10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2012

or

¨ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the transition period from                 to

Commission File Number: 0-18415

Isabella Bank Corporation

(Exact name of registrant as specified in its charter)

Michigan	38-2830092
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer identification No.)
401 N. Main St, Mt. Pleasant, MI	48858
(Address of principal executive offices)	(Zip code)

(989) 772-9471

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    x  Yes    ¨  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    x  Yes    ¨   No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “accelerated filer”, “large accelerated filer”, and “smaller reporting company”, in

Rule 12b-2 of the Exchange Act (Check One).

Large accelerated filer	¨	Accelerated filer	x
Non-accelerated filer	¨  (Do not check if a smaller reporting company)	Smaller reporting company	¨

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

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common Stock no par value, 7,617,345 as of July 23, 2012

ISABELLA BANK CORPORATION

QUARTERLY REPORT ON FORM 10-Q

Table of Contents

PART I		3
Item 1	Interim Condensed Consolidated Financial Statements (Unaudited)	3
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	39
Item 3	Quantitative and Qualitative Disclosures about Market Risk	58
Item 4	Controls and Procedures	58
PART II		59
Item 1	Legal Proceedings	59
Item 1A	Risk Factors	59
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	59
Item 6	Exhibits	60
SIGNATURES		61

2

PART I – FINANCIAL INFORMATION

Item 1 – Interim Condensed Consolidated Financial Statements (Unaudited)

INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)

	June 30, 2012		December 31 2011
ASSETS
Cash and cash equivalents
Cash and demand deposits due from banks	$	19,492	$	24,514
Interest bearing balances due from banks		759		4,076
Total cash and cash equivalents		20,251		28,590
Certificates of deposit held in other financial institutions		6,880		8,924
Trading securities		1,998		4,710
Available-for-sale securities (amortized cost of $464,931 in 2012 and $414,614 in 2011)		476,935		425,120
Mortgage loans available-for-sale		2,347		3,205
Loans
Agricultural		81,222		74,645
Commercial		368,371		365,714
Consumer		31,357		31,572
Residential real estate		274,002		278,360
Total loans		754,952		750,291
Less allowance for loan losses		12,318		12,375
Net loans		742,634		737,916
Premises and equipment		24,729		24,626
Corporate owned life insurance		22,423		22,075
Accrued interest receivable		5,217		5,848
Equity securities without readily determinable fair values		17,708		17,189
Goodwill and other intangible assets		46,659		46,792
Other assets		13,715		12,930
TOTAL ASSETS	$	1,381,496	$	1,337,925
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits
Noninterest bearing	$	124,230	$	119,072
NOW accounts		163,000		163,653
Certificates of deposit under $100 and other savings		450,159		440,123
Certificates of deposit over $100		241,439		235,316
Total deposits		978,828		958,164
Borrowed funds ($0 in 2012 and $5,242 in 2011 at fair value)		234,132		216,136
Accrued interest payable and other liabilities		8,681		8,842
Total liabilities		1,221,641		1,183,142
Shareholders’ equity
Common stock — no par value
15,000,000 shares authorized; issued and outstanding 7,602,545 shares (including 19,990 shares held in the Rabbi Trust) in 2012 and 7,589,226 shares (including 16,585 shares held in the Rabbi Trust) in 2011		134,931		134,734
Shares to be issued for deferred compensation obligations		4,724		4,524
Retained earnings		16,240		13,036
Accumulated other comprehensive income		3,960		2,489
Total shareholders’ equity		159,855		154,783
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	1,381,496	$	1,337,925

See notes to interim condensed consolidated financial statements.

3

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Dollars in thousands except per share data)

	Common Stock Shares Outstanding			Common Stock			Shares to be Issued for Deferred Compensation Obligations			Retained Earnings			Accumulated Other Comprehensive (Loss) Income			Totals
Balance, January 1, 2011		7,550,074		$	133,592		$	4,682		$	8,596		$	(1,709	)	$	145,161
Comprehensive income		—			—			—			4,988			3,722			8,710
Issuance of common stock		61,218			1,346			—			—			—			1,346
Common stock issued for deferred compensation obligations		14,842			266			(254	)		—			—			12
Share based payment awards under equity compensation plan		—			—			307			—			—			307
Common stock purchased for deferred compensation obligations		—			(227	)		—			—			—			(227	)
Common stock repurchased pursuant to publicly announced repurchase plan		(50,458	)		(914	)		—			—			—			(914	)
Cash dividends ($0.38 per share)		—			—			—			(2,881	)		—			(2,881	)
Balance, June 30, 2011		7,575,676		$	134,063		$	4,735		$	10,703		$	2,013		$	151,514
Balance, January 1, 2012		7,589,226		$	134,734		$	4,524		$	13,036		$	2,489		$	154,783
Comprehensive income		—			—			—			6,238			1,471			7,709
Issuance of common stock		54,900			1,322			—			—			—			1,322
Common stock transferred from the Rabbi Trust to satisfy deferred compensation obligations		—			95			(95	)		—			—			—
Share based payment awards under equity compensation plan		—			—			295			—			—			295
Common stock purchased for deferred compensation obligations		—			(225	)		—			—			—			(225	)
Common stock repurchased pursuant to publicly announced repurchase plan		(41,581	)		(995	)		—			—			—			(995	)
Cash dividends ($0.40 per share)		—			—			—			(3,034	)		—			(3,034	)
Balance, June 30, 2012		7,602,545		$	134,931		$	4,724		$	16,240		$	3,960		$	159,855

See notes to interim condensed consolidated financial statements.

4

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Dollars in thousands except per share data)

	Three Months Ended June 30						Six Months Ended June 30
	2012			2011			2012			2011
Interest income
Loans, including fees	$	10,849		$	11,464		$	21,789		$	22,825
Investment securities
Taxable		1,988			1,836			3,877			3,349
Nontaxable		1,216			1,189			2,420			2,368
Trading account securities		22			47			64			98
Federal funds sold and other		113			133			242			267
Total interest income		14,188			14,669			28,392			28,907
Interest expense
Deposits		2,368			2,776			4,880			5,561
Borrowings		1,061			1,325			2,253			2,593
Total interest expense		3,429			4,101			7,133			8,154
Net interest income		10,759			10,568			21,259			20,753
Provision for loan losses		439			603			900			1,420
Net interest income after provision for loan losses		10,320			9,965			20,359			19,333
Noninterest income
Service charges and fees		1,628			1,617			3,257			3,093
Gain on sale of mortgage loans		279			53			658			182
Net loss on trading securities		(16	)		(8	)		(32	)		(27	)
Net gain on borrowings measured at fair value		—			37			33			117
Gain on sale of available-for-sale investment securities		—			—			1,003			—
Other		653			279			1,166			561
Total noninterest income		2,544			1,978			6,085			3,926
Noninterest expenses
Compensation and benefits		5,232			4,746			10,533			9,751
Occupancy		599			613			1,240			1,259
Furniture and equipment		1,170			1,127			2,260			2,233
Other		2,187			2,293			4,446			4,123
Available-for-sale impairment loss
Total other-than-temporary impairment loss		—			—			486			—
Portion of loss reported in other comprehensive income		—			—			(204	)		—
Net available-for-sale impairment loss		—			—			282			—
Total noninterest expenses		9,188			8,779			18,761			17,366
Income before federal income tax expense		3,676			3,164			7,683			5,893
Federal income tax expense		672			492			1,445			905
NET INCOME	$	3,004		$	2,672		$	6,238		$	4,988
Earnings per share
Basic	$	0.40		$	0.35		$	0.82		$	0.66
Diluted	$	0.39		$	0.34		$	0.80		$	0.64
Cash dividends per basic share	$	0.20		$	0.19		$	0.40		$	0.38

See notes to interim condensed consolidated financial statements.

5

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Dollars in thousands)

	Three Months Ended June 30						Six Months Ended June 30
	2012			2011			2012			2011
Net income	$	3,004		$	2,672		$	6,238		$	4,988
Unrealized holding gains on available-for-sale securities:
Unrealized holding gains arising during the period		1,420			3,576			2,219			5,329
Reclassification adjustment for net realized gains included in net income		—			—			(1,003	)		—
Reclassification adjustment for impairment loss included in net income		—			—			282			—
Net unrealized gains		1,420			3,576			1,498			5,329
Tax effect		(546	)		(1,212	)		(27	)		(1,607	)
Other comprehensive income, net of tax		874			2,364			1,471			3,722
COMPREHENSIVE INCOME	$	3,878		$	5,036		$	7,709		$	8,710

See notes to interim condensed consolidated financial statements.

6

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

	Six Months Ended June 30
	2012			2011
OPERATING ACTIVITIES
Net income	$	6,238		$	4,988
Reconciliation of net income to net cash provided by operations:
Provision for loan losses		900			1,420
Impairment of foreclosed assets		17			35
Depreciation		1,195			1,282
Amortization and impairment of originated mortgage servicing rights		287			193
Amortization of acquisition intangibles		133			152
Net amortization of available-for-sale securities		1,076			693
Available-for-sale security impairment loss		282			—
Gain on sale of available-for-sale securities		(1,003	)		—
Net unrealized losses on trading securities		32			27
Net gain on sale of mortgage loans		(658	)		(182	)
Net unrealized gains on borrowings measured at fair value		(33	)		(117	)
Increase in cash value of corporate owned life insurance		(348	)		(287	)
Share-based payment awards under equity compensation plan		295			307
Origination of loans held for sale		(46,386	)		(17,247	)
Proceeds from loan sales		47,902			17,847
Net changes in operating assets and liabilities which provided (used) cash:
Trading securities		2,680			900
Accrued interest receivable		631			(123	)
Other assets		(1,132	)		653
Accrued interest payable and other liabilities		(161	)		684
Net cash provided by operating activities		11,947			11,225
INVESTING ACTIVITIES
Net change in certificates of deposit held in other financial institutions		2,044			4,934
Activity in available-for-sale securities
Sales		24,241			—
Maturities and calls		37,922			33,799
Purchases		(112,835	)		(78,664	)
Loan principal originations, net		(6,768	)		(13,462	)
Proceeds from sales of foreclosed assets		647			859
Purchases of premises and equipment		(1,298	)		(884	)
Net cash used in investing activities		(56,047	)		(53,418	)

7

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

(Dollars in thousands)

	Six Months Ended June 30
	2012			2011
FINANCING ACTIVITIES
Acceptances and withdrawals of deposits, net		20,664		$	46,860
Increase in other borrowed funds		18,029			1,680
Cash dividends paid on common stock		(3,034	)		(2,881	)
Proceeds from issuance of common stock		1,322			1,092
Common stock repurchased		(995	)		(648	)
Common stock purchased for deferred compensation obligations		(225	)		(227	)
Net cash provided by financing activities		35,761			45,876
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS		(8,339	)		3,683
Cash and cash equivalents at beginning of period		28,590			18,109
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	20,251		$	21,792
SUPPLEMENTAL CASH FLOWS INFORMATION:
Interest paid	$	7,291		$	8,156
Federal income taxes paid		836			365
SUPPLEMENTAL NONCASH INFORMATION:
Transfers of loans to foreclosed assets	$	1,150		$	1,057
Common stock issued for deferred compensation obligations		—			254
Common stock repurchased from the Rabbi Trust		—			(266	)

See notes to interim condensed consolidated financial statements.

8

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands except per share amounts)

NOTE 1 – BASIS OF PRESENTATION

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

The acronyms and abbreviations identified below are used in the Notes to Interim Condensed Consolidated Financial Statements as well as in the Management’s Discussion and Analysis of Financial Condition and Results of Operations. You may find it helpful to refer back to this page as you read this report.

AFS: Available-for-sale	IFRS: International Financial Reporting Standards
ALLL: Allowance for loan and lease losses	IRR: Interest Rate Risk
ASC: FASB Accounting Standards Codification	JOBS Act: Jumpstart our Business Startups Act
ASU: FASB Accounting Standards Update	LIBOR: London Interbank Offered Rate
ATM: Automated Teller Machine	Moody’s: Moody’s Investors Service, Inc
Directors Plan: Isabella Bank Corporation and Related Companies Deferred Compensation Plan for Directors	N/A: Not applicable N/M: Not meaningful
Dodd-Frank Act: Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010	OCI: Other comprehensive income (loss) OMSR: Originated mortgage servicing rights
FASB: Financial Accounting Standards Board	OTTI: Other-than-temporary impairment
FDIC: Federal Deposit Insurance Corporation	PBO: Projected Benefit Obligation
FFIEC: Federal Financial Institutions Council FRB: Board of Governors of the Federal Reserve System	Rabbi Trust: A trust established to fund     the Directors Plan SEC: U.S. Securities & Exchange Commission
FHLB: Federal Home Loan Bank	SOX: Sarbanes-Oxley Act of 2002
Freddie Mac: Federal Home Loan Mortgage Corporation	TDR: Troubled debt restructuring
FTE: Fully taxable equivalent	XBRL: eXtensible Business Reporting Language
GAAP: U.S. generally accepted accounting principles

The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with GAAP for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In our opinion, all adjustments considered necessary for a fair presentation have been included. Operating results for the three and six month periods ended June 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012. For further information, refer to the consolidated financial statements and footnotes thereto included in our annual report for the year ended December 31, 2011.

The accounting policies are materially the same as those discussed in Note 1 to the Consolidated Financial Statements included in our annual report for the year ended December 31, 2011.

9

NOTE 2 – COMPUTATION OF EARNINGS PER SHARE

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

Earnings per common share have been computed based on the following:

	Three Months Ended June 30				Six Months Ended June 30
	2012		2011		2012		2011
Average number of common shares outstanding for basic calculation		7,592,668		7,570,752		7,593,462		7,564,060
Average potential effect of shares in the Directors Plan (1)		203,603		194,964		201,743		194,051
Average number of common shares outstanding used to calculate diluted earnings per common share		7,796,271		7,765,716		7,795,205		7,758,111
Net income	$	3,004	$	2,672	$	6,238	$	4,988
Earnings per share
Basic	$	0.40	$	0.35	$	0.82	$	0.66
Diluted	$	0.39	$	0.34	$	0.80	$	0.64

(1) Exclusive of shares held in the Rabbi Trust

NOTE 3 – RECENTLY ADOPTED ACCOUNTING STANDARDS UPDATES

ASU No. 2011-03: “Reconsideration of Effective Control for Repurchase Agreements”

In April 2011, ASU No. 2011-03 amended ASC Topic 310, “Transfers and Servicing” to eliminate from the assessment of effective control, the criteria calling for the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed upon terms, even in the event of the transferee’s default. The assessment of effective control should instead focus on the transferor’s contractual rights and obligations. The new authoritative guidance was effective for interim and annual periods beginning on or after December 15, 2011 and did not impact our consolidated financial statements.

ASU No. 2011-04: “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS”

In May 2011, ASU No. 2011-04 amended ASC Topic 820, “Fair Value Measurement” to align fair value measurements and disclosures in GAAP and IFRS. The ASU changes the wording used to describe the requirements in GAAP for measuring fair value and disclosures about fair value.

The ASU clarifies the application of existing fair value measurements and disclosure requirements related to:

• The application of highest and best use and valuation premise concepts.

• Measuring the fair value of an instrument classified in a reporting entity’s stockholders’ equity.

• Disclosure about fair value measurements within Level 3 of the fair value hierarchy.

The ASU also changes particular principles or requirements for measuring fair value and disclosing information measuring fair value and disclosures related to:

• Measuring the fair value of financial instruments that are managed within a portfolio.

• Application of premiums and discounts in a fair value measurement.

10

The new authoritative guidance was effective for interim and annual periods beginning on or after December 15, 2011 and did not have a financial impact but increased the level of disclosures related to fair value measurements in our interim condensed consolidated financial statements in 2012.

ASU No. 2011-05: “Presentation of Comprehensive Income”

In June 2011, ASU No. 2011-05 amended ASC Topic 220, “Comprehensive Income” to improve the comparability, consistency, and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income. In addition, to increase the prominence of items reported in other comprehensive income, and to facilitate the convergence of GAAP and IFRS, the FASB eliminated the option to present components of other comprehensive income as part of the statement of changes in shareholders’ equity.

The new authoritative guidance was effective for interim and annual periods beginning on or after December 15, 2011 and did not have an impact on our consolidated financial statements as we have historically elected to present a separate statement of comprehensive income.

NOTE 4 – TRADING SECURITIES

Trading securities, at fair value, consist of the following investments at:

	June 30 2012		December 31 2011
States and political subdivisions	$	1,998	$	4,710

Included in the net trading losses of $32 during the first six months of 2012 were $10 of net unrealized trading losses on securities that were held in our trading portfolio as of June 30, 2012. Included in the net trading losses of $27 during the first six months of 2011 were $32 of net unrealized trading losses on securities that were held in the trading portfolio as of June 30, 2011.

11

NOTE 5 – AVAILABLE-FOR-SALE SECURITIES

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

	June 30, 2012
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Government sponsored enterprises	$	2,197	$	34	$	—	$	2,231
States and political subdivisions		170,958		8,243		547		178,654
Auction rate money market preferred		3,200		—		626		2,574
Preferred stocks		6,800		—		873		5,927
Mortgage-backed securities		161,521		2,991		15		164,497
Collateralized mortgage obligations		120,255		2,844		47		123,052
Total	$	464,931	$	14,112	$	2,108	$	476,935
	December 31, 2011
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Government sponsored enterprises	$	395	$	2	$	—	$	397
States and political subdivisions		166,832		8,157		51		174,938
Auction rate money market preferred		3,200		—		1,151		2,049
Preferred stocks		6,800		—		1,767		5,033
Mortgage-backed securities		140,842		2,807		47		143,602
Collateralized mortgage obligations		96,545		2,556		—		99,101
Total	$	414,614	$	13,522	$	3,016	$	425,120

The amortized cost and fair value of AFS securities by contractual maturity at June 30, 2012 are as follows:

	Maturing								Securities With Variable Monthly Payments or Continual Call Dates		Total
	Due in One Year or Less		After One Year But Within Five Years		After Five Years But Within Ten Years		After Ten Years
Government sponsored enterprises	$	—	$	—	$	72	$	2,125	$	—	$	2,197
States and political subdivisions		7,573		34,073		85,055		44,257		—		170,958
Auction rate money market preferred		—		—		—		—		3,200		3,200
Preferred stocks		—		—		—		—		6,800		6,800
Mortgage-backed securities		—		—		—		—		161,521		161,521
Collateralized mortgage obligations		—		—		—		—		120,255		120,255
Total amortized cost	$	7,573	$	34,073	$	85,127	$	46,382	$	291,776	$	464,931
Fair value	$	7,589	$	35,243	$	90,845	$	47,208	$	296,050	$	476,935

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.

12

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

A summary of the activity related to sales of AFS securities was as follows for the six month period ended June 30, 2012:

Proceeds from sales of securities	$	24,241
Gross realized gains	$	1,003
Applicable income tax expense	$	341

There were no sales of AFS securities in the first six months of 2011. The cost basis used to determine the realized gains or losses of securities sold was the amortized cost of the individual investment security as of the trade date.

Information pertaining to AFS securities with gross unrealized losses at June 30, 2012 and December 31, 2011 aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows:

	June 30, 2012
	Less Than Twelve Months				Over Twelve Months				Total Unrealized Losses
	Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value
States and political subdivisions	$	55	$	6,768	$	492	$	2,482	$	547
Auction rate money market preferred		—		—		626		2,574		626
Preferred stocks		—		—		873		5,927		873
Mortgage-backed securities		15		15,283		—		—		15
Collateralized mortgage obligations		47		4,686		—		—		47
Total	$	117	$	26,737	$	1,991	$	10,983	$	2,108
Number of securities in an unrealized loss position:				24				8		32
	December 31, 2011
	Less Than Twelve Months				Over Twelve Months
	Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Total Unrealized Losses
States and political subdivisions	$	51	$	1,410	$	—	$	—	$	51
Auction rate money market preferred		—		—		1,151		2,049		1,151
Preferred stocks		—		—		1,767		5,033		1,767
Mortgage-backed securities		47		24,291		—		—		47
Total	$	98	$	25,701	$	2,918	$	7,082	$	3,016
Number of securities in an unrealized loss position:				6				6		12

As of June 30, 2012 and December 31, 2011, we conducted an analysis to determine whether any securities currently in an unrealized loss position should be other-than-temporarily impaired. Such analyses considered, among other factors, the following criteria:

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

• Is the issuer’s investment credit rating below investment grade?

