnings on corporate owned life insurance policies
Deferred tax adjustment resulting from the statutory rate reduction pursuant to the Tax Act
Other
Total effect of nontaxable income
Effect of nondeductible expenses
Effect of tax credits
Unrecognized deferred tax benefit on joint venture investment
Federal income tax expense
2019
2018
2017
$
3,025 $
3,231 $
5,526
(990)
(160)
—
283
(867)
108
(984)
98
(1,106)
(148)
—
231
(1,023)
113
(958)
—
$
1,380 $
1,363 $
(1,889)
(247)
319
34
(1,783)
149
(876)
—
3,016
The loss recognized during the fourth quarter of 2019 related to our joint venture investment in CSS is unlikely to reverse in the foreseeable future. As such, we did
not record a deferred tax asset related to our investment in CSS as of December 31, 2019.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for federal income tax purposes. Significant components of our deferred tax assets and liabilities, measured at the 21% statutory rate, included in
other assets and other liabilities in the accompanying consolidated balance sheets, are as follows as of December 31:
Deferred tax assets
Allowance for loan losses
Deferred directors’ fees
Employee benefit plans
Core deposit premium and acquisition expenses
Net unrecognized actuarial losses on pension plan
Net unrealized losses on available-for-sale securities
Life insurance death benefit payable
Alternative minimum tax
Other
Total deferred tax assets
Deferred tax liabilities
Prepaid pension cost
Premises and equipment
Accretion on securities
Core deposit premium and acquisition expenses
Net unrealized gains on available-for-sale securities
Net unrealized gains on derivative instruments
Other
Total deferred tax liabilities
Net deferred tax assets (liabilities)
2019
2018
$
1,255 $
1,615
77
742
717
—
497
—
771
5,674
327
1,859
37
872
1,247
14
1,157
5,513
$
161 $
74
1,304
1,667
81
752
729
1,211
497
710
716
7,667
383
1,548
41
946
—
68
1,696
4,682
2,985
Table of Contents
We are subject to U.S. federal income tax; however, we are no longer subject to examination by taxing authorities for years before 2016. There are no material
uncertain tax positions requiring recognition in our consolidated financial statements. We do not expect the total amount of unrecognized tax benefits to
significantly increase in the next twelve months.
We recognize interest and/or penalties related to income tax matters in income tax expense. We do not have any amounts accrued for interest and penalties at
December 31, 2019 and 2018 and we are not aware of any claims for such amounts by federal income tax authorities.
Note 17 – Accumulated Other Comprehensive Income (Loss)
AOCI includes net income as well as unrealized gains and losses, net of tax, on AFS securities and derivative instruments, as well as changes in the funded status
of our defined benefit pension plan. Unrealized gains and losses and changes in the funded status of the pension plan, net of tax, are excluded from net income, and
are reflected as a direct charge or credit to shareholders’ equity. Comprehensive income (loss) and the related components are disclosed in the consolidated
statements of comprehensive income.
The following table provides a roll-forward of the changes in AOCI by component for the years ended December 31, 2017, 2018 and 2019 (net of tax):
Unrealized
Gains
(Losses) on
AFS
Securities
Unrealized
Gains
(Losses) on Derivative
Instruments
Change in Unrecognized
Pension Cost on Defined
Benefit
Pension Plan
Total
(2,972) $
(2,778)
Balance, January 1, 2017
$
30 $
OCI before reclassifications
Amounts reclassified from AOCI
Subtotal
Tax effect
OCI, net of tax
One-time non-cash tax rate adjustment due to
the Tax Act
Balance, December 31, 2017
OCI before reclassifications
Amounts reclassified from AOCI
Subtotal
Tax effect
OCI, net of tax
Adoption of ASU 2016-01
Balance, December 31, 2018
OCI before reclassifications
Amounts reclassified from AOCI
Subtotal
Tax effect
OCI, net of tax
289
(142)
147
89
236
125
391
(7,229)
—
(7,229)
1,415
(5,814)
223
(5,200)
12,276
(6)
12,270
(2,458)
9,812
164
$
43
—
43
(15)
28
38
230
33
—
33
(7)
26
—
256
(256)
—
(256)
54
(202)
11
412
423
(144)
279
(530)
(3,223)
265
345
610
(128)
482
—
(2,741)
(210)
268
58
(12)
46
343
270
613
(70)
543
(367)
(2,602)
(6,931)
345
(6,586)
1,280
(5,306)
223
(7,685)
11,810
262
12,072
(2,416)
9,656
1,971
Balance, December 31, 2019
$
4,612 $
54
$
(2,695) $
Included in OCI for the year ended December 31, 2017 are changes in unrealized gains and losses related to auction rate money market preferred stocks and
preferred stocks, or equity securities. Changes in unrealized gains and losses related to equity securities were not included in OCI after the adoption of ASU 2016-
01, effective January 1, 2018. Auction rate money market preferred stocks, for federal income tax purposes, have no deferred federal income taxes related to
unrealized gains or losses given the nature of the investments.
In accordance with the Tax Act, the effect of income tax law changes on deferred taxes also applies to items recognized in other comprehensive income. In January
2018, FASB issued ASU 2018-02 which allowed for the "stranded" tax effects in AOCI to be reclassified to retained earnings rather than income tax expense. We
early adopted this guidance and applied this accounting alternative in our consolidated statements of changes in shareholders equity as of December 31, 2017.