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

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

• Has the duration of the investment been extended?

As of June 30, 2012, we held an auction rate money market preferred security and preferred stocks which continued to be in an unrealized loss position as a result of the securities’ interest rates, as they are currently lower than the offering rates of securities with similar characteristics. We determined that any declines in the fair value of these securities are the result of changes in interest rates and not risks related to the underlying credit quality of the security. Additionally, none of the issuers of these securities are deemed to be below investment grade, we do not intend to sell the securities in an unrealized loss position, and it is more likely than not that we will not have to sell the securities before recovery of their cost basis.

During the three month period ended March 31, 2012, we had one state issued student loan auction rate AFS investment security (which is included in states and political subdivisions) that was downgraded by Moody’s from A3 to Caa3. As a result of this downgrade, we engaged the services of an independent investment valuation firm to estimate the amount of credit losses (if any) related to this particular issue as of March 31, 2012. The evaluation calculated a range of estimated credit losses utilizing two different bifurcation methods: 1) Estimated Cash Flow Method and 2) Credit Yield Analysis Method. The two methods were then weighted, with a higher weighting applied to the Estimated Cash Flow Method, to determine the estimated credit related impairment. As a result of this analysis we, recognized an OTTI of $282 in the first quarter of 2012.

A summary of key valuation assumptions used in the aforementioned analysis as of March 31, 2012, follows:

	Discounted Cash Flow Method
Ratings
Fitch	Not Rated
Moody’s	Caa3
S&P	A
Seniority	Senior
Discount rate	LIBOR + 6.35%
	Credit Yield Analysis Method
Credit discount rate	LIBOR + 4.00%
Average observed discounts based on closed transactions	14.00%

To test for additional impairment of this security during the three months ended June 30, 2012, we obtained another investment valuation (from the same firm engaged to perform the March 31, 2012 valuation) as of June 30, 2012. Based on the results of this valuation, no additional OTTI was observed as of June 30, 2012.

A rollforward of credit related impairment recognized in earnings on available-for-sale securities in the three and six months ended June 30, 2012 was as follows:

	Three Months Ended June 30, 2012		Six Months Ended June 30, 2012
Balance at beginning of period	$	282	$	—
Additions to credit losses for which no previous OTTI was recognized		—		282
June 30, 2012	$	282	$	282

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There were no credit losses recognized in on available-for-sale securities during 2011.

Based on our analysis using the above criteria, the fact that we have asserted that we do not have the intent to sell these securities in an unrealized loss position, and that it is more likely than not that we will not have to sell the securities before recovery of their cost basis, we do not believe that the values of any other securities are other-than-temporarily impaired as of as of June 30, 2012 or December 31, 2011.

NOTE 6 – LOANS AND ALLOWANCE FOR LOAN LOSSES

We grant commercial, agricultural, residential real estate, and consumer loans to customers situated primarily in Clare, Gratiot, Isabella, Mecosta, Midland, Montcalm, and Saginaw counties in Michigan. The ability of the borrowers to honor their repayment obligations is often dependent upon the real estate, agricultural, light manufacturing, retail, gaming and tourism, higher education, and general economic conditions of this region. Substantially all of the 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 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 level yield method.

The accrual of interest on commercial, agricultural, and residential real estate loans is typically discontinued at the time the loan is 90 days or more past due unless the credit is well-secured and in the process of collection. Consumer loans are typically charged off no later than 180 days past due. Past due status is based on contractual terms of the loan. In all cases, loans are placed on nonaccrual 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 allowance for loan losses. The interest on these loans is accounted for on the cash basis, until qualifying for return to accrual status. Loans are typically returned to accrual status after six months of continuous performance. For impaired loans not classified as nonaccrual, interest income continues to be accrued over the term of the loan based on the principal amount outstanding.

Commercial and agricultural loans include loans for commercial real estate, commercial operating loans, farmland and agricultural production, and state and political subdivisions. Repayment of these loans is often dependent upon the successful operation and management of a business; thus, these loans generally involve greater risk than other types of lending. We minimize our risk by limiting the amount of loans to any one borrower to $12,500. Borrowers with credit needs of more than $12,500 are serviced through the use of loan participations with other commercial banks. Commercial and agricultural real estate loans generally require loan-to-value limits of less than 80%. Depending upon the type of loan, past credit history, and current operating results, we may require the borrower to pledge accounts receivable, inventory, and property and equipment. Personal guarantees are generally required from the owners of closely held corporations, partnerships, and sole proprietorships. In addition, we require annual financial statements, prepare cash flow analyses, and review credit reports as deemed necessary.

We offer adjustable rate mortgages, fixed rate balloon mortgages, construction loans, and fixed rate mortgage loans which typically have amortization periods up to a maximum of 30 years. Fixed rate loans with an amortization of greater than 15 years are generally sold upon origination to Freddie Mac. Fixed rate residential real estate loans with an amortization of 15 years or less may be held in our portfolio, held for future sale, or sold upon origination. We consider the direction of interest rates, the sensitivity of our balance sheet to changes in interest rates, and overall loan demand to determine whether or not to sell loans to Freddie Mac.

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Our lending policies generally limit the maximum loan-to-value ratio on residential real estate loans to 95% of the lower of the appraised value of the property or the purchase price, with the condition that private mortgage insurance is required on loans with loan to value ratios in excess of 80%. Substantially all loans upon origination have a loan to value ratio of less than 80%. Underwriting criteria for residential real estate loans include: evaluation of the borrower’s ability to make monthly payments, the value of the property securing the loan, ensuring the payment of principal, interest, taxes, and hazard insurance does not exceed 28% of a borrower’s gross income, all debt servicing does not exceed 36% of income, acceptable credit reports, verification of employment, income, and financial information. Appraisals are performed by independent appraisers and reviewed internally. All mortgage loan requests are reviewed by our mortgage loan committee or through a secondary market automated underwriting system; loans in excess of $400 require the approval of our Internal Loan Committee, the Board of Directors’ Loan Committee, or the Board of Directors.

Consumer loans include automobile loans, secured and unsecured personal loans, and overdraft protection related loans. Loans are amortized generally for a period of up to 6 years. 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 uncollectibility of the loan balance is confirmed. Subsequent recoveries, if any, are credited to the ALLL.

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

The primary factors behind the determination of the level of the ALLL are specific allocations for impaired loans, historical loss percentages, as well as unallocated components. Specific allocations for impaired loans are primarily determined based on the difference between the net realizable value of the loan’s underlying collateral or the net present value of the projected payment stream and our recorded investment. Historical loss allocations were calculated at the loan class and segment levels based on a migration analysis of the loan portfolio over the preceding four years. An unallocated component is maintained to cover uncertainties that we believe affect our estimate of probable losses based on qualitative factors. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.

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

	Allowance for Loan Losses Three Months Ended June 30, 2012
	Commercial			Agricultural			Residential Real Estate			Consumer			Unallocated		Total
Allowance for loan losses
April 1, 2012	$	5,728		$	859		$	3,702		$	625		$	1,461	$	12,375
Loans charged off		(237	)		—			(238	)		(146	)		—		(621	)
Recoveries		42			—			20			63			—		125
Provision for loan losses		475			(426	)		185			125			80		439
June 30, 2012	$	6,008		$	433		$	3,669		$	667		$	1,541	$	12,318

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	Allowance for Loan Losses Six Months Ended June 30, 2012
	Commercial			Agricultural			Residential Real Estate			Consumer			Unallocated		Total
Allowance for loan losses
January 1, 2012	$	6,284		$	1,003		$	2,980		$	633		$	1,475	$	12,375
Loans charged off		(686	)		—			(353	)		(237	)		—		(1,276	)
Recoveries		128			—			61			130			—		319
Provision for loan losses		282			(570	)		981			141			66		900
June 30, 2012	$	6,008		$	433		$	3,669		$	667		$	1,541	$	12,318

	Allowance for Loan Losses and Recorded Investment in Loans As of June 30, 2012
	Commercial		Agricultural		Residential Real Estate		Consumer		Unallocated		Total
Allowance for loan losses
Individually evaluated for impairment	$	2,115	$	133	$	1,308	$	—	$	—	$	3,556
Collectively evaluated for impairment		3,893		300		2,361		667		1,541		8,762
Total	$	6,008	$	433	$	3,669	$	667	$	1,541	$	12,318
Loans
Individually evaluated for impairment		15,271		2,955		8,248		82				26,556
Collectively evaluated for impairment		353,100		78,267		265,754		31,275				728,396
Total	$	368,371	$	81,222	$	274,002	$	31,357			$	754,952

	Allowance for Loan Losses
	Three Months Ended June 30, 2011
	Commercial			Agricultural			Residential Real Estate			Consumer			Unallocated		Total
Allowance for loan losses
April 1, 2011	$	6,246		$	776		$	3,422		$	622		$	1,315	$	12,381
Loans charged off		(214	)		(1	)		(555	)		(139	)		—		(909	)
Recoveries		209			—			29			65			—		303
Provision for loan losses		497			(11	)		(11	)		112			16		603
June 30, 2011	$	6,738		$	764		$	2,885		$	660		$	1,331	$	12,378

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	Allowance for Loan Losses
	Six Months Ended June 30, 2011
	Commercial			Agricultural			Residential Real Estate			Consumer			Unallocated			Total
Allowance for loan losses
January 1, 2011	$	6,048		$	1,033		$	3,198		$	605		$	1,489		$	12,373
Loans charged off		(869	)		(1	)		(878	)		(284	)		—			(2,032	)
Recoveries		346			—			103			168			—			617
Provision for loan losses		1,213			(268	)		462			171			(158	)		1,420
June 30, 2011	$	6,738		$	764		$	2,885		$	660		$	1,331		$	12,378

	Allowance for Loan Losses and Recorded Investment in Loans
	As of December 31, 2011
	Commercial		Agricultural		Residential Real Estate		Consumer		Unallocated		Total
Allowance for loan losses
Individually evaluated for impairment	$	2,152	$	822	$	1,146	$	—	$	—	$	4,120
Collectively evaluated for impairment		4,132		181		1,834		633		1,475		8,255
Total	$	6,284	$	1,003	$	2,980	$	633	$	1,475	$	12,375
Loans
Individually evaluated for impairment	$	14,097	$	3,384	$	7,664	$	105			$	25,250
Collectively evaluated for impairment		351,617		71,261		270,696		31,467				725,041
Total	$	365,714	$	74,645	$	278,360	$	31,572			$	750,291

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

	June 30, 2012
	Commercial						Agricultural
	Real Estate		Other		Total		Real Estate		Other		Total
Rating
2 – High quality	$	27,077	$	14,143	$	41,220	$	2,578	$	2,199	$	4,777
3 – High satisfactory		81,883		28,314		110,197		15,964		8,273		24,237
4 – Low satisfactory		124,323		51,092		175,415		25,173		19,382		44,555
5 – Special mention		12,303		2,691		14,994		1,088		3,022		4,110
6 – Substandard		17,658		5,196		22,854		1,704		1,363		3,067
7 – Vulnerable		2,556		92		2,648		—		—		—
8 – Doubtful		1,019		24		1,043		190		286		476
Total	$	266,819	$	101,552	$	368,371	$	46,697	$	34,525	$	81,222

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	December 31, 2011
	Commercial						Agricultural
	Real Estate		Other		Total		Real Estate		Other		Total
Rating
2 – High quality	$	11,113	$	11,013	$	22,126	$	3,583	$	1,390	$	4,973
3 – High satisfactory		90,064		29,972		120,036		11,154		5,186		16,340
4 – Low satisfactory		118,611		57,572		176,183		24,253		15,750		40,003
5 – Special mention		15,482		4,200		19,682		3,863		2,907		6,770
6 – Substandard		19,017		4,819		23,836		1,640		4,314		5,954
7 – Vulnerable		187		—		187		—		—		—
8 – Doubtful		3,621		43		3,664		190		415		605
Total	$	258,095	$	107,619	$	365,714	$	44,683	$	29,962	$	74,645

Internally assigned 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 risk ratings for commercial and agricultural loans are as follows:

1. EXCELLENT – Substantially Risk Free

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

• High liquidity, strong cash flow, low leverage.

• Unquestioned ability to meet all obligations when due.

• Experienced management, with management succession in place.

• Secured by cash.

2. HIGH QUALITY – Limited Risk

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

• Favorable liquidity and leverage ratios.

• Ability to meet all obligations when due.

• Management with successful track record.

• Steady and satisfactory earnings history.

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

• Access to alternative financing.

• Well defined primary and secondary source of repayment.

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

3. HIGH SATISFACTORY – Reasonable Risk

Credit with satisfactory financial condition and further characterized by:

• Working capital adequate to support operations.

• Cash flow sufficient to pay debts as scheduled.

• Management experience and depth appear favorable.

• Loan performing according to terms.

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

4. LOW SATISFACTORY – Acceptable Risk

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

• Would include most start-up businesses.

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

• Management’s abilities are apparent, yet unproven.

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

• Loan structure generally in accordance with policy.

• If secured, loan collateral coverage is marginal.

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

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

5. SPECIAL MENTION – Criticized

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

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

• Impaired working capital position.

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

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

• Shrinking equity cushion.

• Diminishing primary source of repayment and questionable secondary source.

• Management abilities are questionable.

• Weak industry conditions.

• Litigation pending against the borrower.

• Collateral or guaranty offers limited protection.

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

6. SUBSTANDARD – Classified

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

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

• Deteriorating liquidity.

• Serious management problems or internal fraud.

• Original repayment terms liberalized.

• Likelihood of bankruptcy.

• Inability to access other funding sources.

• Reliance on secondary source of repayment.

• Litigation filed against borrower.

• Collateral provides little or no value.

• Requires excessive attention of the loan officer.

• Borrower is uncooperative with loan officer.

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7. VULNERABLE – Classified

Credit is considered “Substandard” and warrants placing on nonaccrual. 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

Credits are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification is for charged off loans but does not mean that the asset has absolutely no recovery or salvage value. These loans are further characterized by:

• Liquidation or reorganization under bankruptcy, with poor prospects of collection.

• Fraudulently overstated assets and/or earnings.

• Collateral has marginal or no value.

• Debtor cannot be located.

• Over 120 days delinquent.

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

	June 30, 2012
	Accruing Interest and Past Due:				Nonaccrual		Total Past Due and Nonaccrual		Current		Total
	30-89 Days		90 Days or More
Commercial
Commercial real estate	$	3,505	$	309	$	3,818	$	7,632	$	259,186	$	266,818
Commercial other		411		50		199		660		100,893		101,553
Total commercial		3,916		359		4,017		8,292		360,079		368,371
Agricultural
Agricultural real estate		206		—		356		562		46,135		46,697
Agricultural other		319		—		286		605		33,920		34,525
Total agricultural		525		—		642		1,167		80,055		81,222
Residential real estate
Senior liens		2,463		346		876		3,685		212,392		216,077
Junior liens		239		33		65		337		18,293		18,630
Home equity lines of credit		284		—		190		474		38,821		39,295
Total residential real estate		2,986		379		1,131		4,496		269,506		274,002
Consumer
Secured		145		1		—		146		26,290		26,436
Unsecured		33		—		—		33		4,888		4,921
Total consumer		178		1		—		179		31,178		31,357
Total	$	7,605	$	739	$	5,790	$	14,134	$	740,818	$	754,952

	December 31, 2011
	Accruing Interest and Past Due:						Total Past  Due and Nonaccrual
	30-89 Days		90 Days or More		Nonaccrual				Current		Total
Commercial
Commercial real estate	$	1,721	$	364	$	4,176	$	6,261	$	251,834	$	258,095
Commercial other		426		3		25		454		107,165		107,619
Total commercial		2,147		367		4,201		6,715		358,999		365,714
Agricultural
Agricultural real estate		—		99		189		288		44,395		44,683
Agricultural other		2		—		415		417		29,545		29,962
Total agricultural		2		99		604		705		73,940		74,645
Residential real estate
Senior liens		3,004		124		1,292		4,420		213,181		217,601
Junior liens		235		40		94		369		20,877		21,246
Home equity lines of credit		185		125		198		508		39,005		39,513
Total residential real estate		3,424		289		1,584		5,297		273,063		278,360
Consumer
Secured		158		5		—		163		26,011		26,174
Unsecured		23		—		—		23		5,375		5,398
Total consumer		181		5		—		186		31,386		31,572
Total	$	5,754	$	760	$	6,389	$	12,903	$	737,388	$	750,291

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Impaired Loans

Loans may be classified as impaired if they meet one or more of the following criteria:

1. There has been a chargeoff of its principal balance (in whole or in part);

2. The loan has been classified as a Troubled Debt Restructuring (TDR); or

3. The loan is in nonaccrual status.

Impairment is measured on a loan by loan basis for commercial, commercial real estate, agricultural, or agricultural real estate loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral, less cost to sell, if the loan is collateral dependent. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment.

Interest income is recognized on impaired loans in nonaccrual status on the cash basis, but only after all principal has been collected. For impaired loans not in nonaccrual status, interest income is recognized daily as earned according to the terms of the loan agreement.

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

	June 30, 2012						December 31, 2011
	Outstanding Balance		Unpaid Principal Balance		Valuation Allowance		Outstanding Balance		Unpaid Principal Balance		Valuation Allowance
Impaired loans with a valuation allowance
Commercial real estate	$	6,128	$	6,408	$	1,893	$	5,014	$	5,142	$	1,881
Commercial other		944		944		222		734		734		271
Agricultural other		2,046		2,046		133		2,689		2,689		822
Residential real estate senior liens		7,894		9,077		1,278		7,271		8,827		1,111
Residential real estate junior liens		164		268		30		195		260		35
Total impaired loans with a valuation allowance	$	17,176	$	18,743	$	3,556	$	15,903	$	17,652	$	4,120
Impaired loans without a valuation allowance
Commercial real estate	$	5,946	$	6,628			$	7,984	$	10,570
Commercial other		2,253		2,294				365		460
Agricultural real estate		357		357				190		190
Agricultural other		552		672				505		625
Home equity lines of credit		190		490				198		498
Consumer secured		82		95				105		114
Total impaired loans without a valuation allowance	$	9,380	$	10,536			$	9,347	$	12,457
Impaired loans
Commercial	$	15,271	$	16,274	$	2,115	$	14,097	$	16,906	$	2,152
Agricultural		2,955		3,075		133		3,384		3,504		822
Residential real estate		8,248		9,835		1,308		7,664		9,585		1,146
Consumer		82		95		—		105		114		—
Total impaired loans	$	26,556	$	29,279	$	3,556	$	25,250	$	30,109	$	4,120

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	Three Months Ended June 30, 2012				Six Months Ended June 30, 2012
	Average Outstanding Balance		Interest Income Recognized		Average Outstanding Balance		Interest Income Recognized
Impaired loans with a valuation allowance
Commercial real estate	$	6,444	$	83	$	6,165	$	181
Commercial other		829		16		777		28
Agricultural other		2,145		36		2,306		73
Residential real estate senior liens		7,862		92		7,706		175
Residential real estate junior liens		175		2		183		4
Total impaired loans with a valuation allowance	$	17,455	$	229	$	17,137	$	461
Impaired loans without a valuation allowance
Commercial real estate	$	6,789	$	112	$	7,299	$	179
Commercial other		2,249		34		1,777		65
Agricultural real estate		274		—		232		—
Agricultural other		607		3		595		7
Home equity lines of credit		195		4		197		8
Consumer secured		89		1		95		3
Total impaired loans without a valuation allowance	$	10,203	$	154	$	10,195	$	262
Impaired loans
Commercial	$	16,311	$	245	$	16,018	$	453
Agricultural		3,026		39		3,133		80
Residential real estate		8,232		98		8,086		187
Consumer		89		1		95		3
Total impaired loans	$	27,658	$	383	$	27,332	$	723

24

	Three Months Ended June 30, 2011					Six Months Ended June 30, 2011
	Average Outstanding Balance		Interest Income Recognized			Average Outstanding Balance		Interest Income Recognized
Impaired loans with a valuation allowance
Commercial real estate	$	2,570	$	96		$	3,490	$	120
Commercial other		—		—			9		—
Agricultural other		1,776		9			1,776		42
Residential real estate senior liens		4,980		70			4,845		106
Residential real estate junior liens		184		3			186		4
Total impaired loans with a valuation allowance	$	9,510	$	178		$	10,306	$	272
Impaired loans without a valuation allowance
Commercial real estate	$	4,085	$	69		$	3,151	$	102
Commercial other		1,780		28			968		88
Agricultural real estate		190		—			95		(1	)
Agricultural other		641		39			641		39
Residential real estate senior liens		337		(6	)		201		—
Home equity lines of credit		1		—			—		—
Consumer secured		36		1			38		3
Total impaired loans without a valuation allowance	$	7,070	$	131		$	5,094	$	231
Impaired loans
Commercial	$	8,435	$	193		$	7,618	$	310
Agricultural		2,607		48			2,512		80
Residential real estate		5,502		67			5,232		110
Consumer		36		1			38		3
Total impaired loans	$	16,580	$	309		$	15,400	$	503

Impaired loans, which include TDRs, had $290 of unfunded commitments under lines of credit as of June 30, 2012.

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Troubled Debt Restructurings

Loan modifications are considered to be TDR’s when a concession has been granted 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 debt with similar risk characteristics.

3. Forbearance of principal.

4. Forbearance of accrued interest.

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

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

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

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

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

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

The following is a summary of information pertaining to TDR’s for the three and six month periods ended June 30, 2012:

	Loans Restructured in the Three Month						Loans Restructured in the Six Month
	Period ended June 30, 2012						Period ended June 30, 2012
	Number of Loans		Pre- Modification Recorded Investment		Post- Modification Recorded Investment		Number of Loans		Pre- Modification Recorded Investment		Post- Modification Recorded Investment
Commercial other		5	$	305	$	305	$	26	$	4,891	$	4,891
Agricultural other		—		—		—		6		561		561
Residential real estate senior liens		7		684		684		12		1,405		1,405
Total	$	12	$	989	$	989	$	44	$	6,857	$	6,857

	Loans Restructured in the Three Month								Loans Restructured in the Six Month
	Period Ended June 30, 2012								Period Ended June 30, 2012
					Below Market Interest Rate and Extension of Amortization Period				Below Market Interest Rate				Below Market Interest Rate and Extension of Amortization Period
	Below Market
	Interest Rate
			Pre-				Pre-				Pre-				Pre-
	Number		Modification		Number		Modification		Number		Modification		Number		Modification
	of		Recorded		of		Recorded		of		Recorded		of		Recorded
	Loans		Investment		Loans		Investment		Loans		Investment		Loans		Investment
Commercial other		3	$	160		2	$	145		24	$	4,746		2	$	145
Agricultural other		—		—		—		—		6		561		—		—
Residential real estate senior liens		4		324		3		360		4		324		8		1,081
Total		7	$	484		5	$	505		34	$	5,631		10	$	1,226

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We did not restructure any loans through the forbearance of principal or accrued interest in the three or six month periods ended June 30, 2012.

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

Following is a summary of loans that defaulted in the three and six month periods ended June 30, 2012, which were modified within 12 months prior to the default date:

	Three Months Ended June 30, 2012								Six Months Ended June 30, 2012
			Pre-				Post-				Pre-				Post-
	Number		Default		Charge Off		Default		Number		Default		Charge Off		Default
	of		Recorded		Recorded		Recorded		of		Recorded		Recorded		Recorded
	Loans		Investment		Upon Default		Investment		Loans		Investment		Upon Default		Investment
Commercial other		2	$	50	$	25	$	25		3	$	132	$	67	$	65
Residential real estate senior liens		—		—		—		—		1		47		43		4
Consumer secured		1		8		8		—		1		8		8		—
Total		3	$	58	$	33	$	25		5	$	187	$	118	$	69

We had no loans that defaulted during the first six months of 2011, which were modified within 12 months prior to the default date.

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

	June 30		December 31
	2012		2011
Troubled debt restructurings	$	22,543	$	18,756

NOTE 7 – EQUITY SECURITIES WITHOUT READILY DETERMINABLE FAIR VALUES

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

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

	June 30		December 31
	2012		2011
Federal Home Loan Bank Stock	$	7,700	$	7,380
Investment in Corporate Settlement Solutions		6,810		6,611
Federal Reserve Bank Stock		1,879		1,879
Investment in Valley Financial Corporation		1,000		1,000
Other		319		319
Total	$	17,708	$	17,189

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NOTE 8 – BORROWED FUNDS

Borrowed funds consist of the following obligations as of:

	June 30, 2012					December 31, 2011
	Amount		Rate			Amount		Rate
Federal Home Loan Bank advances	$	154,000		2.18	%	$	142,242		3.16	%
Securities sold under agreements to repurchase without stated maturity dates		53,824		0.20	%		57,198		0.25	%
Securities sold under agreements to repurchase with stated maturity dates		16,708		3.51	%		16,696		3.51	%
Federal funds purchased		9,600		0.50	%		—		—
Total	$	234,132		1.75	%	$	216,136		2.42	%

The FHLB advances are collateralized by a blanket lien on all qualified 1-4 family residential real estate loans and certain mortgage-backed securities and collateralized mortgage obligations. Advances are also secured by our holdings of FHLB stock. We had the ability to borrow up to an additional $100,781 based on assets currently pledged as collateral as of June 30, 2012. During the first quarter of 2012, we reduced funding costs by modifying the terms of $60,000 of FHLB advances.

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

	June 30					December 31
	2012					2011
	Amount		Rate			Amount		Rate
Fixed rate advances due 2012	$	2,000		4.90	%	$	17,000		2.97	%
One year putable fixed rate advances due 2012		5,000		3.48	%		15,000		4.10	%
Variable rate advances due 2012		5,000		0.50	%		—		—
Fixed rate advances due 2013		—		—			5,242		4.14	%
One year putable fixed rate advances due 2013		—		—			5,000		3.15	%
Fixed rate advances due 2014		—		—			25,000		3.16	%
Fixed rate advances due 2015		42,000		1.12	%		45,000		3.30	%
Fixed rate advances due 2016		10,000		2.15	%		10,000		2.15	%
Fixed rate advances due 2017		40,000		2.15	%		20,000		2.56	%
Fixed rate advances due 2018		20,000		2.86	%		—		—
Fixed rate advances due 2019		20,000		3.73	%		—		—
Fixed rate advances due 2020		10,000		1.98	%		—		—
Total	$	154,000		2.18	%	$	142,242		3.16	%

Securities sold under agreements to repurchase are classified as secured borrowings. Securities sold under agreements to repurchase without stated maturity dates generally mature within one to four days from the transaction date. Securities sold under agreements to repurchase 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 $120,878 and $99,869 at June 30, 2012 and December 31, 2011, respectively. Such securities remain under our control. We may be required to provide additional collateral based on the fair value of underlying securities.

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The following table provides a summary of short term borrowings for the three and six month periods ended June 30:

	Three Months Ended June 30
	2012							2011
	Maximum Month-End Balance		Quarter to Date Average Balance		Weighted Average Interest Rate During the Period			Maximum Month- End Balance		Quarter to Date Average Balance		Weighted Average Interest Rate During the Period
Securities sold under agreements to repurchase without stated maturity dates	$	58,584	$	58,045		0.20	%	$	43,138	$	44,680		0.25	%
Federal funds purchased		17,900		7,025		0.47	%		18,300		4,539		0.54	%

	Six Months Ended June 30
	2012							2011
	Maximum Month-End Balance		YTD Average Balance		Weighted Average Interest Rate During the Period			Maximum Month- End Balance		YTD Average Balance		Weighted Average Interest Rate During the Period
Securities sold under agreements to repurchase without stated maturity dates	$	58,584	$	55,436		0.11	%	$	43,138	$	40,715		0.25	%
Federal funds purchased		17,900		3,552		0.23	%		18,300		2,906		0.53	%

We had pledged certificates of deposit held in other financial institutions, trading securities, available-for-sale securities, and 1-4 family residential real estate loans in the following amounts at:

	June 30 2012		December 31 2011
Pledged to secure borrowed funds	$	316,349	$	292,092
Pledged to secure repurchase agreements		120,878		99,869
Pledged for public deposits and for other purposes necessary or required by law		24,177		26,761
Total	$	461,404	$	418,722

We had no investment securities that are restricted to be pledged for specific purposes.

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NOTE 9 – OTHER NONINTEREST EXPENSES

A summary of expenses included in other noninterest expenses are as follows for the three month and six month periods ended:

	Three Months Ended June  30					Six Months Ended June  30
	2012			2011		2012		2011
Marketing and donations	$	535		$	527	$	1,029	$	750
FDIC insurance premiums		213			331		428		665
Directors fees		209			206		419		417
Audit fees		154			167		330		323
Education and travel		139			99		266		204
Consulting fees		71			67		258		100
Printing and supplies		110			89		219		189
Postage and freight		94			96		195		196
Foreclosed asset and collection		(18	)		177		79		277
Amortization of deposit premium		67			76		133		152
Legal fees		81			54		143		116
Other Losses		107			10		137		11
All other		425			394		810		723
Total	$	2,187		$	2,293	$	4,446	$	4,123

NOTE 10 – FEDERAL INCOME TAXES

The reconciliation of the provision for federal income taxes and the amount computed at the federal statutory tax rate of 34% of income before federal income tax expense is as follows for the three and six month periods ended June 30:

	Three Months Ended June 30						Six Months Ended June 30
	2012			2011			2012			2011
Income taxes at 34% statutory rate	$	1,250		$	1,076			2,612		$	2,004
Effect of nontaxable income
Interest income on tax exempt municipal bonds		(388	)		(385	)		(779	)		(768	)
Earnings on corporate owned life insurance		(60	)		(50	)		(118	)		(98	)
Other		(141	)		(162	)		(292	)		(256	)
Total effect of nontaxable income		(589	)		(597	)		(1,189	)		(1,122	)
Effect of nondeductible expenses		11			13			22			23
Federal income tax expense	$	672		$	492		$	1,445		$	905

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Included in OCI for the three and six month periods ended June 30, 2012 and 2011 are changes in unrealized holding gains, related to auction rate money market preferred and preferred stocks. For federal income tax purposes, these securities are considered equity investments. As such, no deferred federal income taxes related to unrealized holding gains or losses are expected or recorded.

A summary of OCI follows for the three and six month periods ended June 30:

	Three Months Ended
	June 30, 2012									June 30, 2011
	Auction									Auction
	Rate									Rate
	Money									Money
	Market									Market
	Preferreds			All						Preferreds		All
	and			Other						and		Other
	Preferred Stocks			AFS Securities			Total			Preferred Stocks		AFS Securities			Total
Unrealized (losses) gains arising during the period	$	(185	)	$	1,605		$	1,420		$	8	$	3,568		$	3,576
Tax effect		—			(546	)		(546	)		—		(1,212	)		(1,212	)
Other comprehensive (loss) income, net of tax	$	(185	)	$	1,059		$	874		$	8	$	2,356		$	2,364

	Six Months Ended
	June 30, 2012								June 30, 2011
	Auction								Auction
	Rate								Rate
	Money								Money
	Market								Market
	Preferreds		All						Preferreds		All
	and		Other						and		Other
	Preferred Stocks		AFS Securities			Total			Preferred Stocks		AFS Securities			Total
Unrealized gains arising during the period	$	1,419	$	800		$	2,219		$	603	$	4,726		$	5,329
Reclassification adjustment for net realized gains included in net income		—		(1,003	)		(1,003	)		—		—			—
Reclassification adjustment for impairment loss included in net income		—		282			282			—		—			—
Net unrealized gains		1,419		79			1,498			603		4,726			5,329
Tax effect		—		(27	)		(27	)		—		(1,607	)		(1,607	)
Other comprehensive income, net of tax	$	1,419	$	52		$	1,471		$	603	$	3,119		$	3,722

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NOTE 11 – 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 and plan benefits are based on years of service and the employees’ five highest consecutive years of compensation out of the last ten years of service through March 1, 2007. We contributed $709 to the pension plan during the six month period ended June 30, 2012 and made no contributions to the plan in the six month period ended June 30, 2011. We do not anticipate any additional contributions to the plan over the remainder of 2012.

Following are the components of net periodic benefit cost for the three and six month periods ended June 30:

	Three Months Ended						Six Months Ended
	June 30						June 30
	2012			2011			2012			2011
Interest cost on PBO	$	117		$	127		$	235		$	254
Expected return on plan assets		(127	)		(130	)		(254	)		(261	)
Amortization of unrecognized actuarial net loss		73			39			146			77
Net periodic benefit cost	$	63		$	36		$	127		$	70

NOTE 12 – FAIR VALUE

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

Cash and demand deposits due from banks: The carrying amounts of cash and short term investments, including Federal funds sold, approximate fair values. As such, we classify cash and demand deposits due from banks as Level 1.

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

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

Due to the limited trading activity of certain auction rate money market preferred securities and preferred stocks we measured these securities using Level 3 inputs as of June 30, 2011. As the markets for these securities normalized and established regular trading patterns, we measured preferred stocks utilizing Level 1 inputs and an auction rate money market preferred security utilizing Level 2 inputs as of December 31, 2011 and continued to measure at these levels as of June 30, 2012.

32

The table below represents the activity in auction rate money market preferred available-for-sale investment securities measured with Level 3 inputs on a recurring basis for the:

	Three Months		Six Months
	Ended		Ended
	June 30, 2011		June 30, 2011
Level 3 inputs at beginning of period	$	2,803	$	2,865
Net unrealized gains (losses)		31		(31	)
Level 3 inputs—June 30	$	2,834	$	2,834
				`

The table below represents the activity in preferred stock available-for-sale investment securities measured with Level 3 inputs on a recurring basis for the:

	Three Months			Six Months
	Ended			Ended
	June 30, 2011			June 30, 2011
Level 3 inputs at beginning of period	$	7,593		$	6,936
Net unrealized (losses) gains		(23	)		634
Level 3 inputs—June 30	$	7,570		$	7,570

We had no financial instruments measured with Level 3 inputs on a recurring basis during 2012.

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

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

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 collateral value, market value of similar debt, enterprise value, liquidation value, or discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans.

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, management utilizes independent appraisals, broker price opinions, or internal evaluations. These valuations are reviewed to determine whether an additional discount should be applied given the age of market information that may have been considered as well as other factors such as costs to carry and sell an asset if it is determined that the collateral will be liquidated in connection with the ultimate settlement of the loan. We use these valuations to determine if any charge offs or specific reserves are necessary. We may obtain new valuations in certain circumstances, including when there has been significant deterioration in the condition of the collateral, if the foreclosure process has begun, or if the existing valuation is deemed to be outdated.

Impaired loans where an allowance is established based on the net realizable value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraisal value, we record the loan as nonrecurring Level 2. When a current appraised value is not available or we determine the fair value of collateral is further impaired below the appraised value, the impaired loan is classified as nonrecurring Level 3.

33

The table below lists the quantitative information about impaired loans measured utilizing Level 3 fair value measurements as of June 30, 2012:

Valuation Techniques	Fair Value		Unobservable Input	Range
			Duration of cash flows		20 - 120 Months
Discounted cash flow	$	6,750	Reduction in interest rate from original loan terms		2.13% - 3.38%
			Discount applied to
			collateral appraisal:
			Real Estate		20% - 30%
			Equipment		50%
Discounted appraisal value	$	16,250	Livestock		50%
			Cash crop inventory		50%
			Other inventory		75%
			Accounts receivable		75%
			Estimated liquidation costs		10%

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

Goodwill and other intangible assets: Acquisition intangibles and goodwill are evaluated for potential impairment on at least an annual basis. Goodwill is typically qualitatively evaluated to determine if it is more likely than not that the carrying balance is impaired. If it is determined that the carrying balance of goodwill is more likely than not to be impaired, we perform a cash flow valuation to determine the extent of the potential impairment. Acquisition intangibles are tested for impairment with a cash flow valuation. This valuation method requires a significant degree of 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. If the testing resulted in impairment, we would classify goodwill and other acquisition intangibles subjected to nonrecurring fair value adjustments as Level 3. During 2012 and 2011 there were no impairments recorded on goodwill and other acquisition intangibles.

Equity securities without readily determinable fair values: We have investments in equity securities without readily determinable fair values as well as investments in joint ventures. The assets are individually reviewed for impairment on an annual basis, or more frequently if an indication of impairment exists, by comparing the carrying value to the estimated fair value. The lack of an independent source to validate fair value estimates, including the impact of future capital calls and transfer restrictions, is an inherent limitation in the valuation process. We classify nonmarketable equity securities and investments in joint ventures subjected to nonrecurring fair value adjustments as Level 3. During 2012 and 2011, there were no impairments recorded on equity securities without readily determinable fair values.

Foreclosed assets: Upon transfer from the loan portfolio, foreclosed assets are adjusted to and subsequently carried at the lower of carrying value or fair value less costs to sell. Net realizable value is based upon independent market prices, appraised values of the collateral, or management’s estimation of the value of the collateral and as such, we classify foreclosed assets as a nonrecurring Level 2. When the net realizable value of the collateral is further impaired below the appraised value but there is no observable market price, we record the foreclosed asset as nonrecurring Level 3.

Originated mortgage servicing rights: OMSR is subject to impairment testing. A valuation model, which utilizes a discounted cash flow analysis using interest rates and prepayment speed assumptions currently quoted for comparable instruments and a discount rate determined by management, is used for impairment testing. If the valuation model reflects a value less than the carrying value, originated mortgage servicing rights are adjusted to fair value through a valuation allowance as determined by the model. As such, we classify loan servicing rights subject to nonrecurring fair value adjustments as Level 2.

34

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

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

We elected to measure a portion of borrowed funds at fair value as of December 31, 2011. These borrowings were recorded at fair value on a recurring basis, with the fair value measurement estimated using discounted cash flow analysis based on current incremental borrowing rates for similar types of borrowing arrangements. Changes in the fair value of these borrowings are included in noninterest income. As such, other borrowed funds are classified as Level 2.

The activity in borrowings which the Corporation has elected to carry at fair value was as follows:

	Three Months Ended					Six Months Ended
	June 30					June 30
	2012		2011			2012			2011
Borrowings carried at fair value—beginning of year	$	—	$	10,343		$	5,242		$	10,423
Paydowns and maturities		—		—			(5,209	)		—
Net unrealized change in fair value		—		(37	)		(33	)		(117	)
Borrowings carried at fair value—June 30	$	—	$	10,306		$	—		$	10,306
Unpaid principal balance—June 30	$	—	$	10,000		$	—		$	10,000

Commitments to extend credit, standby letters of credit and undisbursed loans: Fair values for off balance sheet lending commitments are based on fees currently charged to enter into similar agreements, taking into consideration the remaining terms of the agreements and the counterparties’ credit standings. As we do not charge fees for lending commitments outstanding, it is not practicable to estimate the fair value of these instruments.

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. Furthermore, 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.