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A summary of the components of unrealized gains on AFS securities included in OCI follows for the years ended December 31:
2019
2018
2017
Auction Rate
Money Market
Preferred Stocks
All Other
AFS
Securities
Auction Rate
Money Market
Preferred Stocks
All Other
AFS
Securities
Total
Total
Auction Rate
Money Market
Preferred and
Preferred Stocks
All Other AFS
securities
Total
$
565 $
11,711 $
12,276 $
(495) $
(6,734) $
(7,229) $
407 $
(118) $
289
—
565
—
(6)
11,705
(2,458)
(6)
12,270
(2,458)
—
(495)
—
—
(6,734)
1,415
—
(7,229)
1,415
—
407
—
(142)
(260)
89
$
565 $
9,247 $
9,812 $
(495) $
(5,319) $
(5,814) $
407 $
(171) $
(142)
147
89
236
Unrealized gains (losses)
arising during the period
Reclassification adjustment
for net (gains) losses
included in net income
Net unrealized gains (losses)
Tax effect (1)
Unrealized gains
(losses), net of tax
(1) Calculations are based on a federal income tax rate of 21% in 2019 and 2018 and 34% in 2017.
The following table details reclassification adjustments and the related affected line items in our consolidated statements of income for the years ended December
31:
Details about AOCI components
Unrealized gains (losses) on AFS securities
Change in unrecognized pension cost on defined
benefit pension plan
$
$
$
$
Amount
Reclassified from
AOCI
Affected Line Item in the
Consolidated
Statements of Income
2019
2018
2017
6 $
1
5 $
— $
—
— $
142 Net gains on sale of AFS securities
48 Federal income tax expense (1)
94 Net income
268 $
56
212 $
345 $
72
273 $
412 Other noninterest expenses
140 Federal income tax expense (1)
272 Net income
(1) Calculations are based on a federal income tax rate of 21% in 2019 and 2018 and 34% in 2017.
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Table of Contents
Note 18 – Fair Value
Under fair value measurement and disclosure authoritative guidance, we group assets and liabilities measured at fair value into three levels, based on the markets in
which the assets and liabilities are traded, and the reliability of the assumptions used to determine fair value, based on the prioritization of inputs in the valuation
techniques. These levels are:
Level 1:
Valuation is based upon quoted prices for identical instruments traded in active markets.
Level 2:
Level 3:
Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are
not active and model based valuation techniques for which all significant assumptions are observable in the market.
Valuation is generated from model based techniques that use at least one significant assumption not observable in the market. These unobservable
assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability.
The asset’s or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value
measurement. Valuation techniques maximize the use of observable inputs and minimize the use of unobservable inputs. Transfers between measurement levels are
recognized at the end of reporting periods.
Fair value measurement requires the use of an exit price notion which may differ from entrance pricing. Generally, we believe our assets and liabilities classified as
Level 1 or Level 2 approximate an exit price notion.
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.
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.
Loans: 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
losses may be established. Loans for which it is probable that payment of interest and principal will be significantly different than the contractual terms of the
original loan agreement are considered impaired. Once a loan is identified as impaired, we measure the estimated impairment. The fair value of impaired loans is
estimated using one of several methods, including the present value of expected future cash flows discounted at the loan’s effective interest rate, or the fair value of
the collateral, less costs 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.
77
Table of Contents
The following tables list the quantitative fair value information about impaired loans as of:
Valuation Technique
Fair Value
Discounted value
$19,135
Valuation Technique
Fair Value
Discounted value
$20,045
December 31, 2019
Unobservable Input
Discount applied to collateral:
Real Estate
Equipment
Cash crop inventory
Livestock
Other inventory
Accounts receivable
December 31, 2018
Unobservable Input
Discount applied to collateral:
Real Estate
Equipment
Cash crop inventory
Livestock
Other inventory
Accounts receivable
Liquor license
Furniture, fixtures & equipment
Actual Range
20% - 30%
20% - 40%
40%
30%
50%
25% - 50%
Actual Range
20% - 30%
20% - 40%
30% - 40%
30%
45% - 50%
50%
75%
35% - 45%
Collateral discount rates may have ranges to accommodate differences in the age of the independent appraisal, broker price opinion, or internal evaluation.
Derivative instruments: Derivative instruments, consisting solely of interest rate swaps, are recorded at fair value on a recurring basis. Derivatives qualifying as
cash flow hedges, when highly effective, are reported at fair value in other assets or other liabilities on our Consolidated Balance Sheets with changes in value
recorded in OCI. Should the hedge no longer be considered effective, the ineffective portion of the change in fair value is recorded directly in earnings in the period
in which the change occurs. The fair value of a derivative is determined by quoted market prices and model-based valuation techniques. As such, we classify
derivative instruments as Level 2.
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.
Equity securities without readily determinable fair values: Equity securities without readily determinable fair values include our holdings in FHLB stock and FRB
stock as well as our ownership interest in CSS. As a 50% investor of the membership units in CSS, we account for our investment under the equity method of
accounting. The General Manager of CSS, through the normal course of business, chose to evaluate its operations of the company and obtained an independent,
third-party valuation of the company during the fourth quarter of 2019. As of December 31, 2019, our recorded investment in CSS relied on assumptions and use of
estimates pursuant to the valuation. As such, we classify such equity securities instruments as Level 3 with the related impairment in 2019 a nonrecurring Level 3
fair value adjustment.
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.
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Table of Contents
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
December 31:
Carrying
Value
Estimated
Fair Value
Level 1
Level 2
Level 3
2019
ASSETS
Cash and cash equivalents
Mortgage loans AFS
Gross loans
Less allowance for loan and lease losses
Net loans
Accrued interest receivable
Equity securities without readily determinable fair
values (1)
OMSR
LIABILITIES
Deposits without stated maturities
Deposits with stated maturities
Borrowed funds
Accrued interest payable
$
60,572 $
60,572 $
60,572 $
904
925
1,186,570
1,170,370
7,939
7,939
1,178,631
1,162,431
—
—
—
—
6,501
6,501
6,501
21,629
2,264
906,232
407,619
275,999
860
N/A
2,264
906,232
409,600
278,761
860
—
—
906,232
—
—
860
2018
— $
925
—
—
—
—
—
2,264
—
409,600
278,761
—
Carrying
Value
Estimated
Fair Value
Level 1
Level 2
Level 3
ASSETS
Cash and cash equivalents
Mortgage loans AFS
Gross loans
Less allowance for loan and lease losses
Net loans
Accrued interest receivable
Equity securities without readily determinable fair
values (1)
OMSR
LIABILITIES
Deposits without stated maturities
Deposits with stated maturities
Borrowed funds
Accrued interest payable
$
73,471 $
73,471 $
73,471 $
358
365
1,128,707
1,099,645
8,375
8,375
1,120,332
1,091,270
—
—
—
—
6,928
6,928
6,928
24,948
2,434
859,073
433,620
340,299
826
N/A
2,602
859,073
425,993
333,829
826
—
—
859,073
—
—
826
— $
365
—
—
—
—
—
2,602
—
425,993
333,829
—
(1) Due to the characteristics of equity securities without readily determinable fair values, they are not disclosed under a specific fair value hierarchy. When an
impairment or write-down related to these securities is recorded, such amount would be classified as a nonrecurring Level 3 fair value adjustment.
79
—
—
1,170,370
7,939
1,162,431
—
—
—
—
—
—
—
—
—
1,099,645
8,375
1,091,270
—
—
—
—
—
—
—
Table of Contents
Financial Instruments Recorded at Fair Value
The table below presents the recorded amount of assets and liabilities measured at fair value on December 31:
Total
Level 1
Level 2
Level 3
Total
Level 1
Level 2
Level 3
2019
2018
Recurring items
AFS securities
Government-sponsored
enterprises
States and political
subdivisions
Auction rate money market
preferred
Mortgage-backed securities
Collateralized mortgage
obligations
Total AFS securities
Derivative instruments
Nonrecurring items
Impaired loans (net of the
ALLL)
OMSR
Investment in CSS
Foreclosed assets
Total
Percent of assets and liabilities
measured at fair value
$
— $
— $
— $
— $
170 $
— $
170
$
169,752
—
169,752
—
190,866
—
190,866
3,119
140,204
116,764
429,839
67
19,135
2,264
4,246
456
—
—
—
—
—
—
—
—
—
3,119
140,204
116,764
429,839
67
—
—
—
—
—
—
—
—
—
19,135
2,264
4,246
456
2,554
184,484
116,760
494,834
323
20,045
2,434
7,565
355
—
—
—
—
—
—
—
—
—
2,554
184,484
116,760
494,834
323
—
—
—
—
20,045
2,434
7,565
355
$
456,007 $
— $
429,906
$
26,101
$
525,556 $
— $
495,157
$
30,399
—%
94.28%
5.72%
—%
94.22%
5.78%
—
—
—
—
—
—
—
We recorded $111 and $0 through earnings related to fair value changes in foreclosed assets for the years ended December 31, 2019 and 2018. We recorded an
impairment related to OMSR of $214 and $0 through earnings for the years ended December 31, 2019 and 2018. We recorded a reduction to our investment in CSS
of $3,566 and $0 through earnings for the years ended December 31, 2019 and 2018. We had no other assets or liabilities recorded at fair value with changes in fair
value recognized through earnings, on a recurring basis or nonrecurring basis, as of December 31, 2019 and 2018.
Note 19 – Related Party Transactions
In the ordinary course of business, we grant loans to principal officers and directors and their affiliates (including their families and companies in which they have
10% or more ownership). Annual activity consisted of the following for the years ended December 31:
Balance, January 1
New loans
Repayments
Balance, December 31
2019
2018
3,343 $
1,584
(1,232)
3,695 $
4,335
1,184
(2,176)
3,343
$
$
Total deposits of these principal officers and directors and their affiliates amounted to $5,137 and $5,029 at December 31, 2019 and 2018, respectively.
From time to time, we make charitable donations to The Isabella Bank Foundation (the “Foundation”), which is a non-controlled nonprofit organization formed for
the purpose of distributing charitable donations to recipient organizations generally located in the communities we serve. Our donations are recognized as expense
when paid to the Foundation. The assets and transactions of the Foundation are not included in our consolidated financial statements.
Assets of the Foundation include cash and cash equivalents, certificates of deposit, and shares of Isabella Bank Corporation common stock. The Foundation owned
44,350 shares of our common stock as of December 31, 2019 and 2018, respectively. Such shares are included in the computation of dividends and earnings per
share.
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Table of Contents
The following table displays total assets of, and our donations to, the Foundation as of, and for the years ended December 31:
Total assets
Donations
Note 20 – Operating Segments
2019
2018
2017
$
$
1,678 $
50 $
1,731 $
— $
2,162
—
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 December 31, 2019,
2018, and 2017 represent approximately 90% or more of our consolidated total assets and operating results. As such, no additional segment reporting is presented.