35

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 on our consolidated balance sheets are as follows as of:

	June 30, 2012
	Carrying			Estimated
	Value			Fair Value			(Level 1)		(Level 2)			(Level 3)
ASSETS
Cash and demand deposits due from banks	$	20,251		$	20,251		$	20,251	$	—		$	—
Certicates of deposit held in other financial institutions		6,880			6,906			—		6,906			—
Mortgage loans available-for-sale		2,347			2,413			—		2,413			—
Total loans		754,952			768,354			—		741,798			26,556
Less allowance for loan losses		(12,318	)		(12,318	)		—		(8,762	)		(3,556	)
Net loans		742,634			756,036			—		733,036			23,000
Accrued interest receivable		5,217			5,217			5,217		—			—
Equity securities without readily determinable fair values (1)		17,708			17,708			—		—			—
Originated mortgage servicing rights		2,424			2,424			—		2,424			—
LIABILITIES
Deposits without stated maturities		499,900			499,900			499,900		—			—
Deposits with stated maturities		478,928			491,475			—		491,475			—
Borrowed funds		234,132			240,869			—		240,869			—
Accrued interest payable		809			809			809		—			—

(1) Due to the characteristics of equity securities without readily determinable fair values, they are not disclosed under a specific fair value hierarchy.

36

	December 31, 2011
	Carrying			Estimated
	Value			Fair Value
ASSETS
Cash and demand deposits due from banks	$	28,590		$	28,590
Certificates of deposit held in other financial institutions		8,924			8,977
Mortgage loans available-for-sale		3,205			3,252
Total loans		750,291			769,177
Less allowance for loan losses		(12,375	)		(12,375	)
Net loans		737,916			756,802
Accrued interest receivable		5,848			5,848
Equity securities without readily determinable fair values		17,189			17,189
Originated mortgage servicing rights		2,374			2,374
LIABILITIES
Deposits without stated maturities		476,627			476,627
Deposits with stated maturities		481,537			499,644
Borrowed funds		210,894			222,538
Accrued interest payable		967			967

Financial Instruments Recorded at Fair Value

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

	June 30, 2012											December 31, 2011
Description	Total		(Level 1)			(Level 2)			(Level 3)			Total		(Level 1)			(Level 2)			(Level 3)
Recurring items
Trading securities
States and political subdivisions	$	1,998	$	—		$	1,998		$	—		$	4,710	$	—		$	4,710		$	—
Available-for-sale investment securities
Government sponsored enterprises		2,231		—			2,231			—			397		—			397			—
States and political subdivisions		178,654		—			178,654			—			174,938		—			174,938			—
Auction rate money market preferred		2,574		—			2,574			—			2,049		—			2,049			—
Preferred stocks		5,927		5,927			—			—			5,033		5,033			—			—
Mortgage-backed securities		164,497		—			164,497			—			143,602		—			143,602			—
Collateralized mortgage obligations		123,052		—			123,052			—			99,101		—			99,101			—
Total available-for-sale investment securities		476,935		5,927			471,008			—			425,120		5,033			420,087			—
Borrowed funds		—		—			—			—			5,242		—			5,242			—
Nonrecurring items
Impaired loans (net of the allowance for loan losses)		23,000		—			—			23,000			21,130		—			—			21,130
Originated mortgage servicing rights		2,424		—			2,424			—			2,374		—			2,374			—
Foreclosed assets		2,362		—			2,362			—			1,876		—			1,876			—
	$	506,719	$	5,927		$	477,792		$	23,000		$	460,452	$	5,033		$	434,289		$	21,130
Percent of assets and liabilities measured at fair value				1.17	%		94.29	%		4.54	%				1.09	%		94.32	%		4.59	%

37

The changes in fair value of assets and liabilities recorded at fair value through earnings on a recurring basis and changes in assets and liabilities recorded at fair value on a nonrecurring basis, for which an impairment, or reduction of an impairment, was recognized in the three and six month periods ended June 30, 2012 and 2011, are summarized as follows:

	Three Months Ended June 30
	2012									2011
Description	Trading Gains and (Losses)			Other Gains and (Losses)			Total			Trading Gains and (Losses)			Other Gains and (Losses)			Total
Recurring Items
Trading securities	$	(16	)	$	—		$	(16	)	$	(8	)	$	—		$	(8	)
Borrowed funds		—			—			—			—			37			37
Nonrecurring Items
Foreclosed assets		—			—			—			—			(25	)		(25	)
Originated mortgage servicing rights		—			(32	)		(32	)		—			(25	)		(25	)
Total	$	(16	)	$	(32	)	$	(48	)	$	(8	)	$	(13	)	$	(21	)
	Six Months Ended June 30
	2012									2011
Description	Trading Losses			Other Gains and (Losses)			Total			Trading Losses			Other Gains and (Losses)			Total
Recurring items
Trading securities	$	(32	)	$	—		$	(32	)	$	(27	)	$	—		$	(27	)
Borrowed funds		—			33			33			—			117			117
Nonrecurring items
Foreclosed assets		—			(17	)		(17	)		—			(35	)		(35	)
Originated mortgage servicing rights		—			42			42			—			(18	)		(18	)
Total	$	(32	)	$	58		$	26		$	(27	)	$	64		$	37

NOTE 13 – OPERATING SEGMENTS

Our reportable segments are based on legal entities that account for at least 10% of net operating results. The operations of Isabella Bank as of June 30, 2012 and 2011 and each of the three and six month periods then ended, represented 90% or more of the our consolidated total assets and operating results. As such, no additional segment reporting is presented.

38

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

ISABELLA BANK CORPORATION FINANCIAL REVIEW

(All dollars in thousands, except per share data)

This section reviews the financial condition and results of operations of Isabella Bank Corporation and its subsidiaries for the three and six month periods ended June 30, 2012 and 2011. This analysis should be read in conjunction with our 2011 annual report and with the unaudited interim condensed consolidated financial statements and notes, beginning on page 3 of this report. A comprehensive list of acronyms and abbreviations used throughout this discussion is included in “Note 1 – Basis of Presentation” of our interim condensed consolidated financial statements.

Executive Summary

While there have been slight improvements in the local, regional, and national economies, there still remains a large degree of economic uncertainty. Despite the challenges of the current economic environment and increased regulatory compliance costs, we continue to remain profitable. Our continued success throughout these challenging times is a direct result of our unwavering focus on community banking principles, prudent underwriting standards, and long term sustainable growth. These values have enabled us to continue to meet the needs of the communities we serve which translates in increased shareholder value.

As a result of our continued success and our desire to expand into complimentary markets, we are anticipating opening a new full service banking office in Freeland, Michigan in late fall 2012. The new location will complement our existing office locations and increase our brand awareness in the Freeland area.

Recent Legislation

The Health Care and Education Act of 2010 and the Patient Protection and Affordable Care Act, the Dodd-Frank Act, and the JOBS Act, have already or could have a significant impact on the Corporation’s operating results in future periods. While the legislation has been passed for these acts, much of the regulations have yet to be written. As such, some of the potential impact on our operations has yet to be determined. Of these three acts, The Dodd-Frank Act has had, and is likely to have, the most significant impact. It made sweeping changes in the regulation of financial institutions aimed at strengthening the sound operation of the financial services sector. As a result of the implementation of some of the provisions, we have had increases in compensation costs and this trend is expected to continue.

In June 2012, the FFIEC proposed new capital requirements for all financial institutions. In general, the proposal adds a new capital standard of equity capital to assets and increases the minimum capital ratios to be considered well capitalized. While these proposals are not yet final, they could significantly impact our capital requirements, which could impact our ability to pay dividends.

39

RESULTS OF OPERATIONS

Selected Financial Data

The following table outlines the results of operations and provides certain performance measures for:

	Three Months Ended						Six Months Ended
	June 30			June 30			June 30			June 30
	2012			2011			2012			2011
INCOME STATEMENT DATA
Interest income	$	14,188		$	14,669		$	28,392		$	28,907
Interest expense		3,429			4,101			7,133			8,154
Net interest income		10,759			10,568			21,259			20,753
Provision for loan losses		439			603			900			1,420
Noninterest income		2,544			1,978			6,085			3,926
Noninterest expenses		9,188			8,779			18,761			17,366
Federal income tax expense		672			492			1,445			905
Net Income	$	3,004		$	2,672		$	6,238		$	4,988
PER SHARE
Basic earnings		0.40			0.35			0.82			0.66
Diluted earnings		0.39			0.34			0.80			0.64
Dividends		0.20			0.19			0.40			0.38
Market value*		24.85			17.48			24.85			17.48
Tangible book value*		14.37			13.54			14.37			13.54
BALANCE SHEET DATA
At end of period
Loans		754,952			746,294			754,952			746,294
Total assets		1,381,496			1,281,270			1,381,496			1,281,270
Deposits		978,828			924,199			978,828			924,199
Shareholders’ equity		159,855			151,514			159,855			151,514
Average balance
Loans		748,223			742,439			746,072			738,535
Total assets		1,369,240			1,274,865			1,362,675			1,259,685
Deposits		972,953			922,213			975,835			914,183
Shareholders’ equity		154,627			146,152			155,374			146,150
PERFORMANCE RATIOS
Return on average total assets (annualized)		0.88	%		0.84	%		0.92	%		0.79	%
Return on average shareholders’ equity (annualized)		7.77	%		7.31	%		8.03	%		6.83	%
Return on average tangible equity (annualized)		11.11	%		10.76	%		11.66	%		10.12	%
Net interest margin yield (FTE annualized)		3.73	%		3.95	%		3.71	%		3.93	%
Loan to deposit*		77.13	%		80.75	%		77.13	%		80.75	%
Nonperforming loans to total loans*		0.86	%		0.90	%		0.86	%		0.90	%
Nonperforming assets to total assets*		0.64	%		0.67	%		0.64	%		0.67	%
ALLL to nonperforming loans*		188.67	%		183.41	%		188.67	%		183.41	%
CAPITAL RATIOS
Shareholders’ equity to assets*		11.57	%		11.83	%		11.57	%		11.83	%
Tier 1 capital to average assets*		8.24	%		8.16	%		8.24	%		8.16	%
Tier 1 risk-based capital*		13.19	%		12.52	%		13.19	%		12.52	%
Total risk-based capital*		14.44	%		13.77	%		14.44	%		13.77	%

* At end of period

40

Net Interest Income

Net interest income is our primary source of income. Interest income includes loan fees of $809 and $1,456 for the three and six month periods ended June 30, 2012, respectively, as compared to $655 and $1,221 during the same periods in 2011. For analytical purposes, net interest income is adjusted to an FTE basis by adding the income tax savings from interest on tax exempt loans and securities, thus making year to year comparisons more meaningful.

AVERAGE BALANCES, INTEREST RATE, AND NET INTEREST INCOME

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

The following table displays the results for the three month periods ended June 30:

	2012								2011
	Average Balance			Tax Equivalent Interest		Average Yield\ Rate			Average Balance			Tax Equivalent Interest		Average Yield\ Rate
INTEREST EARNING ASSETS
Loans	$	748,223		$	10,849		5.80	%	$	742,439		$	11,464		6.18	%
Taxable investment securities		316,237			1,988		2.51	%		233,681			1,836		3.14	%
Nontaxable investment securities		144,492			1,983		5.49	%		134,898			1,942		5.76	%
Trading account securities		2,496			33		5.29	%		5,089			71		5.58	%
Other		25,911			113		1.74	%		33,529			133		1.59	%
Total earning assets		1,237,359			14,966		4.84	%		1,149,636			15,446		5.37	%
NONEARNING ASSETS
Allowance for loan losses		(12,586	)							(12,551	)
Cash and demand deposits due from banks		18,572								19,361
Premises and equipment		24,948								24,135
Accrued income and other assets		100,947								94,284
Total assets	$	1,369,240							$	1,274,865
INTEREST BEARING LIABILITIES
Interest bearing demand deposits	$	167,399			50		0.12	%	$	150,696			47		0.12	%
Savings deposits		210,872			109		0.21	%		195,856			122		0.25	%
Time deposits		475,996			2,209		1.86	%		464,685			2,607		2.24	%
Borrowed funds		227,360			1,061		1.87	%		193,669			1,325		2.74	%
Total interest bearing liabilities		1,081,627			3,429		1.27	%		1,004,906			4,101		1.63	%
NONINTEREST BEARING LIABILITIES
Demand deposits		118,686								110,976
Other		14,300								12,831
Shareholders’ equity		154,627								146,152
Total liabilities and shareholders’ equity	$	1,369,240							$	1,274,865
Net interest income (FTE)				$	11,537							$	11,345
Net yield on interest earning assets (FTE)							3.73	%							3.95	%

41

The following table displays the results for the six month periods ended June 30:

	2012								2011
	Average Balance			Tax Equivalent Interest		Average Yield / Rate			Average Balance			Tax Equivalent Interest		Average Yield / Rate
INTEREST EARNING ASSETS
Loans	$	746,072		$	21,789		5.84	%	$	738,535		$	22,825		6.18	%
Taxable investment securities		300,689			3,877		2.58	%		217,595			3,349		3.08	%
Nontaxable investment securities		141,560			3,948		5.58	%		134,706			3,870		5.75	%
Trading account securities		3,457			97		5.61	%		5,308			148		5.58	%
Other		37,246			242		1.30	%		38,405			267		1.39	%
Total earning assets		1,229,024			29,953		4.87	%		1,134,549			30,459		5.37	%
NONEARNING ASSETS
Allowance for loan losses		(12,597	)							(12,568	)
Cash and demand deposits due from banks		19,442								19,935
Premises and equipment		24,974								24,323
Accrued income and other assets		101,832								93,446
Total assets	$	1,362,675							$	1,259,685
INTEREST BEARING LIABILITIES
Interest bearing demand deposits	$	170,153			104		0.12	%	$	150,962			93		0.12	%
Savings deposits		209,047			231		0.22	%		193,002			246		0.25	%
Time deposits		477,843			4,545		1.90	%		461,030			5,222		2.27	%
Borrowed funds		219,386			2,253		2.05	%		188,306			2,593		2.75	%
Total interest bearing liabilities		1,076,429			7,133		1.33	%		993,300			8,154		1.64	%
NONINTEREST BEARING LIABILITIES
Demand deposits		118,792								109,189
Other		12,080								11,046
Shareholders’ equity		155,374								146,150
Total liabilities and shareholders’ equity	$	1,362,675							$	1,259,685
Net interest income (FTE)				$	22,820							$	22,305
Net yield on interest earning assets (FTE)							3.71	%							3.93	%

42

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 Variance—change in volume multiplied by the previous year’s rate.

Rate Variance—change in the FTE rate multiplied by the previous year’s volume.

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

	Three Months Ended June 30, 2012 Compared to June 30, 2011 Increase (Decrease) Due to									Six Months Ended June 30, 2012 Compared to June 30, 2011 Increase (Decrease) Due to:
	Volume			Rate			Net			Volume			Rate			Net
CHANGES IN INTEREST INCOME
Loans	$	89		$	(704	)	$	(615	)	$	231		$	(1,267	)	$	(1,036	)
Taxable investment securities		566			(414	)		152			1,133			(605	)		528
Nontaxable investment securities		134			(93	)		41			193			(115	)		78
Trading account securities		(34	)		(4	)		(38	)		(52	)		1			(51	)
Other		(32	)		12			(20	)		(8	)		(17	)		(25	)
Total changes in interest income		723			(1,203	)		(480	)		1,497			(2,003	)		(506	)
CHANGES IN INTEREST EXPENSE
Interest bearing demand deposits		5			(2	)		3			12			(1	)		11
Savings deposits		9			(22	)		(13	)		19			(34	)		(15	)
Time deposits		62			(460	)		(398	)		185			(862	)		(677	)
Borrowed funds		205			(469	)		(264	)		385			(725	)		(340	)
Total changes in interest expense		281			(953	)		(672	)		601			(1,622	)		(1,021	)
Net change in interest margin (FTE)	$	442		$	(250	)	$	192		$	896		$	(381	)	$	515

Historically low interest rates continue to compress our net interest margin yield. Some of this margin compression has also been caused by a shift in composition of earning assets. Our strategy of growing net interest income through volume has increased our reliance on investment securities to generate this interest income as loan demand continues to be soft. This strategy has led to increases in net interest income at the cost of accelerating the reduction in net interest margin yield as investment securities earn lower returns than loans. To offset some of the declines in net interest margin yield, we reduced future interest expense by restructuring $60,000 of FHLB advances in the first quarter of 2012. This modification strategy is anticipated to reduce interest expense by approximately $450 for 2012.

Despite these efforts, we anticipate that net interest margin yield will continue to decline due to the following factors:

• While acknowledging some improvement in the economy, the Federal Open Market Committee (“FOMC”) continues its stance for accommodative monetary policy by stating that the federal funds rate would likely remain at exceptionally low levels at least through late 2014, coupled with continued discussions of additional economic stimulus.

• As loan demand is expected to remain soft, investment securities will continue to increase as a percentage of earning assets.

• The rates earned on interest earning assets will continue to decline faster than rates paid on interest bearing liabilities.

43

Allowance for Loan Losses

The viability of any financial institution is ultimately determined by its management of credit risk. Loans outstanding represent our single largest concentration of risk. The ALLL is our estimation of probable losses inherent in the existing loan portfolio. We allocate the ALLL throughout the loan portfolio based on our assessment of the underlying risks associated with each loan segment. Our assessments include allocations based on specific impairment allocations, historical losses, internally assigned credit ratings, and past due and nonaccrual balances. A portion of the ALLL is not allocated to any one loan segment, but is instead a reflection of other qualitative risks within the loan portfolio.

The following table summarizes our charge off and recovery activity for the:

	Three Months Ended						Six Months Ended
	June 30 2012			June 30 2011			June 30 2012			June 30 2011
Allowance for loan losses at beginning of period	$	12,375		$	12,381		$	12,375		$	12,373
Loans charged off
Commercial and agricultural		237			215			686			870
Residential real estate		238			555			353			878
Consumer		146			139			237			284
Total loans charged off		621			909			1,276			2,032
Recoveries
Commercial and agricultural		42			209			128			346
Residential real estate		20			29			61			103
Consumer		63			65			130			168
Total recoveries		125			303			319			617
Provision for loan losses		439			603			900			1,420
Allowance for loan losses at end of period	$	12,318		$	12,378		$	12,318		$	12,378
Net loans charged off	$	496		$	606		$	957		$	1,415
Average loans outstanding		748,223			742,439			746,072			738,535
Net loans charged off to average loans outstanding		0.07	%		0.08	%		0.13	%		0.19	%
Total amount of loans outstanding at end of period	$	754,952		$	746,294		$	754,952		$	746,294
Allowance for loan losses as a % of loans at end of period		1.63	%		1.66	%		1.63	%		1.66	%

As shown in the preceding table, the level of net chargeoffs continues to decline. This trend has allowed us to reduce our provision in, which has led to a decline in the ALLL in both amount and as a percentage of loans. For further discussion on the allocation of the ALLL, see “Note 6 – Loans and Allowance for Loan Losses” to our interim condensed consolidated financial statements.

44

Loans Past Due and Loans in Nonaccrual Status

Increases in past due and nonaccrual loans can have a significant impact on the allowance for loan losses. To determine the potential impact, and corresponding estimated losses, we analyze our historical loss trends on loans past due 30-89 days, 90 days or more, and nonaccrual loans. A summary of loans past due and in nonaccrual status, including the composition of the ending balance of nonaccrual loans by type, is included in “Note 6 – Loans and Allowance for Loan Losses” of our interim condensed consolidated financial statements.

Troubled Debt Restructurings

We have taken a proactive approach to avoid foreclosures on borrowers who are willing to work with us in modifying their loans, thus making them more affordable. While this approach has allowed certain borrowers to develop a payment structure that will allow them to continue making payments in lieu of foreclosure, it has contributed to a significant increase in the level of loans classified as TDR. The implementation of ASU No. 2011-02 “A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring” has also contributed to the increased level of TDR’s. The modifications have been extremely successful for us and our customers as very few of the modified loans have resulted in foreclosures. Troubled debt restructurings that have been placed in nonaccrual status may be placed back on accrual status after six months of continued performance.