Note 21 – Parent Company Only Financial Information
Condensed Balance Sheets
ASSETS
Cash on deposit at the Bank
Investments in subsidiaries
Premises and equipment
Other assets
TOTAL ASSETS
LIABILITIES AND SHAREHOLDERS’ EQUITY
Other liabilities
Shareholders' equity
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
December 31
2019
2018
1,360 $
157,415
1,539
49,887
210,201 $
19 $
210,182
210,201 $
2,499
143,942
1,912
51,674
200,027
4,508
195,519
200,027
$
$
$
$
Condensed Statements of Income
Year Ended December 31
2019
2018
2017
$
7,800 $
13,100 $
Income
Dividends from subsidiaries
Interest income
Net income (loss) on CSS joint venture
Other income
Total income
Expenses
Compensation and benefits
Occupancy and equipment
Audit, consulting, and legal fees
Director fees
Other
Total expenses
Income before income tax benefit and equity in undistributed earnings of subsidiaries
Federal income tax benefit
Income before equity in undistributed earnings of subsidiaries
Undistributed earnings of subsidiaries
Net income
81
7
(3,108)
—
4,699
—
59
477
368
1,165
2,069
2,630
984
3,614
9,410
1
274
2,756
16,131
4,132
513
774
413
796
6,628
9,503
749
10,252
3,769
$
13,024 $
14,021 $
9,600
2
164
6,299
16,065
5,196
1,779
824
382
1,887
10,068
5,997
91
6,088
7,149
13,237
Table of Contents
Operating activities
Net income
Condensed Statements of Cash Flows
Year Ended December 31
2019
2018
2017
$
13,024 $
14,021 $
13,237
Adjustments to reconcile net income to cash provided by operations
Undistributed earnings of subsidiaries
Undistributed earnings of equity securities without readily determinable fair values
Share-based payment awards under equity compensation plan
Depreciation
Deferred income tax expense (benefit)
Changes in operating assets and liabilities which provided (used) cash
Other assets
Other liabilities
Net cash provided by (used in) operating activities
Investing activities
Maturities, calls, principal payments, and sales of AFS securities
Purchases of premises and equipment
Net cash provided by (used in) investing activities
Financing activities
Cash dividends paid on common stock
Proceeds from the issuance of common stock
Common stock repurchased
Common stock purchased for deferred compensation obligations
Net cash provided by (used in) financing activities
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
(9,410)
3,320
523
46
114
(285)
69
7,401
—
—
—
(8,282)
4,876
(4,003)
(1,131)
(8,540)
(1,139)
2,499
(3,769)
(144)
612
134
(31)
1,237
(937)
11,123
—
(96)
(96)
(8,169)
6,864
(7,007)
(401)
(8,713)
2,314
185
Cash and cash equivalents at end of period
$
1,360 $
2,499 $
(7,149)
40
640
154
792
42
(1,590)
6,166
249
(113)
136
(7,990)
6,177
(5,181)
(420)
(7,414)
(1,112)
1,297
185
On January 1, 2019, there was a transaction to restructure the Bank and the parent holding company for the purpose of better-organizing the entities for present and
future needs. The transaction is expected to produce future benefits for us in the form of reduced operational costs and better-managed risk. Assets and liabilities
transferred from the parent company to the Bank related primarily to capital assets, net deferred income tax asset, prepaid assets, employee benefits payable,
accrued expenses, and a pension plan. Effective January 1, 2019, employee compensation and benefit expenses are now recognized directly by the Bank, where
expenses related to certain administrative functions were previously recognized by the parent holding company. Similarly, expenses related to most capital assets
are now recognized directly by the Bank. A portion of employee compensation and benefit expenses, as well as some expenses related to capital assets, are now
recognized by the holding company through a management fee paid to the Bank.
Note 22 – Subsequent Events
We evaluated subsequent events for potential recognition and disclosure through the date the consolidated financial statements were issued. Events or transactions
occurring after December 31, 2019, but prior to the date the consolidated financial statements were issued, include anticipated proceeds from the redemption of a
corporate owned life insurance policy. Proceeds, from the death benefit on an insurance policy on the life of a former executive officer, are estimated at $500 and
will be recognized as noninterest income during 2020.
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Table of Contents
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
None.
Item 9A. 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 December 31, 2019, 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 December 31, 2019, 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
We also conducted an evaluation of internal control over financial reporting to determine whether any changes occurred during the quarter ended December 31,
2019, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Based on this evaluation, we have
concluded that there have been no such changes during the quarter ended December 31, 2019.
Management’s Report on Internal Control Over Financial Reporting
We are responsible for the preparation and integrity of our published consolidated financial statements. The consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States of America and, accordingly, include amounts based on judgments and estimates.
We also prepared the other information included in the Annual Report on Form 10-K and are responsible for the accuracy and consistency with the consolidated
financial statements.
We are responsible for establishing and maintaining a system of internal control over financial reporting, which is intended to provide reasonable assurance to our
management and Board of Directors regarding the reliability of our consolidated financial statements. The system includes but is not limited to:
•
•
•
•
•
•
A documented organizational structure and division of responsibility;
Established policies and procedures, including a code of conduct to foster a strong ethical climate which is communicated throughout our
Corporation;
Internal auditors that monitor the operation of the internal control system and report findings and recommendations to management and the Audit
Committee;
Procedures for taking action in response to an internal audit finding or recommendation;
Regular reviews of our consolidated financial statements by qualified individuals; and
The careful selection, training and development of our people.
There are inherent limitations in the effectiveness of any system of internal control, including the possibility of human error and the circumvention or overriding of
controls. Also, the effectiveness of an internal control system may change over time. We have implemented a system of internal control that was designed to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in
accordance with generally accepted accounting principles.
We have assessed our internal control system in relation to criteria for effective internal control over financial reporting described in “Internal Control-Integrated
Framework” issued by the Committee of Sponsoring Organizations (2013 framework) of the Treadway Commission.
Based upon these criteria, we believe that, as of December 31, 2019, our system of internal control over financial reporting was effective.
Our independent registered public accounting firm, Rehmann Robson LLC ("Rehmann"), has audited our 2019 consolidated financial statements and our internal
control over financial reporting as of December 31, 2019. Rehmann was given unrestricted access to all financial records and related data, including minutes of all
meetings of stockholders, the Board of Directors and committees of the Board. Rehmann has issued an unqualified audit opinion on our 2019 consolidated financial
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statements and an unqualified opinion on the effectiveness of our internal controls as of December 31, 2019, as a result of the integrated audit.
Isabella Bank Corporation
By:
/s/ Jae A. Evans
Jae A. Evans
President, Chief Executive Officer
(Principal Executive Officer)
March 13, 2020
/s/ Neil M. McDonnell
Neil M. McDonnell
Chief Financial Officer
(Principal Financial Officer)
March 13, 2020
Item 9B. Other Information.
None.
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Item 10. Directors, Executive Officers and Corporate Governance.
PART III
For information concerning our directors and certain executive officers, see “Election of Directors” and “Section 16(a) Beneficial Ownership Reporting
Compliance” in our Proxy Statement for the Annual Meeting of Shareholders to be held May 5, 2020 (“Proxy Statement”) which is incorporated herein by
reference.
For Information concerning our Audit Committee financial experts, see “Committees of the Board of Directors and Meeting Attendance” in the Proxy Statement
which is incorporated herein by reference.
We have adopted a Code of Conduct and Business Ethics that applies to our Chief Executive Officer, Chief Financial Officer, and Controller. We shall provide to
any person without charge upon request, a copy of our Code of Conduct and Business Ethics. Written requests should be sent to: Secretary, Isabella Bank
Corporation, 401 North Main Street, Mount Pleasant, Michigan 48858.
Item 11. Executive Compensation.
For information concerning executive compensation, see “Executive Officers” and “Remuneration of Directors” in the Proxy Statement which is incorporated
herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
For information concerning the security ownership of certain owners and management, see “Security Ownership of Certain Beneficial Owners and Management”
in the Proxy Statement which is incorporated herein by reference.
Equity Compensation Plan Information
The following table provides information as of December 31, 2019, with respect to compensation plans under which our common shares are authorized for
issuance to directors, officers or employees in exchange for consideration in the form of goods or services.
Plan Category
Equity compensation plans approved by shareholders:
None
Equity compensation plans not approved by shareholders:
Deferred director compensation plan (1)
Stock Award Incentive Plan (2)
Total
Number of Securities
to be Issued
Upon Exercise of
Outstanding
Options, Warrants,
and Rights
(A)
Weighted Average
Exercise Price
of Outstanding
Options, Warrants,
and Rights
(B)
—
177,935 (3)
7,890 (4)
185,825
—
— (5)
— (5)
Number of Securities
Remaining
Available for Future
Issuance Under Equity
Compensation Plans
(Excluding Securities
Reflected in Column (A))
(C)
—
— (6)
— (6)
(1) Pursuant to the terms of the Directors Plan, our directors are required to invest at least 25% of their board fees in our common stock. These stock investments can
be made either through deferred fees or through the purchase of shares through the Dividend Reinvestment Plan. Deferred fees, under the Directors Plan, are
converted on a quarterly basis into stock units of our common stock based on the fair value of a share of our common stock as of the relevant valuation date. Stock
units credited to a participant’s account are eligible for stock and cash dividends as declared. Dividend Reinvestment Plan shares are purchased pursuant to the
Dividend Reinvestment Plan.
Distribution of deferred fees from the Directors Plan occurs when the participant retires from the Board or upon the occurrence of certain other events. The
participant is eligible to receive a distribution in the form of shares of our common stock of all of the stock units that are then in his or her account, and any
unconverted cash will be converted to and rounded up to whole shares of stock and distributed, as well. The Directors Plan does not allow for cash settlement, and
therefore, such share-based payment awards qualify for classification as equity. We may use authorized but unissued shares or purchase shares of common stock on
the open market to meet our obligations under the Directors Plan.
(2) The Stock Award Incentive Plan is an equity-based bonus plan. Under the plan, we may award stock bonuses to the President and CEO, the CFO and the Bank
President. The plan authorizes the issuance of vested stock to eligible employees worth up to 20% of the employee’s annualized base wages, on a calendar year
basis. The plan imposes several conditions on
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Table of Contents
the issuance of stock awards and therefore, the stock awards are restricted. Awards are converted to shares upon payment to the participant based on the market
value of our common stock on the date of award.
(3) As of December 31, 2019, the Directors Plan had 205,004 shares eligible to be distributed under the Directors Plan. The Rabbi Trust holds 27,069 shares for the
benefit of participants pursuant to the Directors Plan. Accordingly, such shares are not included in the number of securities issuable in column (A).
(4) This amount includes shares subject to outstanding incentive awards at the maximum amount of shares issuable under such awards. However, payout of
incentive awards is contingent on the individual and the Corporation reaching certain levels of performance. If the performance criteria for these awards are not
fully satisfied, the award recipient will receive less than the maximum number of shares eligible under these grants and may receive nothing from these grants.
Additionally, this amount assumes the closing price of our common stock as of December 31, 2019 for purposes of the conversion from awards to stock.
(5) The Directors Plan and the Stock Award Incentive Plan do not have an exercise price.
(6) There is no maximum number of shares available for issuance under the Directors Plan and the Stock Award Incentive Plan.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
For information, see “Indebtedness of and Transactions with Management” and “Election of Directors” in the Proxy Statement, which is incorporated herein by
reference.