The following table summarizes our troubled debt restructurings component of impaired loans as of:

	June 30, 2012						December 31, 2011
	Accruing Interest		Nonaccrual		Total		Accruing Interest		Nonaccrual		Total		Total Change
Current	$	18,101	$	2,601	$	20,702	$	16,125	$	514	$	16,639	$	4,063
Past due 30-89 days		1,533		96		1,629		1,614		429		2,043		(414	)
Past due 90 days or more		—		212		212		—		74		74		138
Total troubled debt restructurings	$	19,634	$	2,909	$	22,543	$	17,739	$	1,017	$	18,756	$	3,787

Additional disclosures about TDR’s are included in “Note 6 – Loans and Allowance for Loan Losses” of our interim condensed consolidated financial statements.

Nonperforming Assets

The following table summarizes our nonperforming assets as of:

	June 30 2012			December 31 2011
Nonaccrual loans	$	5,790		$	6,389
Accruing loans past due 90 days or more		739			760
Total nonperforming loans		6,529			7,149
Other real estate owned		2,320			1,867
Repossessed assets		42			9
Total nonperforming assets	$	8,891		$	9,025
Nonperforming loans as a % of total loans		0.86	%		0.95	%
Nonperforming assets as a % of total assets		0.64	%		0.67	%

Loans are placed in nonaccrual status when the foreclosure process has begun, generally after a loan is 90 days past due, unless they are well secured and in the process of collection. Upon transferring the loans to nonaccrual status, an evaluation to determine the net realizable value of the underlying collateral is performed. This evaluation is used to help determine if any charge offs are necessary. Loans may be placed back on accrual status after six months of continued performance.

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Included in the nonaccrual loan balances above were credits currently classified as troubled debt restructurings as of:

	June 30 2012		December 31 2011
Commercial and agricultural	$	2,679	$	520
Residential real estate		230		497
Total	$	2,909	$	1,017

Included in commercial and agricultural loans were nonaccrual loans with balances in excess of $1,000 as of:

	June 30, 2012				December 31, 2011
	Outstanding Balance		Specific Allocation		Outstanding Balance		Specific Allocation
Loan 1	$	1,122	$	107	$	—	$	—
Loan 2		997		A		1,014		A
Loan 3		—		—		1,900		B
Other not individually significant		2,540				1,891
Total	$	4,659			$	4,805

A —   No specific allocation as the net realizable value of the loan’s underlying collateral value exceeded the loan’s carrying balance.

B —   No specific allocation established for this loan as it was charged down to reflect the current market value of the real estate.

There were no other individually significant credits included in nonaccrual loans as of June 30, 2012 or December 31, 2011.

Additional disclosures about nonaccrual loans are included in “Note 6 – Loans and Allowance for Loan Losses” of our interim condensed consolidated financial statements.

We continue to devote considerable attention to identifying impaired loans and adjusting the net carrying value of these loans to their current net realizable values through the establishment of a specific reserve or the recording of a chargeoff. We believe that all loans deemed to be impaired have been recognized.

We believe that the level of the ALLL is appropriate as we have yet to see a consistent and sustainable economic recovery and our net loans charged off, past due loans, and nonperforming loans remain at historically high levels. We will continue to closely monitor overall credit quality and our policies and procedures related to the analysis of the ALLL to ensure that the allowance for loan losses remains appropriate.

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NONINTEREST INCOME AND EXPENSES

Noninterest Income

Noninterest income consists of service charges and fee income, gains from the sale of mortgage loans, gains and losses on trading securities and borrowings measured at fair value, gains from the sale of investment securities, and other. Significant account balances are highlighted in the accompanying tables with additional descriptions of significant fluctuations:

	Three Months Ended June 30
							Change
	2012			2011			$			%
Service charges and fees
NSF and overdraft fees	$	597		$	651		$	(54	)		-8.3	%
ATM and debit card fees		477			441			36			8.2	%
Trust fees		266			267			(1	)		-0.4	%
Freddie Mac servicing fee		187			174			13			7.5	%
Service charges on deposit accounts		84			83			1			1.2	%
Net originated mortgage servicing rights loss		(13	)		(36	)		23			N/M
All other		30			37			(7	)		-18.9	%
Total service charges and fees		1,628			1,617			11			0.7	%
Gain on sale of mortgage loans		279			53			226			426.4	%
Net loss on trading securities		(16	)		(8	)		(8	)		-100.0	%
Net gain on borrowings measured at fair value		—			37			(37	)		-100.0	%
Other
Earnings on corporate owned life insurance policies		177			145			32			22.1	%
Brokerage and advisory fees		137			144			(7	)		-4.9	%
Income from investment in Corporate Settlement Solutions		167			(147	)		314			N/M
All other		172			137			35			25.5	%
Total other		653			279			374			134.1	%
Total noninterest income	$	2,544		$	1,978		$	566			28.6	%

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	Six Months Ended June 30
							Change
	2012			2011			$			%
Service charges and fees
NSF and overdraft fees	$	1,155		$	1,222		$	(67	)		-5.5	%
ATM and debit card fees		934			844			90			10.7	%
Trust fees		516			488			28			5.7	%
Freddie Mac servicing fee		378			356			22			6.2	%
Service charges on deposit accounts		158			158			—			0.0	%
Net originated mortgage servicing rights gain (loss)		50			(50	)		100			N/M
All other		66			75			(9	)		-12.0	%
Total service charges and fees		3,257			3,093			164			5.3	%
Gain on sale of mortgage loans		658			182			476			261.5	%
Net loss on trading securities		(32	)		(27	)		(5	)		-18.5	%
Net gain on borrowings measured at fair value		33			117			(84	)		-71.8	%
Gain on sale of available-for-sale investment securities		1,003			—			1,003			N/M
Other
Earnings on corporate owned life insurance policies		348			287			61			21.3	%
Brokerage and advisory fees		267			283			(16	)		-5.7	%
Income from investment in Corporate Settlement Solutions		199			(284	)		483			N/M
All other		352			275			77			28.0	%
Total other		1,166			561			605			107.8	%
Total noninterest income	$	6,085		$	3,926		$	2,159			55.0	%

Significant changes in noninterest income are detailed below:

• We continuously analyze various fees related to deposit accounts including service charges and NSF and overdraft fees. Based on these analyses, we make any necessary adjustments to ensure that our fee structure is within the range of our competitors, while at the same time making sure that the fees remain fair to deposit customers. NSF and overdraft represent the largest single component of service charges and fees. While we have experienced significant increases in deposit accounts, NSF and overdraft fees have declined. This decline has been the result of reduced overdraft activity by our customers as well as changes in banking regulations. Based on this trend, we do not anticipate a significant change in NSF and overdraft fees in the foreseeable future.

• As customers have continued to increase their dependence on ATM and debit cards, we have seen a corresponding increase in fees. We do not anticipate significant changes to ATM and debit fee structure; however, we do expect that these fees will continue to increase as the usage of debit cards increases.

• The recent decline in offering rates on residential real estate loans has led to a significant increase in the level of refinancing activity. This increase in activity has resulted in substantial increases in the gain on sale of mortgage loans, while contributing to fluctuations in the value of our OMSR portfolio. Additionally, this increased refinancing activity has also been the primary driver behind the increase in income from Corporate Settlement Solutions as their primary sources of revenues are title insurance policies and fees for mortgage closings. We anticipate this trend to continue for the remainder of 2012.

• Fluctuations in the gains and losses related to trading securities and borrowings measured at fair value are caused by interest rate variances.

• During the first quarter of 2012, we identified several pools of mortgage-backed securities with significant unrealized gains. As the interest rates of the underlying mortgages were significantly higher than the current offering rates for similar mortgages, we elected to realize these gains through the sales of such securities as the investments would have likely been paid off in the near term through refinancing activity. We do not anticipate any further significant investment sales during the remainder of 2012.

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• Earnings on corporate owned life insurance policies have increased from 2011 as a result of the purchase of an additional $4,000 in policies in the third quarter of 2011. Earnings are expected to approximate current levels for the remainder of 2012.

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

Noninterest Expenses

Noninterest expenses include compensation and benefits, occupancy, furniture and equipment, available-for-sale security impairment loss, and other expenses. Significant account balances are highlighted in the accompanying tables with additional descriptions of significant fluctuations:

	Three Months Ended June 30
						Change
	2012			2011		$			%
Compensation and benefits
Compensation	$	3,820		$	3,513	$	307			8.7	%
Benefits		1,412			1,233		179			14.5	%
Total compensation and benefits		5,232			4,746		486			10.2	%
Occupancy
Outside services		153			145		8			5.5	%
Depreciation		155			150		5			3.3	%
Property taxes		130			130		—			0.0	%
Utilities		98			106		(8	)		-7.5	%
Building repairs		42			59		(17	)		-28.8	%
All other		21			23		(2	)		-8.7	%
Total occupancy		599			613		(14	)		-2.3	%
Furniture and equipment
Computer / service contracts		534			465		69			14.8	%
Depreciation		443			485		(42	)		-8.7	%
ATM and debit card fees		179			157		22			14.0	%
All other		14			20		(6	)		-30.0	%
Total furniture and equipment		1,170			1,127		43			3.8	%
Other
Marketing and donations		535			527		8			1.5	%
FDIC insurance premiums		213			331		(118	)		-35.6	%
Directors fees		209			206		3			1.5	%
Audit fees		154			167		(13	)		-7.8	%
Education and travel		139			99		40			40.4	%
Consulting fees		71			67		4			6.0	%
Printing and supplies		110			89		21			23.6	%
Postage and freight		94			96		(2	)		-2.1	%
Foreclosed asset and collection		(18	)		177		(195	)		-110.2	%
Amortization of deposit premium		67			76		(9	)		-11.8	%
Legal fees		81			54		27			50.0	%
All other		532			404		128			31.7	%
Total other		2,187			2,293		(106	)		-4.6	%
Total noninterest expenses	$	9,188		$	8,779	$	409			4.7	%

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	Six Months Ended June 30
					Change
	2012		2011		$			%
Compensation and benefits
Compensation	$	7,648	$	7,069	$	579			8.2	%
Benefits		2,885		2,682		203			7.6	%
Total compensation and benefits		10,533		9,751		782			8.0	%
Occupancy
Outside services		300		307		(7	)		-2.3	%
Depreciation		309		298		11			3.7	%
Property taxes		259		258		1			0.4	%
Utilities		224		233		(9	)		-3.9	%
Building repairs		107		119		(12	)		-10.1	%
All other		41		44		(3	)		-6.8	%
Total occupancy		1,240		1,259		(19	)		-1.5	%
Furniture and equipment
Computer / service contracts		1,014		925		89			9.6	%
Depreciation		886		984		(98	)		-10.0	%
ATM and debit card fees		330		296		34			11.5	%
All other		30		28		2			7.1	%
Total furniture and equipment		2,260		2,233		27			1.2	%
Available-for-sale security impairment loss		282		—		282			N/M
Other
Marketing and donations		1,029		750		279			37.2	%
FDIC insurance premiums		428		665		(237	)		-35.6	%
Directors fees		419		417		2			0.5	%
Audit fees		330		323		7			2.2	%
Education and travel		266		204		62			30.4	%
Consulting fees		258		100		158			158.0	%
Printing and supplies		219		189		30			15.9	%
Postage and freight		195		196		(1	)		-0.5	%
Foreclosed asset and collection		79		277		(198	)		-71.5	%
Amortization of deposit premium		133		152		(19	)		-12.5	%
Legal fees		143		116		27			23.3	%
All other		947		734		213			29.0	%
Total other		4,446		4,123		323			7.8	%
Total noninterest expenses	$	18,761	$	17,366	$	1,395			8.0	%

Significant changes in noninterest expenses are detailed below:

• The increase in compensation is due to annual merit increases and our continued growth as well as additional staff additions to help comply with the Dodd Frank Act and other recently passed regulations. Benefit costs increased significantly during the second quarter as a result of increased pension expenses, which was triggered by a reduction in the plan’s discount rate. We expect that pension expenses will exceed budgeted levels by an additional $70 over the remainder of 2012 as a result of this discount rate reduction.

• Marketing and donations relations expenses increased in 2012 primarily as a result of increased contribution expense to the Isabella Bank Foundation. Marketing and donations are expected to normalize throughout the remainder of 2012.

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• FDIC insurance premiums have declined since 2011 due to a change in the premium calculation. These premiums are expected to approximate current levels for the remainder of 2012.

• The increase in consulting fees is primarily related to consulting services employed to review the FHLB advance restructure (see “Volume and Rate Variance Analysis”, above). Consulting fees are anticipated to approximate current levels for the remainder of 2012.

• As a result of decreases in foreclosure and repossession activity, we have seen significant declines in foreclosed asset and collection expenses. These expenses have also declined as we have been able to recover expenses through our collection efforts. These collection efforts have actually led to a net negative expense for the current quarter. Foreclosed asset and collection expenses are expected to decline for the remainder of 2012.

• During the first quarter of 2012, we recorded a credit impairment on an AFS investment security through earnings due to a bond being downgraded by Moody’s to Caa3. We will continue to monitor the investment portfolio throughout the year for other potential other-than-temporary impairments. For further discussion, see “Note 5 – Available-For-Sale Securities” to the interim condensed consolidated financial statements.

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

ANALYSIS OF CHANGES IN FINANCIAL CONDITION

	June 30 2012			December 31 2011			$ Change			% Change (unannualized)
ASSETS
Cash and cash equivalents	$	20,251		$	28,590		$	(8,339	)		-29.17	%
Certificates of deposit held in other financial institutions		6,880			8,924			(2,044	)		-22.90	%
Trading securities		1,998			4,710			(2,712	)		-57.58	%
Available-for-sale securities		476,935			425,120			51,815			12.19	%
Mortgage loans available-for-sale		2,347			3,205			(858	)		-26.77	%
Loans		754,952			750,291			4,661			0.62	%
Allowance for loan losses		(12,318	)		(12,375	)		57			N/M
Premises and equipment		24,729			24,626			103			0.42	%
Corporate owned life insurance		22,423			22,075			348			1.58	%
Accrued interest receivable		5,217			5,848			(631	)		-10.79	%
Equity securities without readily determinable fair values		17,708			17,189			519			3.02	%
Goodwill and other intangible assets		46,659			46,792			(133	)		-0.28	%
Other assets		13,715			12,930			785			6.07	%
TOTAL ASSETS	$	1,381,496		$	1,337,925		$	43,571			3.26	%
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities
Deposits	$	978,828		$	958,164		$	20,664			2.16	%
Borrowed funds		234,132			216,136			17,996			8.33	%
Accrued interest payable and other liabilities		8,681			8,842			(161	)		-1.82	%
Total liabilities		1,221,641			1,183,142			38,499			3.25	%
Shareholders’ equity		159,855			154,783			5,072			3.28	%
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	1,381,496		$	1,337,925		$	43,571			3.26	%

As shown above, we were able to grow our balance sheet since December 31, 2011. The growth in deposits was supplemented by an increase in borrowed funds. As loans have remained essentially unchanged since year end 2011, these funds were deployed into available-for-sale investment securities to generate additional net interest income. We anticipate that loan growth will continue to be a challenge and that deposit growth will approximate current levels over the remainder of the year.

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The following table outlines the changes in the loan portfolio:

	June 30 2012		December 31 2011		$ Change			% Change (unannualized)
Agricultural	$	81,222	$	74,645	$	6,577			8.81	%
Commercial		368,371		365,714		2,657			0.73	%
Consumer		31,357		31,572		(215	)		-0.68	%
Residential real estate		274,002		278,360		(4,358	)		-1.57	%
Total	$	754,952	$	750,291	$	4,661			0.62	%

The following table outlines the changes in the deposit portfolio:

	June 30 2012		December 31 2011		$ Change			% Change (unannualized)
Noninterest bearing demand deposits	$	124,230	$	119,072	$	5,158			4.33	%
Interest bearing demand deposits		163,000		163,653		(653	)		-0.40	%
Savings deposits		212,670		193,902		18,768			9.68	%
Certificates of deposit		382,498		395,777		(13,279	)		-3.36	%
Brokered certificates of deposit		62,419		54,326		8,093			14.90	%
Internet certificates of deposit		34,011		31,434		2,577			8.20	%
Total	$	978,828	$	958,164	$	20,664			2.16	%

Borrowed funds consist of the following obligations as of:

	June 30, 2012					December 31, 2011
	Amount		Rate			Amount		Rate
Federal Home Loan Bank advances	$	154,000		2.18	%	$	142,242		3.16	%
Securities sold under agreements to repurchase without stated maturity dates		53,824		0.20	%		57,198		0.25	%
Securities sold under agreements to repurchase with stated maturity dates		16,708		3.51	%		16,696		3.51	%
Federal funds purchased		9,600		0.50	%		—		—
Total	$	234,132		1.75	%	$	216,136		2.42	%

The FHLB advances are collateralized by a blanket lien on all qualified 1-4 family residential real estate loans and certain mortgage-backed securities and collateralized mortgage obligations. Advances are also secured by FHLB stock. We had the ability to borrow up to an additional $100,781 based on assets currently pledged as collateral as of June 30, 2012. During the first quarter of 2012, we reduced funding costs by modifying the terms of $60,000 of FHLB advances. This modification strategy extended the duration of our interest bearing liabilities and will reduce interest expense by approximately $450 for 2012.

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

	June 30 2012					December 31 2011
	Amount		Rate			Amount		Rate
Fixed rate advances due 2012	$	2,000		4.90	%	$	17,000		2.97	%
One year putable fixed rate advances due 2012		5,000		3.48	%		15,000		4.10	%
Variable rate advances due 2012		5,000		0.50	%		—		—
Fixed rate advances due 2013		—		—			5,242		4.14	%
One year putable fixed rate advances due 2013		—		—			5,000		3.15	%
Fixed rate advances due 2014		—		—			25,000		3.16	%
Fixed rate advances due 2015		42,000		1.12	%		45,000		3.30	%
Fixed rate advances due 2016		10,000		2.15	%		10,000		2.15	%
Fixed rate advances due 2017		40,000		2.15	%		20,000		2.56	%
Fixed rate advances due 2018		20,000		2.86	%		—		—
Fixed rate advances due 2019		20,000		3.73	%		—		—
Fixed rate advances due 2020		10,000		1.98	%		—		—
Total	$	154,000		2.18	%	$	142,242		3.16	%

Capital

Capital consists solely of common stock, retained earnings, and accumulated other comprehensive income. We offer dividend reinvestment, employee and director stock purchase, and shareholder stock purchase plans. Under the provisions of these plans, we issued 54,900 shares or $1,322 of common stock during the first six months of 2012, as compared to 61,057 shares or $1,090 of common stock during the same period in 2011. We also offer the Directors Plan which allows participants to purchase stock units, in lieu of cash payments. Pursuant to this plan, we increased shareholders’ equity by $295 and $307 during the six month periods ended June 30, 2012 and 2011, respectively.

We have approved a publicly announced common stock repurchase plan. During the first six months of 2012 and 2011, pursuant to this plan, we repurchased 41,581 shares of common stock at an average price of $23.93 and 50,458 shares of common stock at an average price of $18.11, respectively. As of June 30, 2012, we were authorized to repurchase up to an additional 127,415 shares of common stock.

Accumulated other comprehensive income increased $1,471 for the six month period ended June 30, 2012, net of tax. The increase is a result of unrealized gains on available-for-sale investment securities.

There are no significant regulatory constraints placed on our capital. The FRB’s current recommended minimum primary capital to assets requirement is 6.0%. Our primary capital to adjusted average assets, which consists of shareholders’ equity plus the allowance for loan losses less acquisition intangibles, was 8.24% as of June 30, 2012.