Item 14. Principal Accountant Fees and Services.
For information concerning our principal accountant fees and services see “Fees for Professional Services Provided by Rehmann Robson LLC” and “Pre-approval
Policies and Procedures” in our Proxy Statement which is incorporated herein by reference.
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Table of Contents
Item 15. Exhibits, Financial Statement Schedules.
PART IV
(a)
(1)
Financial Statements: The following documents are filed as part of Item 8 of this report:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Changes in Shareholders’ Equity
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income (Loss)
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
(2)
(3)
Financial Statement Schedules: All schedules are omitted because they are neither applicable nor required, or because the required
information is included in the consolidated financial statements or related notes.
See the exhibits listed below under Item 15(b):
(b) The following exhibits required by Item 601 of Regulation S-K are filed as part of this report:
3(a)
3(b)
3(c)
3(d)
3(e)
3(f)
3(g)
3(h)
3(i)
10(a)
10(b)
10(c)
10(d)
10(e)
10(f)
14
21
23
31(a)
31(b)
32
Amended Articles of Incorporation (1)
Amendment to the Articles of Incorporation (2)
Amendment to the Articles of Incorporation (3)
Amendment to the Articles of Incorporation (4)
Amendment to the Articles of Incorporation (7)
Amended Bylaws (5)
Amendment to Bylaws (6)
Amendment to Bylaws (9)
Amendment to Bylaws (10)
Isabella Bank Corporation and Related Companies Deferred Compensation Plan for Directors* (8)
Isabella Bank Corporation Split Dollar Plan* (12)
Isabella Bank Corporation Retirement Bonus Plan* (11)
Isabella Bank Corporation Supplemental Executive Retirement Plan* (13)
Amendment to the Isabella Bank Corporation Supplemental Executive Retirement Plan* (14)
Isabella Bank Corporation Stock Award Incentive Plan* (14)
Code of Conduct and Business Ethics
Subsidiaries of the Registrant
Consent of Rehmann Robson LLC, Independent Registered Public Accounting Firm
Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002 by the Chief Executive Officer
Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002 by the Chief Financial Officer
Section 1350 Certification of Chief Executive Officer and Chief Financial Officer
101.INS
XBRL Interactive Data File**
101.SCH
XBRL Interactive Data File**
101.CAL
XBRL Interactive Data File**
101.LAB
XBRL Interactive Data File**
101.PRE
XBRL Interactive Data File**
101.DEF
XBRL Interactive Data File**
87
Table of Contents
*
**
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
(12)
(13)
(14)
Management Contract or Compensatory Plan or Arrangement.
As provided by Rule 406T in Regulation S-T, this information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933
and Section 18 of the Exchange Act
Previously filed as an Exhibit to the Isabella Bank Corporation Form 10-K, filed March 12, 1991, and incorporated herein by reference
Previously filed as an Exhibit to the Isabella Bank Corporation Form 10-K, filed March 26, 1994, and incorporated herein by reference.
Previously filed as an Exhibit to Isabella Bank Corporation Form 10-K, filed March 22, 2000, and incorporated herein by reference.
Previously filed as an Exhibit to Isabella Bank Corporation Form 10-K, filed March 27, 2001, and incorporated herein by reference.
Previously filed as an Exhibit to Isabella Bank Corporation Form 10-K, filed March 16, 2005, and incorporated herein by reference.
Previously filed as an Exhibit to Isabella Bank Corporation Form 8-K, filed November 22, 2006, and incorporated herein by reference.
Previously filed as an Exhibit to Isabella Bank Corporation Form 8-K, filed May 16, 2008, and incorporated herein by reference.
Previously filed as an Exhibit to Isabella Bank Corporation Form 8-K, filed March 13, 2019, and incorporated herein by reference.
Previously filed as an Exhibit to Isabella Bank Corporation Form 8-K, filed August 28, 2009, and incorporated herein by reference.
Previously filed as an Exhibit to Isabella Bank Corporation Form 8-K, filed December 23, 2009, and incorporated herein by reference.
Previously filed as an Exhibit to Isabella Bank Corporation Form 8-K, filed December 19, 2008, and incorporated herein by reference.
Previously filed as an Exhibit to Isabella Bank Corporation Form 8-K, filed March 31, 2015, and incorporated herein by reference.
Previously filed as an Exhibit to Isabella Bank Corporation Form 8-K, filed April 27, 2015, and incorporated herein by reference.
Previously filed as an Exhibit to Isabella Bank Corporation Form 8-K, filed February 12, 2019, and incorporated herein by reference.
Item 16. Form 10-K Summary.
Not applicable.
88
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
(Registrant)
By:
/s/ Jae A. Evans
Jae A. Evans
President, Chief Executive Officer
(Principal Executive Officer)
Date:
March 13, 2020
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
Signatures
/s/ Dr. Jeffrey J. Barnes
Dr. Jeffrey J. Barnes
/s/ Jill Bourland
Jill Bourland
/s/ Jae A. Evans
Jae A. Evans
/s/ G. Charles Hubscher
G. Charles Hubscher
/s/ Thomas L. Kleinhardt
Thomas L. Kleinhardt
/s/ David J. Maness
David J. Maness
/s/ W. Joseph Manifold
W. Joseph Manifold
/s/ Neil M. McDonnell
Neil M. McDonnell
/s/ Sarah R. Opperman
Sarah R. Opperman
/s/ Vicki L. Rupp
Vicki L. Rupp
/s/ Jerome Schwind
Jerome Schwind
/s/ Rhonda S. Tudor
Rhonda S. Tudor
/s/ Gregory V. Varner
Gregory V. Varner
Capacity
Director
Director
President, Chief Executive Officer
(Principal Executive Officer), and Director
Director
Director
Director
Director
Chief Financial Officer
(Principal Financial Officer)
Director
Director
Date
March 13, 2020
March 13, 2020
March 13, 2020
March 13, 2020
March 13, 2020
March 13, 2020
March 13, 2020
March 13, 2020
March 13, 2020
March 13, 2020
Isabella Bank President and Director
March 13, 2020
Controller
Director
89
March 13, 2020
March 13, 2020
Exhibit 14
Introduction
Code of Conduct and Business Ethics
In accordance with the provisions of Section 406 of the Sarbanes-Oxley Act, Isabella Bank Corporation (the Corporation) has adopted this Code of Business
Conduct and Ethics (the Code) applicable to the principal executive officer, the principal financial officer and the principal accounting officer or controller of the
Corporation (collectively, Covered Individuals). The Code has been designed to deter wrongdoing and to promote honest and ethical conduct. Accordingly, the
Code provides principles to which the Covered Individuals are expected to adhere and advocate. The Code embodies rules regarding individual and peer
responsibilities, as well as responsibilities to the Corporation, the public and shareholders.
Complying With Law
The Covered Individuals shall respect and comply with all of the laws, rules and regulations of the U.S. and the states, counties, cities and other jurisdictions, in
which the Corporation conducts its business or the laws, rules and regulations of which are applicable to the Corporation.
Such legal compliance should include, without limitation, compliance with the insider trading prohibitions applicable to the Corporation and its employees, officers
and directors. Generally, Covered Individuals who have knowledge of material nonpublic information from or about the Corporation are not permitted to buy, sell
or otherwise trade in the Corporation’s securities, whether or not they are using or relying upon that information. This restriction extends to sharing or tipping
others about such information, especially since the individuals receiving such information might utilize such information to trade in the Corporation’s securities.
This restriction generally does not extend to normal recurring transactions such as purchase transactions under the dividend reinvestment plan. Covered Individuals
are directed to the Corporation Secretary if they have questions regarding the applicability of such insider trading prohibitions.
The Code does not summarize all laws, rules and regulations applicable to the Corporation and its employees, officers and directors. Please consult the employee
handbook and the various guidelines which the Corporation has prepared on specific laws, rules and regulations.
Conflicts Of Interest
The Covered Individuals should be scrupulous in avoiding a conflict of interest with regard to the Corporation’s interests. A conflict of interest exists whenever an
individual’s private interests interfere or conflict in any way (or even appear to interfere or conflict) with the interests of the Corporation. A conflict situation can
arise when a Covered Individual takes actions or has interests that may make it difficult to perform work objectively and effectively for the Corporation. It is
almost always a conflict of interest for a Corporation employee to work simultaneously for a competitor or customer. The Covered Individuals are not allowed to
work for a competitor as a consultant or board member. The Covered Individuals shall avoid any direct or indirect business connection with the Corporation’s
customers or competitors, except on the Corporation’s behalf. Conflicts of interest may also arise when a Covered Individual or members of his or her family,
receives improper personal benefits as a result of the Covered Individual’s position in the Corporation, whether received from the Corporation or a third party.
Conflicts of interest are prohibited as a matter of Corporation policy, except under guidelines approved by the Board of Directors or committees of the Board.
Conflicts of interest may not always be clear-cut, so the Board of Directors should be consulted when questions arise. Any Covered Individual who becomes aware
of a conflict or potential conflict should bring it to the attention of the Board of Directors or consult the procedures described in the Code.
Corporate Opportunity
Covered Individuals are prohibited from (a) taking for themselves personally opportunities that properly belong to the Corporation or are discovered through the
use of corporate property, information or position; (b) using corporate property, information or position for personal gain; and (c) competing with the Corporation.
Covered Individuals owe a duty to the Corporation to advance its legitimate interests when the opportunity to do so arises.
Confidentiality
Covered Individuals must maintain the confidentiality of confidential information entrusted to them by the Corporation or its customers, except when disclosure is
authorized by the Board of Directors or required by laws, regulations or legal proceedings. Whenever feasible, Covered Individuals should consult the Board of
Directors if they believe they have a legal obligation to disclose confidential information. Confidential information includes all nonpublic information that might be
of use to competitors of the Corporation, or harmful to the Corporation or its customers if disclosed.
Fair Dealing
Each Covered Individual should endeavor to deal fairly with the Corporation’s customers, competitors, directors, officers and employees. None should take unfair
advantage of anyone through manipulation, concealment, abuse of privileged information, misrepresentation of material facts or any other unfair business practice.
Isabella Bank Corporation seeks competitive advantages through superior performance, never through unethical or illegal business practices. Stealing proprietary
information, possessing trade secret information that was obtained without the owner’s consent, or inducing such disclosures by past or present employees of other
companies is prohibited.
The purpose of business entertainment and gifts in a commercial setting is to create good will and sound working relationships, not to gain unfair advantage. No
gift or entertainment should be offered, given, provided or accepted by a Covered Individual or family member of a Covered Individual unless it: (1) is not a cash
gift, (2) is consistent with customary business practices, (3) is not excessive in value, (4) cannot be construed as a bribe or payoff (5) does not violate any laws or
regulations, and (6) has been approved by the Board of Directors or fits within pre-approved parameters.
Protection and Proper Use of Corporation Assets
All Covered Individuals should protect the Corporation’s assets and ensure their efficient use. Theft, carelessness, and waste have a direct impact on the
Corporation’s profitability. All Corporation assets should be used for legitimate business purposes.