The FRB has established a minimum risk based capital standard. Under this standard, 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. The minimum standard is 8%, of which at least 4% must consist of equity capital net of goodwill. The following table sets forth the percentages required under the Risk Based Capital guidelines and our values as of:

	June 30 2012			December 31 2011			Required
Equity Capital		13.19	%		12.92	%		4.00	%
Secondary Capital		1.25	%		1.25	%		4.00	%
Total Capital		14.44	%		14.17	%		8.00	%

Secondary capital includes only the allowance for loan losses. The percentage for the secondary capital under the required column is the maximum amount allowed from all sources.

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The FRB and FDIC also prescribe minimum capital requirements for Isabella Bank. At June 30, 2012, the Bank exceeded these minimum capital requirements. Recently passed legislation will likely increase the required level of capital for banks. This increase in capital levels may have an adverse impact on our ability to grow and pay dividends.

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 demand deposits due from banks, certificates of deposit held in other financial institutions, trading securities, and available-for-sale securities. These categories totaled $506,064 or 36.6% of assets as of June 30, 2012 as compared to $467,344 or 34.9% as of December 31, 2011. Liquidity is important for financial institutions because of their need to meet loan funding commitments, depositor withdrawal requests, and various other commitments including expansion of operations, investment opportunities, and payment of cash dividends. Liquidity varies on a daily basis as a result of customer activity.

Our primary source of funds is deposits, which includes noninterest bearing deposits, or checking accounts.

We have the ability to borrow from the FHLB, the FRB, and through various correspondent banks as federal funds purchased. These funding methods typically carry a higher interest rate than traditional market deposit accounts. Some borrowed funds, including FHLB Advances, FRB Discount Window Advances, and repurchase agreements, require us to pledge assets, typically in the form of certificates of deposits held in other financial institutions, investment securities, or loans as collateral. We had the ability to borrow up to an additional $100,781 based on the assets currently pledged as collateral.

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

	2012			2011			$ Variance
Net cash provided by operating activities	$	11,947		$	11,225		$	722
Net cash used in investing activities		(56,047	)		(53,418	)		(2,629	)
Net cash provided by financing activities		35,761			45,876			(10,115	)
(Decrease) increase in cash and cash equivalents		(8,339	)		3,683			(12,022	)
Cash and cash equivalents January 1		28,590			18,109			10,481
Cash and cash equivalents June 30	$	20,251		$	21,792		$	(1,541	)

Market Risk

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

IRR is the exposure of our net interest income to changes in interest rates. IRR results from the difference in the maturity or repricing frequency of a financial institution’s interest earning assets and its interest bearing liabilities. IRR is the fundamental method in 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, our primary Federal regulator, has adopted a policy requiring us to effectively manage the various risks that can have a material impact on our safety and soundness. The risks include credit, interest rate, liquidity, operational, and reputational. We have policies, procedures and internal controls for measuring and managing these risks. Specifically, the IRR policy and procedures include defining acceptable types and terms of investments and funding sources, liquidity requirements, limits on investments in long term assets, limiting the mismatch in repricing opportunity of assets and liabilities, and the frequency of measuring and reporting to our Board of Directors.

The primary technique to measure interest rate risk is simulation analysis. Simulation analysis forecasts the effects on the balance sheet structure and net interest income under a variety of scenarios that incorporate changes in interest rates, the shape of yield curves, interest rate relationships, and loan prepayments. These forecasts are compared against net interest income projected in a stable interest rate environment. While many assets and liabilities reprice either at maturity or in accordance with their contractual terms, several balance sheet components demonstrate characteristics that require an evaluation to more accurately reflect their repricing

54

behavior. Key assumptions in the simulation analysis include prepayments on loans, probable calls of investment securities, changes in market conditions, loan volumes and loan pricing, deposit sensitivity and customer preferences. These assumptions are inherently uncertain as they are subject to fluctuation and revision in a dynamic environment. As a result, the simulation analysis cannot precisely forecast the impact of rising and falling interest rates on net interest income. Actual results will differ from simulated results due to many other factors, including changes in balance sheet components, interest rate changes, changes in market conditions, and management strategies.

Our interest rate sensitivity is estimated by first forecasting the next twelve months of net interest income under an assumed environment of a constant balance sheet and constant market interest rates (base case). We then compare the results of various simulation analyses to the base case. At June 30, 2012, we projected the change in net interest income during the next twelve months assuming market interest rates were to immediately decrease by 100 basis points and increase by 100, 200, 300, and 400 basis points in a parallel fashion over the entire yield curve during the same time period. We did not project scenarios showing decreases in interest rates beyond 100 basis points as this is considered extremely unlikely given prevailing interest rate levels. These projections were based on our assets and liabilities remaining static over the next twelve months, while factoring in probable calls and prepayments of certain investment securities and real estate residential and consumer loans. While it is extremely unlikely that interest rates would immediately increase at these levels, we feel that these extreme scenarios help us identify potential gaps and mismatches in the repricing characteristics of assets and liabilities. We regularly monitor our forecasted net interest income sensitivity to ensure that it remains within established limits.

The following table summarizes our interest rate sensitivity as of:

	June 30, 2012
Immediate basis point change asumption (short-term rates)		-100		0	100		200		300		400
Percent change in net income vs. constant rates		1.18	%	—	1.18	%	0.50	%	0.36	%	-1.00	%
	June 30, 2011
Immediate basis point change asumption (short-term rates)		-100		0	100		200		300		400
Percent change in net income vs. constant rates		-3.50	%	—	1.08	%	0.56	%	-1.34	%	N/A

A 400 basis point reduction was not applicable as of June 30, 2011 as we were not utilizing this scenario as part of our interest rate sensitivity analysis at that time.

The secondary method to measure interest rate risk is gap analysis. Gap analysis 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 imbedded repricing options contained in assets and liabilities. A substantial portion of our assets are invested in loans and investment securities with issuer call options. Residential real estate and consumer loans have imbedded options that allow the borrower to repay the balance prior to maturity without penalty, while commercial and agricultural loans 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 interest rate for residential real estate loans, 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 subject to prepayment. The call option is more likely to be exercised in a period of decreasing interest rates. Investment securities, other than those that are callable, do not have any significant imbedded options. Savings and NOW accounts may generally be withdrawn on request without prior notice. The timing of cash flows from these deposits is estimated based on historical experience. Time deposits have penalties that discourage early withdrawals.

The following tables provide information about assets and liabilities that are sensitive to changes in interest rates as of June 30, 2012 and December 31, 2011. The principal amounts of assets and time deposits maturing were calculated based on the contractual maturity dates. Savings and NOW accounts are based on management’s estimate of their future cash flows.

55

(dollars in thousands)	June 30, 2012
	2013			2014			2015			2016			2017			Thereafter			Total			Fair Value
Rate sensitive assets
Other interest bearing assets	$	6,074		$	1,325		$	240		$	—		$	—		$	—		$	7,639		$	7,665
Average interest rates		1.50	%		1.14	%		1.25	%		—			—			—			1.43	%
Trading securities	$	1,057		$	941		$	—		$	—		$	—		$	—		$	1,998		$	1,998
Average interest rates		2.52	%		2.64	%		—			—			—			—			2.58	%
Fixed interest rate securities	$	108,847		$	67,829		$	54,248		$	43,608		$	40,894		$	161,509		$	476,935		$	476,935
Average interest rates		2.63	%		2.65	%		2.70	%		2.82	%		3.03	%		2.71	%		2.72	%
Fixed interest rate loans (1)	$	137,533		$	102,932		$	93,089		$	79,955		$	97,583		$	68,540		$	579,632		$	593,034
Average interest rates		6.12	%		5.73	%		5.87	%		5.47	%		4.82	%		5.02	%		5.57	%
Variable interest rate loans (1)	$	70,923		$	26,994		$	29,284		$	14,847		$	17,648		$	15,624		$	175,320		$	175,320
Average interest rates		4.82	%		4.04	%		3.97	%		3.77	%		3.37	%		3.79	%		4.23	%
Rate sensitive liabilities
Borrowed funds	$	75,856		$	5,105		$	33,171		$	20,000		$	40,000		$	60,000		$	234,132		$	240,869
Average interest rates		0.61	%		4.47	%		1.14	%		2.21	%		2.11	%		2.92	%		1.75	%
Savings and NOW accounts	$	92,563		$	68,984		$	61,837		$	48,244		$	32,636		$	71,406		$	375,670		$	375,670
Average interest rates		0.17	%		0.16	%		0.17	%		0.17	%		0.16	%		0.15	%		0.16	%
Fixed interest rate time deposits	$	239,844		$	60,779		$	55,836		$	59,523		$	42,014		$	19,633		$	477,629		$	490,176
Average interest rates		1.44	%		2.10	%		2.17	%		2.29	%		2.06	%		1.69	%		1.78	%
Variable interest rate time deposits	$	929		$	370		$	—		$	—		$	—		$	—		$	1,299		$	1,299
Average interest rates		0.45	%		0.45	%		—			—			—			—			0.45	%
	December 31, 2011
	2012			2013			2014			2015			2016			Thereafter			Total			Fair Value
Rate sensitive assets
Other interest bearing assets	$	8,775		$	4,125		$	100		$	—		$	—		$	—		$	13,000		$	13,053
Average interest rates		1.18	%		1.33	%		0.35	%		—			—			—			1.22	%
Trading securities	$	3,156		$	1,031		$	523		$	—		$	—		$	—		$	4,710		$	4,710
Average interest rates		3.34	%		2.48	%		2.49	%		—			—			—			3.06	%
Fixed interest rate securities	$	104,559		$	61,421		$	48,659		$	37,777		$	35,108		$	137,596		$	425,120		$	425,120
Average interest rates		2.98	%		2.84	%		2.91	%		2.93	%		3.21	%		3.01	%		2.98	%
Fixed interest rate loans (1)	$	141,867		$	140,390		$	90,852		$	75,690		$	76,985		$	61,854		$	587,638		$	606,524
Average interest rates		6.24	%		6.08	%		5.94	%		5.99	%		5.40	%		5.15	%		5.90	%
Variable interest rate loans (1)	$	70,783		$	25,267		$	20,803		$	18,853		$	11,631		$	15,316		$	162,653		$	162,653
Average interest rates		5.87	%		3.97	%		4.05	%		3.68	%		4.00	%		3.98	%		4.78	%
Rate sensitive liabilities
Borrowed funds	$	89,869		$	15,000		$	25,869		$	45,398		$	20,000		$	20,000		$	216,136		$	222,538
Average interest rates		1.42	%		3.93	%		3.13	%		3.30	%		2.67	%		2.56	%		2.41	%
Savings and NOW accounts	$	120,850		$	78,313		$	51,291		$	34,006		$	22,803		$	50,292		$	357,555		$	357,555
Average interest rates		0.20	%		0.19	%		0.18	%		0.17	%		0.15	%		0.15	%		0.18	%
Fixed interest rate time deposits	$	264,147		$	62,883		$	46,802		$	55,493		$	43,601		$	7,052		$	479,978		$	498,085
Average interest rates		1.61	%		2.67	%		2.33	%		2.56	%		2.41	%		1.48	%		2.00	%
Variable interest rate time deposits	$	1,152		$	407		$	—		$	—		$	—		$	—		$	1,559		$	1,559
Average interest rates		0.67	%		0.69	%		—			—			—			—			0.68	%

(1) The fair value reported is exclusive of the allocation of the allowance for loan losses.

We do not believe that there has been a material change in the nature or categories of our primary market risk exposure, or the particular markets that present the primary risk of loss. As of the date of this report, we do not know of or expect there to be any material change in the general nature of our primary market risk exposure in the near term. The methods by which we manage primary market risk exposure, as described in our Annual Report on Form 10-K for the year ended December 31, 2011, have not changed materially during 2012. As of the date of this report, we do not expect to make material changes in those methods in the near term. We may change those methods in the future to adapt to changes in circumstances or to implement new techniques.

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FINANCIAL INSTRUMENTS WITH OFF BALANCE SHEET ARRANGEMENTS

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

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

	June 30 2012		December 31 2011
Unfunded commitments under lines of credit	$	113,049	$	102,822
Commercial and standby letters of credit		4,103		4,461
Commitments to grant loans		29,149		21,806

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. Therefore, the total commitment amounts do not necessarily represent future cash requirements.

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

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

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

Forward Looking Statements

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

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Item 3 – Quantitative and Qualitative Disclosures about Market Risk

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

Item 4 – Controls and Procedures

DISCLOSURE CONTROLS AND PROCEDURES

We carried out an evaluation, under the supervision and with the participation of the Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15(d)-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) as of June 30, 2012, pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures as of June 30, 2012, were effective to ensure that information required to be disclosed in reports that we file or submit under the Exchange Act are recorded, processed, summarized and reported within the time periods specified in SEC rules and forms.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

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

58

PART II – OTHER INFORMATION

Item 1 – Legal Proceedings

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

Item 1A – Risk Factors

There have been no material changes to the risk factors disclosed in Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2011.

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

(A) None

(B) None

(C) Repurchases of Common Stock

We have adopted and announced a common stock repurchase plan. On April 26, 2012, we amended the plan to allow for the repurchase of an additional 150,000 shares of common stock. These authorizations do not have expiration dates. As shares are repurchased under this plan, they are retired and revert back to the status of authorized, but unissued shares.

The following table provides information for the three month period ended June 30, 2012, with respect to this plan:

					Total Number of Shares Purchased		Maximum Number of
	Shares Repurchased				as Part of Publicly		Shares That May Yet Be
	Number		Average Price Per Share		Announced Plan or Program		Purchased Under the Plans or Programs
Balance, March 31, 2012								544
April 1 – 26, 2012		—						544
Additional Authorization (150,000 shares)								150,544
April 27 – 30, 2012		7,678	$	24.09		7,678		142,866
May 1 – 31, 2012		8,441		24.88		8,441		134,425
June 1 – 30, 2012		7,010		24.82		7,010		127,415
Balance, June 30, 2012		23,129	$	24.60		23,129		127,415

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Item 6 – Exhibits

(a) Exhibits

31(a)	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Principal Executive Officer
31(b)	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Principal Financial Officer
32	Section 1350 Certification of Principal Executive Officer and Principal Financial Officer
101.1*	101.INS   (XBRL Instance Document)
	101.SCH  (XBRL Taxonomy Extension Schema Document)
	101.CAL  (XBRL Calculation Linkbase Document)
	101.LAB  (XBRL Taxonomy Label Linkbase Document)
	101.DEF  (XBRL Taxonomy Linkbase Document)
	101.PRE   (XBRL Taxonomy Presentation Linkbase Document)

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

60

SIGNATURES

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

	Isabella Bank Corporation
Date: July 30, 2012	/s/    Richard J. Barz
	Richard J. Barz
	Chief Executive Officer
	(Principal Executive Officer)
Date: July 30, 2012	/s/    Dennis P. Angner
	Dennis P. Angner
	President, Chief Financial Officer
	(Principal Financial Officer, Principal Accounting Officer)

61

EX-31.A

Exhibit 31(a)

I, Richard J. Barz, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Isabella Bank Corporation (the “registrant”).

2. Based on my knowledge, this quarterly 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 quarterly report.

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly report.

4. 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:

a) 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 quarterly report is being prepared;

b) 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;

c) 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

d) 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) 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

b) 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: July 30, 2012	/s/    Richard J. Barz
	Chief Executive Officer
	(Principal Executive Officer)

EX-31.B

Exhibit 31(b)

I, Dennis P. Angner, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Isabella Bank Corporation (the “registrant”).

2. Based on my knowledge, this quarterly 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 quarterly report.

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly report.

4. 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:

a) 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 quarterly report is being prepared;

b) 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;

c) 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

d) 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) 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

b) 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: July 30, 2012	/s/    Dennis P, Angner
	President, Chief Financial Officer
	(Principal Financial Officer, Principal Accounting Officer)

EX-32

Exhibit 32

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Isabella Bank Corporation (the “Corporation”) on Form 10-Q for the quarterly period ended June 30, 2012 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Richard J. Barz, Chief Executive Officer and Dennis P. Angner, 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/    Richard J. Barz        

Chief Executive Officer

(Principal Executive Officer)

July 30, 2012

/s/    Dennis P. Angner        

President, Chief Financial Officer

(Principal Financial Officer, Principal Accounting Officer)

July 30, 2012

XML

Available-For-Sale Securities (Details 3) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2012 Securities	Dec. 31, 2011 Securities
Available-for-sale securities with gross unrealized losses
Gross Unrealized Losses, Less Than Twelve Months	$ 117	$ 98
Fair Value, Less Than Twelve Months	26,737	25,701
Gross Unrealized Losses, Over Twelve Months	1,991	2,918
Fair Value, Over Twelve Months	10,983	7,082
Total Unrealized Losses	2,108	3,016
Number of Securities in an unrealized loss position, Less Than Twelve Months, Fair Value	24	6
Number of Securities in an unrealized loss position, Over Twelve Months, Fair Value	8	6
Number of Securities in an unrealized loss position	32	12
Auction rate money market preferred [Member]
Available-for-sale securities with gross unrealized losses
Gross Unrealized Losses, Less Than Twelve Months
Fair Value, Less Than Twelve Months
Gross Unrealized Losses, Over Twelve Months	626	1,151
Fair Value, Over Twelve Months	2,574	2,049
Total Unrealized Losses	626	1,151
Collateralized mortgage obligations [Member]
Available-for-sale securities with gross unrealized losses
Gross Unrealized Losses, Less Than Twelve Months	47
Fair Value, Less Than Twelve Months	4,686
Gross Unrealized Losses, Over Twelve Months
Fair Value, Over Twelve Months
Total Unrealized Losses	47
States and political subdivisions [Member]
Available-for-sale securities with gross unrealized losses
Gross Unrealized Losses, Less Than Twelve Months	55	51
Fair Value, Less Than Twelve Months	6,768	1,410
Gross Unrealized Losses, Over Twelve Months	492
Fair Value, Over Twelve Months	2,482
Total Unrealized Losses	547	51
Preferred stocks [Member]
Available-for-sale securities with gross unrealized losses
Gross Unrealized Losses, Less Than Twelve Months
Fair Value, Less Than Twelve Months
Gross Unrealized Losses, Over Twelve Months	873	1,767
Fair Value, Over Twelve Months	5,927	5,033
Total Unrealized Losses	873	1,767
Mortgage-backed securities [Member]
Available-for-sale securities with gross unrealized losses
Gross Unrealized Losses, Less Than Twelve Months	15	47
Fair Value, Less Than Twelve Months	15,283	24,291
Gross Unrealized Losses, Over Twelve Months
Fair Value, Over Twelve Months
Total Unrealized Losses	$ 15	$ 47

XML

Borrowed Funds (Details 1) (USD $) In Thousands, unless otherwise specified	6 Months Ended
	Jun. 30, 2012	Dec. 31, 2011
Schedule of maturity and weighted average interest rates of FHLB advances
Fixed rate advances due 2012, Amount	$ 2,000	$ 17,000
Fixed rate advances due 2012, Rate	4.90%	2.97%
Variable rate advances due 2012, Amount	5,000
Variable rate advances due 2012, Rate	0.50%
One year putable advances due 2012, Amount	5,000	15,000
One year putable advances due 2012, Rate	3.48%	4.10%
Fixed rate advance due 2013, Amount		5,242
Fixed rate advances due 2013, Rate	0.00%	4.14%
One year putable advances due 2013, Amount		5,000
One year putable advances due 2013, Rate	0.00%	3.15%
Fixed rate advances due 2014, Amount		25,000
Fixed rate advances due 2014, Rate	0.00%	3.16%
Fixed rate advances due 2015, Amount	42,000	45,000
Fixed rate advances due 2015, Rate	1.12%	3.30%
Fixed rate advances due 2016, Amount	10,000	10,000
Fixed rate advances due 2016, Rate	2.15%	2.15%
Fixed rate advances due 2017, Amount	40,000	20,000
Fixed rate advances due 2017, Rate	2.15%	2.56%
Fixed rate advances due 2018, Amount	20,000
Fixed rate advances due 2018, Rate	2.86%
Fixed rate advances due 2019, Amount	20,000
Fixed rate advances due 2019, Rate	3.73%
Fixed rate advances due 2020, Amount	10,000
Fixed rate advances due 2020, Rate	1.98%
Total, Amount	$ 154,000	$ 142,242
Total, Rate	2.18%	3.16%