Accounting Complaints
The Corporation’s policy is to comply with all applicable financial reporting and accounting regulations applicable to the Corporation. All of the Corporation’s
books, records, accounts and financial statements must be maintained in reasonable detail, must appropriately reflect the Corporation’s transactions and must
conform both to applicable legal requirements and to the Corporation’s system of internal controls. Unrecorded or off the balance sheet funds or assets should not
be maintained unless permitted by applicable laws or regulations. If any Covered Individual has concerns or complaints regarding questionable accounting or
auditing matters of the Corporation, then he/she is encouraged to submit those concerns or complaints (anonymously, confidentially or otherwise) to the Audit
Committee of the Board of Directors (which will, subject to its duties arising under applicable law, regulations and legal proceedings, treat such submissions
confidentially). Such submissions may be directed to the attention of the Audit Committee, or any director who is a member of the Audit Committee, at the
principal executive offices of the Corporation.
Reporting Any Illegal or Unethical Behavior
Covered Individuals are encouraged to talk to the Board of Directors about observed illegal or unethical behavior and, when in doubt, about the best course of
action in a particular situation. Covered Individuals who are concerned that violations of the Code or that other illegal or unethical conduct by employees, officers
or directors of the Corporation have occurred or may occur should contact the Board of Directors. If they do not believe it appropriate or are not comfortable
approaching the Board of Directors about their concerns or complaints, then they may contact the Audit Committee of the Board of Directors. If their concerns or
complaints require confidentiality, including keeping their identity anonymous, then this confidentiality will be protected, subject to applicable law, regulation or
legal proceedings.
No Retaliation
The Corporation will not permit retaliation of any kind by or on behalf of the Corporation and its employees, officers and directors against good faith reports or
complaints of violations of the Code or other illegal or unethical conduct.
Public Corporation Reporting
As a public Corporation, it is of critical importance that the Corporation’s filings with the Securities and Exchange Commission (the SEC) be accurate and timely.
Depending on his or her position with the Corporation, a Covered Individual may be called upon to provide necessary information to assure full, fair, accurate,
timely and understandable disclosure in the periodic reports
required to be filed by the Corporation with the SEC. The Corporation expects Covered Individuals to take this responsibility very seriously and to provide prompt
accurate answers to inquiries to the Corporation’s public disclosure requirements.
Accountability for Adherence to the Code
Failure to comply with the standards outlined in the Code will result in disciplinary action including, but not limited to, reprimands, warnings, probation or
suspension without pay, demotions, reduction in salary, discharge and restitution. Certain violations of the Code may require the Corporation to refer the matter to
the appropriate governmental or regulatory authorities for investigation or prosecution.
Amendment, Modification and Waiver
The Code may be amended, modified or waived by the Board of Directors, subject to the disclosure and other provisions of the Securities Exchange Act of 1934,
and the rules there under.
Subsidiaries of Isabella Bank Corporation:
Isabella Bank
Wholly owned
Exhibit 21
Consent of Independent Registered Public Accounting Firm
We hereby consent to the incorporation by reference in the registration statements (Form S-3 No. 333-226638 and Form S-8 No. 333-228953) pertaining to the
Isabella Bank Corporation Stockholder Dividend Reinvestment and Employee Stock Purchase Plan of our integrated audit report dated March 16, 2020, relating to
the consolidated financial statements and the effectiveness of internal control over financial reporting of Isabella Bank Corporation, included in this Annual Report
on Form 10-K for the year ended December 31, 2019.
/s/ Rehmann Robson LLC
Exhibit 23
Saginaw, Michigan
March 16, 2020
I, Jae A. Evans, certify that:
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K of Isabella Bank Corporation (the “registrant”).
Based on my knowledge, this Annual Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period
covered by this Annual Report.
Based on my knowledge, the financial statements, and other financial information included in this Annual Report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this Annual Report.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-
15(f)) for the registrant and have:
Exhibit 31(a)
a)
b)
c)
d)
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this Annual Report is being prepared;
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under my supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on
such evaluation; and
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s
internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to
the registrant’s auditors and the audit committee of registrant’s board of directors:
a)
b)
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and
any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: March 13, 2020
/s/ Jae A. Evans
President, Chief Executive Officer
(Principal Executive Officer)
I, Neil M. McDonnell, certify that:
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K of Isabella Bank Corporation (the “registrant”).
Based on my knowledge, this Annual Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period
covered by this Annual Report.
Based on my knowledge, the financial statements, and other financial information included in this Annual Report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this Annual Report.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-
15(f)) for the registrant and have:
Exhibit 31(b)
a)
b)
c)
d)
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this Annual Report is being prepared;
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under my supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on
such evaluation; and
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s
internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to
the registrant’s auditors and the audit committee of registrant’s board of directors:
a)
b)
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and
any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: March 13, 2020
/s/ Neil M. McDonnell
Chief Financial Officer
(Principal Financial Officer)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32
In connection with the Annual Report of Isabella Bank Corporation (the “Corporation”) on Form 10-K for the year ended December 31, 2019 as filed with
the Securities and Exchange Commission on the date hereof (the “Report”), Jae A. Evans, President and Chief Executive Officer and Neil M. McDonnell, Chief
Financial Officer of the Corporation, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Corporation.
/s/ Jae A. Evans
President, Chief Executive Officer
(Principal Executive Officer)
March 13, 2020
/s/ Neil M. McDonnell
Chief Financial Officer
(Principal Financial Officer)
March 13, 2020