XML

Loans and Allowance for Loan Losses (Details 5) (USD $) In Thousands, unless otherwise specified	3 Months Ended	6 Months Ended
	Jun. 30, 2012 NumberofLoan	Jun. 30, 2012 NumberofLoan
Information pertaining to TDR's
Number of Loans	12	44
Pre- Modification Recorded Investment	$ 989	$ 6,857
Post- Modification Recorded Investment	989	6,857
Below Market Interest Rate [Member]
Information pertaining to TDR's
Number of Loans	7	34
Pre- Modification Recorded Investment	484	5,631
Below Market Interest Rate and Extension of Amortization Period [Member]
Information pertaining to TDR's
Number of Loans	5	10
Pre- Modification Recorded Investment	505	1,226
Commercial other [Member]
Information pertaining to TDR's
Number of Loans	5	26
Pre- Modification Recorded Investment	305	4,891
Post- Modification Recorded Investment	305	4,891
Commercial other [Member] | Below Market Interest Rate [Member]
Information pertaining to TDR's
Number of Loans	3	24
Pre- Modification Recorded Investment	160	4,786
Commercial other [Member] | Below Market Interest Rate and Extension of Amortization Period [Member]
Information pertaining to TDR's
Number of Loans	2	2
Pre- Modification Recorded Investment	145	145
Agricultural other [Member]
Information pertaining to TDR's
Number of Loans		6
Pre- Modification Recorded Investment		561
Post- Modification Recorded Investment		561
Agricultural other [Member] | Below Market Interest Rate [Member]
Information pertaining to TDR's
Number of Loans		6
Pre- Modification Recorded Investment		561
Agricultural other [Member] | Below Market Interest Rate and Extension of Amortization Period [Member]
Information pertaining to TDR's
Number of Loans
Pre- Modification Recorded Investment
Residential real estate senior liens [Member]
Information pertaining to TDR's
Number of Loans	7	12
Pre- Modification Recorded Investment	684	1,405
Post- Modification Recorded Investment	684	1,405
Residential real estate senior liens [Member] | Below Market Interest Rate [Member]
Information pertaining to TDR's
Number of Loans	4	4
Pre- Modification Recorded Investment	324	324
Residential real estate senior liens [Member] | Below Market Interest Rate and Extension of Amortization Period [Member]
Information pertaining to TDR's
Number of Loans	3	8
Pre- Modification Recorded Investment	$ 360	$ 1,081

XML

Fair Value (Details 6) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011
Changes in fair value of assets and liabilities recorded at fair value
Total	$ (48)	$ (21)	$ 26	$ 37
Recurring items [Member]
Changes in fair value of assets and liabilities recorded at fair value
Trading securities	(16)	(8)	(32)	(27)
Borrowed funds		37	33	117
Nonrecurring items [Member]
Changes in fair value of assets and liabilities recorded at fair value
Foreclosed assets		(25)	(17)	(35)
Originated mortgage servicing rights	(32)	(25)	42	(18)
Trading Gains and (Losses) [Member]
Changes in fair value of assets and liabilities recorded at fair value
Total	(16)	(8)	(32)	(27)
Trading Gains and (Losses) [Member] | Recurring items [Member]
Changes in fair value of assets and liabilities recorded at fair value
Trading securities	(16)	(8)	(32)	(27)
Borrowed funds
Trading Gains and (Losses) [Member] | Nonrecurring items [Member]
Changes in fair value of assets and liabilities recorded at fair value
Foreclosed assets
Originated mortgage servicing rights
Other Gains and (Losses) [Member]
Changes in fair value of assets and liabilities recorded at fair value
Total	(32)	(13)	58	64
Other Gains and (Losses) [Member] | Recurring items [Member]
Changes in fair value of assets and liabilities recorded at fair value
Trading securities
Borrowed funds		37	33	117
Other Gains and (Losses) [Member] | Nonrecurring items [Member]
Changes in fair value of assets and liabilities recorded at fair value
Foreclosed assets		(25)	(17)	(35)
Originated mortgage servicing rights	$ (32)	$ (25)	$ 42	$ (18)

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Borrowed Funds (Details 2) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011
Securities sold under agreements to repurchase without stated maturity dates [Member]
Summary of short term borrowings
Maximum Month-End Balance	$ 58,584	$ 43,138	$ 58,584	$ 43,138
YTD Average Balance	58,045	44,680	55,436	40,715
Weighted Average Interest Rate During the Period	0.20%	0.25%	0.11%	0.25%
Federal funds purchased [Member]
Summary of short term borrowings
Maximum Month-End Balance	17,900	18,300	17,900	18,300
YTD Average Balance	$ 7,025	$ 4,539	$ 3,552	$ 2,906
Weighted Average Interest Rate During the Period	0.47%	0.54%	0.23%	0.53%

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Loans and Allowance for Loan Losses (Details 3) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2012	Dec. 31, 2011
Credit quality indicators for residential real estate and consumer loans is the individual loans past due aging
Accruing Interest and Past Due: 30-89 Days	$ 7,605	$ 5,754
Accruing Interest and Pass Due: 90 Days or More	739	760
Nonaccrual	5,790	6,389
Total Past Due and Nonaccrual	14,134	12,903
Current	740,818	737,388
Total	754,952	750,291
Commercial real estate [Member]
Credit quality indicators for residential real estate and consumer loans is the individual loans past due aging
Accruing Interest and Past Due: 30-89 Days	3,505	1,721
Accruing Interest and Pass Due: 90 Days or More	309	364
Nonaccrual	3,818	4,176
Total Past Due and Nonaccrual	7,632	6,261
Current	259,186	251,834
Total	266,818	258,095
Commercial other [Member]
Credit quality indicators for residential real estate and consumer loans is the individual loans past due aging
Accruing Interest and Past Due: 30-89 Days	411	426
Accruing Interest and Pass Due: 90 Days or More	50	3
Nonaccrual	199	25
Total Past Due and Nonaccrual	660	454
Current	100,893	107,165
Total	101,553	107,619
Total commercial [Member]
Credit quality indicators for residential real estate and consumer loans is the individual loans past due aging
Accruing Interest and Past Due: 30-89 Days	3,916	2,147
Accruing Interest and Pass Due: 90 Days or More	359	367
Nonaccrual	4,017	4,201
Total Past Due and Nonaccrual	8,392	6,715
Current	360,079	358,999
Total	368,371	365,714
Agricultural real estate [Member]
Credit quality indicators for residential real estate and consumer loans is the individual loans past due aging
Accruing Interest and Past Due: 30-89 Days	206
Accruing Interest and Pass Due: 90 Days or More		99
Nonaccrual	356	189
Total Past Due and Nonaccrual	562	288
Current	46,135	44,395
Total	46,697	44,683
Agricultural other [Member]
Credit quality indicators for residential real estate and consumer loans is the individual loans past due aging
Accruing Interest and Past Due: 30-89 Days	319	2
Accruing Interest and Pass Due: 90 Days or More
Nonaccrual	286	415
Total Past Due and Nonaccrual	605	417
Current	33,920	29,545
Total	34,525	29,962
Total agricultural [Member]
Credit quality indicators for residential real estate and consumer loans is the individual loans past due aging
Accruing Interest and Past Due: 30-89 Days	525	2
Accruing Interest and Pass Due: 90 Days or More		99
Nonaccrual	642	604
Total Past Due and Nonaccrual	1,167	705
Current	80,055	73,940
Total	81,222	74,645
Residential real estate senior liens [Member]
Credit quality indicators for residential real estate and consumer loans is the individual loans past due aging
Accruing Interest and Past Due: 30-89 Days	2,463	3,004
Accruing Interest and Pass Due: 90 Days or More	346	124
Nonaccrual	876	1,292
Total Past Due and Nonaccrual	3,685	4,420
Current	212,392	213,181
Total	216,077	217,601
Residential real estate junior liens [Member]
Credit quality indicators for residential real estate and consumer loans is the individual loans past due aging
Accruing Interest and Past Due: 30-89 Days	239	235
Accruing Interest and Pass Due: 90 Days or More	33	40
Nonaccrual	65	94
Total Past Due and Nonaccrual	337	369
Current	18,293	20,877
Total	18,630	21,246
Residential real estate home equity lines of credit [Member]
Credit quality indicators for residential real estate and consumer loans is the individual loans past due aging
Accruing Interest and Past Due: 30-89 Days	284	185
Accruing Interest and Pass Due: 90 Days or More		125
Nonaccrual	190	198
Total Past Due and Nonaccrual	474	508
Current	38,821	39,005
Total	39,295	39,513
Total residential real estate [Member]
Credit quality indicators for residential real estate and consumer loans is the individual loans past due aging
Accruing Interest and Past Due: 30-89 Days	2,986	3,424
Accruing Interest and Pass Due: 90 Days or More	379	289
Nonaccrual	1,131	1,584
Total Past Due and Nonaccrual	4,496	5,297
Current	269,506	273,063
Total	274,002	278,360
Consumer secured [Member]
Credit quality indicators for residential real estate and consumer loans is the individual loans past due aging
Accruing Interest and Past Due: 30-89 Days	145	158
Accruing Interest and Pass Due: 90 Days or More	1	5
Nonaccrual
Total Past Due and Nonaccrual	146	163
Current	26,290	26,011
Total	26,436	26,174
Consumer unsecured [Member]
Credit quality indicators for residential real estate and consumer loans is the individual loans past due aging
Accruing Interest and Past Due: 30-89 Days	33	23
Accruing Interest and Pass Due: 90 Days or More
Nonaccrual
Total Past Due and Nonaccrual	33	23
Current	4,888	5,375
Total	4,921	5,398
Total consumer [Member]
Credit quality indicators for residential real estate and consumer loans is the individual loans past due aging
Accruing Interest and Past Due: 30-89 Days	178	181
Accruing Interest and Pass Due: 90 Days or More	1	5
Nonaccrual
Total Past Due and Nonaccrual	179	186
Current	31,178	31,386
Total	$ 31,357	$ 31,572

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Computation of Earnings Per Share (Details) (USD $) In Thousands, except Share data, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011
Computation of earnings per common share
Average number of common shares outstanding for basic calculation	7,592,668	7,570,752	7,593,462	7,564,060
Average potential effect of shares in the Directors Plan	203,603	194,964	201,743	194,051
Average number of common shares outstanding used to calculate diluted earnings per common share	7,796,271	7,765,716	7,795,205	7,758,111
Net income	$ 3,004	$ 2,672	$ 6,238	$ 4,988
Earnings per share
Basic	$ 0.40	$ 0.35	$ 0.82	$ 0.66
Diluted	$ 0.39	$ 0.34	$ 0.80	$ 0.64

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Borrowed Funds (Details Textual) (USD $) In Thousands, unless otherwise specified	3 Months Ended			6 Months Ended
	Mar. 31, 2012	Jun. 30, 2012	Dec. 31, 2011	Jun. 30, 2012 Without stated maturity dates [Member] Maximum [Member]	Jun. 30, 2012 Without stated maturity dates [Member] Minimum [Member]
Borrowed Funds (Textual) [Abstract]
Maturity of securities sold under agreements to repurchase without stated maturity dates				4 days	1 day
Borrowed Funds (Additional Textual) [Abstract]
Additional borrowing capacity		$ 100,781
FHLB advances	60,000
Carrying value of securities sold under agreements to repurchase		120,878
Fair value of securities sold under agreements to repurchase			$ 99,869

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Fair Value (Details Textual) (USD $) In Thousands, unless otherwise specified	6 Months Ended	12 Months Ended
	Jun. 30, 2012	Dec. 31, 2011
Fair Value (Textual) [Abstract]
Maturity dates of Interest bearing balances	3 years
Maturity dates of borrowed funds	90 days
Level 3 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impairments recorded on goodwill and other acquisition intangibles	$ 0	$ 0
Impairments recorded on equity securities without readily determinable fair values	$ 0	$ 0

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Available-For-Sale Securities (Tables)

6 Months Ended

Jun. 30, 2012

Available-For-Sale Securities [Abstract]

Amortized cost and fair value of available-for-sale securities

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

	June 30, 2012
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Government sponsored enterprises	$	2,197	$	34	$	—	$	2,231
States and political subdivisions		170,958		8,243		547		178,654
Auction rate money market preferred		3,200		—		626		2,574
Preferred stocks		6,800		—		873		5,927
Mortgage-backed securities		161,521		2,991		15		164,497
Collateralized mortgage obligations		120,255		2,844		47		123,052
Total	$	464,931	$	14,112	$	2,108	$	476,935
	December 31, 2011
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Government sponsored enterprises	$	395	$	2	$	—	$	397
States and political subdivisions		166,832		8,157		51		174,938
Auction rate money market preferred		3,200		—		1,151		2,049
Preferred stocks		6,800		—		1,767		5,033
Mortgage-backed securities		140,842		2,807		47		143,602
Collateralized mortgage obligations		96,545		2,556		—		99,101
Total	$	414,614	$	13,522	$	3,016	$	425,120

Amortized cost and fair value of available-for-sale securities by contractual maturity

The amortized cost and fair value of AFS securities by contractual maturity at June 30, 2012 are as follows:

	Maturing								Securities With Variable Monthly Payments or Continual Call Dates		Total
	Due in One Year or Less		After One Year But Within Five Years		After Five Years But Within Ten Years		After Ten Years
Government sponsored enterprises	$	—	$	—	$	72	$	2,125	$	—	$	2,197
States and political subdivisions		7,573		34,073		85,055		44,257		—		170,958
Auction rate money market preferred		—		—		—		—		3,200		3,200
Preferred stocks		—		—		—		—		6,800		6,800
Mortgage-backed securities		—		—		—		—		161,521		161,521
Collateralized mortgage obligations		—		—		—		—		120,255		120,255
Total amortized cost	$	7,573	$	34,073	$	85,127	$	46,382	$	291,776	$	464,931
Fair value	$	7,589	$	35,243	$	90,845	$	47,208	$	296,050	$	476,935

Summary of the activity related to sales of available-for-sale securities

A summary of the activity related to sales of AFS securities was as follows for the six month period ended June 30, 2012:

Proceeds from sales of securities	$	24,241
Gross realized gains	$	1,003
Applicable income tax expense	$	341

Available-for-sale securities with gross unrealized losses

Information pertaining to AFS securities with gross unrealized losses at June 30, 2012 and December 31, 2011 aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows:

	June 30, 2012
	Less Than Twelve Months				Over Twelve Months				Total Unrealized Losses
	Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value
States and political subdivisions	$	55	$	6,768	$	492	$	2,482	$	547
Auction rate money market preferred		—		—		626		2,574		626
Preferred stocks		—		—		873		5,927		873
Mortgage-backed securities		15		15,283		—		—		15
Collateralized mortgage obligations		47		4,686		—		—		47
Total	$	117	$	26,737	$	1,991	$	10,983	$	2,108
Number of securities in an unrealized loss position:				24				8		32
	December 31, 2011
	Less Than Twelve Months				Over Twelve Months
	Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Total Unrealized Losses
States and political subdivisions	$	51	$	1,410	$	—	$	—	$	51
Auction rate money market preferred		—		—		1,151		2,049		1,151
Preferred stocks		—		—		1,767		5,033		1,767
Mortgage-backed securities		47		24,291		—		—		47
Total	$	98	$	25,701	$	2,918	$	7,082	$	3,016
Number of securities in an unrealized loss position:				6				6		12

Key valuation assumptions

A summary of key valuation assumptions used in the aforementioned analysis as of March 31, 2012, follows:

	Discounted Cash Flow Method
Ratings
Fitch	Not Rated
Moody’s	Caa3
S&P	A
Seniority	Senior
Discount rate	LIBOR + 6.35%
	Credit Yield Analysis Method
Credit discount rate	LIBOR + 4.00%
Average observed discounts based on closed transactions	14.00%

Impairment recognized in earnings on available-for-sale securities

A rollforward of credit related impairment recognized in earnings on available-for-sale securities in the three and six months ended June 30, 2012 was as follows:

	Three Months Ended June 30, 2012		Six Months Ended June 30, 2012
Balance at beginning of period	$	282	$	—
Additions to credit losses for which no previous OTTI was recognized		—		282
June 30, 2012	$	282	$	282

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Loans and Allowance for Loan Losses (Details 7) (USD $) In Thousands, unless otherwise specified	Mar. 31, 2012	Dec. 31, 2011
Summary of TDR loan balance
Troubled debt restructurings	$ 22,543	$ 18,756

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Available-For-Sale Securities (Details Textual) (USD $) In Thousands, unless otherwise specified	3 Months Ended	6 Months Ended		12 Months Ended
	Mar. 31, 2012	Jun. 30, 2012	Jun. 30, 2011	Dec. 31, 2011
Available-For-Sale Securities (Textual) [Abstract]
Proceeds from sales of securities		$ 24,241	$ 0
Other than Temporary Impairment Losses, Investments, Portion Recognized in Earnings, Net, Available-for-sale Securities	282
Credit losses recognized on available-for-sale securities				$ 0

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Available-For-Sale Securities (Details 1) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2012
Amortized cost and fair value of available-for-sale securities by contractual maturity
Maturing, Due in One Year or Less	$ 7,573
Maturing, After One Year But Within Five Years	34,073
Maturing, After Five Years But Within Ten Years	85,127
Maturing, After Ten Years	46,382
Securities With Variable Monthly Payments or Continual Call Dates	291,776
Total available-for-sale securities	464,931
Maturing, Due in One Year or Less, Fair value	7,589
Maturing, After One Year But Within Five Years, Fair value	35,243
Maturing, After Five Years But Within Ten Years, Fair value	90,845
Maturing, After Ten Years, Fair value	47,208
Securities With Variable Monthly Payments or Continual Call Dates, Fair value	296,050
Total, Fair value	476,935
Auction rate money market preferred [Member]
Amortized cost and fair value of available-for-sale securities by contractual maturity
Maturing, Due in One Year or Less
Maturing, After One Year But Within Five Years
Maturing, After Five Years But Within Ten Years
Maturing, After Ten Years
Securities With Variable Monthly Payments or Continual Call Dates	3,200
Total available-for-sale securities	3,200
Collateralized mortgage obligations [Member]
Amortized cost and fair value of available-for-sale securities by contractual maturity
Maturing, Due in One Year or Less
Maturing, After One Year But Within Five Years
Maturing, After Five Years But Within Ten Years
Maturing, After Ten Years
Securities With Variable Monthly Payments or Continual Call Dates	120,255
Total available-for-sale securities	120,255
Government sponsored enterprises [Member]
Amortized cost and fair value of available-for-sale securities by contractual maturity
Maturing, Due in One Year or Less
Maturing, After One Year But Within Five Years
Maturing, After Five Years But Within Ten Years	72
Maturing, After Ten Years	2,125
Securities With Variable Monthly Payments or Continual Call Dates
Total available-for-sale securities	2,197
States and political subdivisions [Member]
Amortized cost and fair value of available-for-sale securities by contractual maturity
Maturing, Due in One Year or Less	7,573
Maturing, After One Year But Within Five Years	34,073
Maturing, After Five Years But Within Ten Years	85,055
Maturing, After Ten Years	44,257
Securities With Variable Monthly Payments or Continual Call Dates
Total available-for-sale securities	170,958
Preferred stocks [Member]
Amortized cost and fair value of available-for-sale securities by contractual maturity
Maturing, Due in One Year or Less
Maturing, After One Year But Within Five Years
Maturing, After Five Years But Within Ten Years
Maturing, After Ten Years
Securities With Variable Monthly Payments or Continual Call Dates	6,800
Total available-for-sale securities	6,800
Mortgage-backed securities [Member]
Amortized cost and fair value of available-for-sale securities by contractual maturity
Maturing, Due in One Year or Less
Maturing, After One Year But Within Five Years
Maturing, After Five Years But Within Ten Years
Maturing, After Ten Years
Securities With Variable Monthly Payments or Continual Call Dates	161,521
Total available-for-sale securities	$ 161,521

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Equity Securities Without Readily Determinable Fair Values (Details) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2012	Dec. 31, 2011
Schedule of equity securities without fair values
Federal Home Loan Bank Stock	$ 7,700	$ 7,380
Federal Reserve Bank Stock	1,879	1,879
Other	319	319
Total	17,708	17,189
Investment in Corporate Settlement Solutions [Member]
Schedule of equity securities without fair values
Equity method investments	6,810	6,611
Investment in Valley Financial Corporation [Member]
Schedule of equity securities without fair values
Equity method investments	$ 1,000	$ 1,000

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Fair Value (Details 3) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011
Activity in borrowings which the Corporation has elected to carry at fair value
Borrowings carried at fair value - beginning of year		$ 10,343	$ 5,242	$ 10,423
Paydowns and maturities			(5,209)
Net unrealized change in fair value		(37)	(33)	(117)
Borrowings carried at fair value - June 30		10,306		10,306
Unpaid principal balance - June 30		$ 10,000		$ 10,000

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Federal Income Taxes (Details Textual)	6 Months Ended
	Jun. 30, 2012
Federal Income Taxes (Textual) [Abstract]
Federal statutory tax rate	34.00%

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Loans and Allowance for Loan Losses (Details 4) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011	Dec. 31, 2011
Information Pertaining to Impaired Loans
Impaired loans with a valuation allowance, Outstanding Balance	$ 17,176		$ 17,176		$ 15,903
Impaired loans without a valuation allowance, Outstanding Balance	9,380		9,380		9,347
Impaired loans, Outstanding Balance	26,556		26,556		25,250
Impaired loans with a valuation allowance, Unpaid Principal Balance	18,743		18,743		17,652
Impaired loans without a valuation allowance, Unpaid Principal Balance	10,536		10,536		12,457
Impaired loans, Unpaid Principal Balance	29,279		29,279		30,109
Impaired loans with a valuation allowance, Valuation Allowance	3,556		3,556		4,120
Impaired loans, Valuation Allowance	3,556		3,556		4,120
Impaired loans with a valuation allowance, Average Outstanding Balance	17,455	9,510	17,137	10,306
Impaired loans without a valuation allowance, Average Outstanding Balance	10,203	7,070	10,195	5,094
Impaired loans, Average Outstanding Balance	27,658	16,580	27,332	15,400
Impaired loans with a valuation allowance, Interest Income Recognized	229	178	461	272
Impaired loans without a valuation allowance, Interest Income Recognized	154	131	262	231
Impaired loans, Interest Income Recognized	383	309	723	503
Commercial real estate [Member]
Information Pertaining to Impaired Loans
Impaired loans with a valuation allowance, Outstanding Balance	6,128		6,128		5,014
Impaired loans without a valuation allowance, Outstanding Balance	5,946		5,946		7,984
Impaired loans with a valuation allowance, Unpaid Principal Balance	6,408		6,408		5,142
Impaired loans without a valuation allowance, Unpaid Principal Balance	6,628		6,628		10,570
Impaired loans with a valuation allowance, Valuation Allowance	1,893		1,893		1,881
Impaired loans with a valuation allowance, Average Outstanding Balance	6,444	2,570	6,165	3,490
Impaired loans without a valuation allowance, Average Outstanding Balance	6,789	4,085	7,299	3,151
Impaired loans with a valuation allowance, Interest Income Recognized	83	96	181	120
Impaired loans without a valuation allowance, Interest Income Recognized	112	69	179	102
Commercial other [Member]
Information Pertaining to Impaired Loans
Impaired loans with a valuation allowance, Outstanding Balance	944		944		734
Impaired loans without a valuation allowance, Outstanding Balance	2,253		2,253		365
Impaired loans with a valuation allowance, Unpaid Principal Balance	944		944		734
Impaired loans without a valuation allowance, Unpaid Principal Balance	2,294		2,294		460
Impaired loans with a valuation allowance, Valuation Allowance	222		222		271
Impaired loans with a valuation allowance, Average Outstanding Balance	829		777	9
Impaired loans without a valuation allowance, Average Outstanding Balance	2,249	1,780	1,777	968
Impaired loans with a valuation allowance, Interest Income Recognized	16		28
Impaired loans without a valuation allowance, Interest Income Recognized	34	28	65	88
Commercial [Member]
Information Pertaining to Impaired Loans
Impaired loans, Outstanding Balance	15,271		15,271		14,097
Impaired loans, Unpaid Principal Balance	16,274		16,274		16,906
Impaired loans, Valuation Allowance	2,115		2,115		2,152
Impaired loans, Average Outstanding Balance	16,311	8,435	16,018	7,618
Impaired loans, Interest Income Recognized	245	193	453	310
Agricultural real estate [Member]
Information Pertaining to Impaired Loans
Impaired loans without a valuation allowance, Outstanding Balance	357		357		190
Impaired loans without a valuation allowance, Unpaid Principal Balance	357		357		190
Impaired loans with a valuation allowance, Average Outstanding Balance
Impaired loans without a valuation allowance, Average Outstanding Balance	274	190	232	95
Impaired loans with a valuation allowance, Interest Income Recognized
Impaired loans without a valuation allowance, Interest Income Recognized				(1)
Agricultural other [Member]
Information Pertaining to Impaired Loans
Impaired loans with a valuation allowance, Outstanding Balance	2,046		2,046		2,689
Impaired loans without a valuation allowance, Outstanding Balance	552		552		505
Impaired loans with a valuation allowance, Unpaid Principal Balance	2,046		2,046		2,689
Impaired loans without a valuation allowance, Unpaid Principal Balance	672		672		625
Impaired loans with a valuation allowance, Valuation Allowance	133		133		822
Impaired loans with a valuation allowance, Average Outstanding Balance	2,145	1,776	2,306	1,776
Impaired loans without a valuation allowance, Average Outstanding Balance	607	641	595	641
Impaired loans with a valuation allowance, Interest Income Recognized	36	9	73	42
Impaired loans without a valuation allowance, Interest Income Recognized	3	39	7	39
Agricultural [Member]
Information Pertaining to Impaired Loans
Impaired loans, Outstanding Balance	2,955		2,955		3,384
Impaired loans, Unpaid Principal Balance	3,075		3,075		3,504
Impaired loans, Valuation Allowance	133		133		822
Impaired loans, Average Outstanding Balance	3,026	2,607	3,133	2,512
Impaired loans, Interest Income Recognized	39	48	80	80
Residential real estate senior liens [Member]
Information Pertaining to Impaired Loans
Impaired loans with a valuation allowance, Outstanding Balance	7,894		7,894		7,271
Impaired loans with a valuation allowance, Unpaid Principal Balance	9,077		9,077		8,827
Impaired loans with a valuation allowance, Valuation Allowance	1,278		1,278		1,111
Impaired loans with a valuation allowance, Average Outstanding Balance	7,862	4,980	7,706	4,845
Impaired loans without a valuation allowance, Average Outstanding Balance		337		201
Impaired loans with a valuation allowance, Interest Income Recognized	92	70	175	106
Impaired loans without a valuation allowance, Interest Income Recognized		(6)
Residential real estate junior liens [Member]
Information Pertaining to Impaired Loans
Impaired loans with a valuation allowance, Outstanding Balance	164		164		195
Impaired loans with a valuation allowance, Unpaid Principal Balance	268		268		260
Impaired loans with a valuation allowance, Valuation Allowance	30		30		35
Impaired loans with a valuation allowance, Average Outstanding Balance	175	184	183	186
Impaired loans with a valuation allowance, Interest Income Recognized	2	3	4	4
Home equity lines of credit [Member]
Information Pertaining to Impaired Loans
Impaired loans without a valuation allowance, Outstanding Balance	190		190		198
Impaired loans without a valuation allowance, Unpaid Principal Balance	490		490		498
Impaired loans without a valuation allowance, Average Outstanding Balance	195	1	197
Impaired loans without a valuation allowance, Interest Income Recognized	4		8
Residential Real Estate [Member]
Information Pertaining to Impaired Loans
Impaired loans, Outstanding Balance	8,248		8,248		7,664
Impaired loans, Unpaid Principal Balance	9,835		9,835		9,585
Impaired loans, Valuation Allowance	1,308		1,308		1,146
Impaired loans, Average Outstanding Balance	8,232	5,502	8,086	5,232
Impaired loans, Interest Income Recognized	98	67	187	110
Consumer secured [Member]
Information Pertaining to Impaired Loans
Impaired loans without a valuation allowance, Outstanding Balance	82		82		105
Impaired loans, Outstanding Balance	82		82		105
Impaired loans without a valuation allowance, Unpaid Principal Balance	95		95		114
Impaired loans, Unpaid Principal Balance	95		95		114
Impaired loans, Valuation Allowance
Impaired loans without a valuation allowance, Average Outstanding Balance	89	36	95	38
Impaired loans without a valuation allowance, Interest Income Recognized	1	1	3	3
Consumer [Member]
Information Pertaining to Impaired Loans
Impaired loans, Average Outstanding Balance	89	36	95	38
Impaired loans, Interest Income Recognized	$ 1	$ 1	$ 3	$ 3

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Basis of Presentation

6 Months Ended

Jun. 30, 2012

Basis of Presentation [Abstract]

BASIS OF PRESENTATION

NOTE 1 – BASIS OF PRESENTATION

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

The acronyms and abbreviations identified below are used in the Notes to Interim Condensed Consolidated Financial Statements as well as in the Management’s Discussion and Analysis of Financial Condition and Results of Operations. You may find it helpful to refer back to this page as you read this report.

AFS: Available-for-sale	IFRS: International Financial Reporting Standards
ALLL: Allowance for loan and lease losses	IRR: Interest Rate Risk
ASC: FASB Accounting Standards Codification	JOBS Act: Jumpstart our Business Startups Act
ASU: FASB Accounting Standards Update	LIBOR: London Interbank Offered Rate
ATM: Automated Teller Machine	Moody’s: Moody’s Investors Service, Inc
Directors Plan: Isabella Bank Corporation and Related Companies Deferred Compensation Plan for Directors	N/A: Not applicable N/M: Not meaningful
Dodd-Frank Act: Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010	OCI: Other comprehensive income (loss) OMSR: Originated mortgage servicing rights
FASB: Financial Accounting Standards Board	OTTI: Other-than-temporary impairment
FDIC: Federal Deposit Insurance Corporation	PBO: Projected Benefit Obligation
FFIEC: Federal Financial Institutions Council FRB: Board of Governors of the Federal Reserve System	Rabbi Trust: A trust established to fund     the Directors Plan SEC: U.S. Securities & Exchange Commission
FHLB: Federal Home Loan Bank	SOX: Sarbanes-Oxley Act of 2002
Freddie Mac: Federal Home Loan Mortgage Corporation	TDR: Troubled debt restructuring
FTE: Fully taxable equivalent	XBRL: eXtensible Business Reporting Language
GAAP: U.S. generally accepted accounting principles

The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with GAAP for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In our opinion, all adjustments considered necessary for a fair presentation have been included. Operating results for the three and six month periods ended June 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012. For further information, refer to the consolidated financial statements and footnotes thereto included in our annual report for the year ended December 31, 2011.

The accounting policies are materially the same as those discussed in Note 1 to the Consolidated Financial Statements included in our annual report for the year ended December 31, 2011.

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Defined Benefit Pension Plan (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011
Components of net periodic benefit cost
Interest cost on projected benefit obligation	$ 117	$ 127	$ 235	$ 254
Expected return on plan assets	(127)	(130)	(254)	(261)
Amortization of unrecognized actuarial net loss	73	39	146	77
Net periodic benefit cost	$ 63	$ 36	$ 127	$ 70

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Loans and Allowance for Loan Losses (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011
Summary of changes in the ALLL and the recorded investment
Allowance for loan losses, Beginning Balance	$ 12,375	$ 12,381	$ 12,375	$ 12,373
Allowance for loan losses, Loans charged off	(621)	(909)	(1,276)	(2,032)
Allowance for loan losses, Recoveries	125	303	319	617
Allowance for loan losses, Provision for loan losses	439	603	900	1,420
Allowance for loan losses, Ending Balance	12,318	12,378	12,318	12,378
Commercial [Member]
Summary of changes in the ALLL and the recorded investment
Allowance for loan losses, Beginning Balance	5,728	6,246	6,284	6,048
Allowance for loan losses, Loans charged off	(237)	(214)	(686)	(869)
Allowance for loan losses, Recoveries	42	209	128	346
Allowance for loan losses, Provision for loan losses	475	497	282	1,213
Allowance for loan losses, Ending Balance	6,008	6,738	6,008	6,738
Agricultural [Member]
Summary of changes in the ALLL and the recorded investment
Allowance for loan losses, Beginning Balance	859	776	1,003	1,033
Allowance for loan losses, Loans charged off		(1)		(1)
Allowance for loan losses, Recoveries
Allowance for loan losses, Provision for loan losses	(426)	(11)	(570)	(268)
Allowance for loan losses, Ending Balance	433	764	433	764
Residential Real Estate [Member]
Summary of changes in the ALLL and the recorded investment
Allowance for loan losses, Beginning Balance	3,702	3,422	2,980	3,198
Allowance for loan losses, Loans charged off	(238)	(555)	(353)	(878)
Allowance for loan losses, Recoveries	20	29	61	103
Allowance for loan losses, Provision for loan losses	185	(11)	981	462
Allowance for loan losses, Ending Balance	3,669	2,885	3,669	2,885
Consumer [Member]
Summary of changes in the ALLL and the recorded investment
Allowance for loan losses, Beginning Balance	625	622	633	605
Allowance for loan losses, Loans charged off	(146)	(139)	(237)	(284)
Allowance for loan losses, Recoveries	63	65	130	168
Allowance for loan losses, Provision for loan losses	125	112	141	171
Allowance for loan losses, Ending Balance	667	660	667	660
Unallocated [Member]
Summary of changes in the ALLL and the recorded investment
Allowance for loan losses, Beginning Balance	1,461	1,315	1,475	1,489
Allowance for loan losses, Loans charged off
Allowance for loan losses, Recoveries
Allowance for loan losses, Provision for loan losses	80	16	66	(158)
Allowance for loan losses, Ending Balance	$ 1,541	$ 1,331	$ 1,541	$ 1,331

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Other Noninterest Expenses (Tables)

6 Months Ended

Jun. 30, 2012

Other Noninterest Expenses [Abstract]

Summary of expenses included in other noninterest expenses

A summary of expenses included in other noninterest expenses are as follows for the three month and six month periods ended:

	Three Months Ended June  30					Six Months Ended June  30
	2012			2011		2012		2011
Marketing and donations	$	535		$	527	$	1,029	$	750
FDIC insurance premiums		213			331		428		665
Directors fees		209			206		419		417
Audit fees		154			167		330		323
Education and travel		139			99		266		204
Consulting fees		71			67		258		100
Printing and supplies		110			89		219		189
Postage and freight		94			96		195		196
Foreclosed asset and collection		(18	)		177		79		277
Amortization of deposit premium		67			76		133		152
Legal fees		81			54		143		116
Other Losses		107			10		137		11
All other		425			394		810		723
Total	$	2,187		$	2,293	$	4,446	$	4,123

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Borrowed Funds (Tables)

6 Months Ended

Jun. 30, 2012

Borrowed Funds [Abstract]

Summary of borrowed funds

Borrowed funds consist of the following obligations as of:

	June 30, 2012					December 31, 2011
	Amount		Rate			Amount		Rate
Federal Home Loan Bank advances	$	154,000		2.18	%	$	142,242		3.16	%
Securities sold under agreements to repurchase without stated maturity dates		53,824		0.20	%		57,198		0.25	%
Securities sold under agreements to repurchase with stated maturity dates		16,708		3.51	%		16,696		3.51	%
Federal funds purchased		9,600		0.50	%		—		—
Total	$	234,132		1.75	%	$	216,136		2.42	%

Schedule of maturity and weighted average interest rates of FHLB advances

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

	June 30					December 31
	2012					2011
	Amount		Rate			Amount		Rate
Fixed rate advances due 2012	$	2,000		4.90	%	$	17,000		2.97	%
One year putable fixed rate advances due 2012		5,000		3.48	%		15,000		4.10	%
Variable rate advances due 2012		5,000		0.50	%		—		—
Fixed rate advances due 2013		—		—			5,242		4.14	%
One year putable fixed rate advances due 2013		—		—			5,000		3.15	%
Fixed rate advances due 2014		—		—			25,000		3.16	%
Fixed rate advances due 2015		42,000		1.12	%		45,000		3.30	%
Fixed rate advances due 2016		10,000		2.15	%		10,000		2.15	%
Fixed rate advances due 2017		40,000		2.15	%		20,000		2.56	%
Fixed rate advances due 2018		20,000		2.86	%		—		—
Fixed rate advances due 2019		20,000		3.73	%		—		—
Fixed rate advances due 2020		10,000		1.98	%		—		—
Total	$	154,000		2.18	%	$	142,242		3.16	%

Summary of short term borrowings

The following table provides a summary of short term borrowings for the three and six month periods ended June 30:

	Three Months Ended June 30
	2012							2011
	Maximum Month-End Balance		Quarter to Date Average Balance		Weighted Average Interest Rate During the Period			Maximum Month- End Balance		Quarter to Date Average Balance		Weighted Average Interest Rate During the Period
Securities sold under agreements to repurchase without stated maturity dates	$	58,584	$	58,045		0.20	%	$	43,138	$	44,680		0.25	%
Federal funds purchased		17,900		7,025		0.47	%		18,300		4,539		0.54	%

	Six Months Ended June 30
	2012							2011
	Maximum Month-End Balance		YTD Average Balance		Weighted Average Interest Rate During the Period			Maximum Month- End Balance		YTD Average Balance		Weighted Average Interest Rate During the Period
Securities sold under agreements to repurchase without stated maturity dates	$	58,584	$	55,436		0.11	%	$	43,138	$	40,715		0.25	%
Federal funds purchased		17,900		3,552		0.23	%		18,300		2,906		0.53	%

Summary of pledged certificates of deposit

We had pledged certificates of deposit held in other financial institutions, trading securities, available-for-sale securities, and 1-4 family residential real estate loans in the following amounts at:

	June 30 2012		December 31 2011
Pledged to secure borrowed funds	$	316,349	$	292,092
Pledged to secure repurchase agreements		120,878		99,869
Pledged for public deposits and for other purposes necessary or required by law		24,177		26,761
Total	$	461,404	$	418,722

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Borrowed Funds (Details 3) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2012	Dec. 31, 2011
Summary of pledged certificates of deposit
Pledged to secure borrowed funds	$ 316,349	$ 292,092
Pledged to secure repurchase agreements	120,878	99,869
Pledged for public deposits and for other purposes necessary or required by law	24,177	26,761
Total	$ 461,404	$ 418,722

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Loans and Allowance for Loan Losses (Details 1) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2012	Dec. 31, 2011
Allowance for loan losses [Member]
Allowance for Loan Losses and Recorded Investment in Loans
Individual evaluated for impairment	$ 3,556	$ 4,120
Collectively evaluated for impairment	8,762	8,255
Total	12,318	12,375
Loans [Member]
Allowance for Loan Losses and Recorded Investment in Loans
Individual evaluated for impairment	26,556	25,250
Collectively evaluated for impairment	728,396	725,041
Total	754,952	750,291
Commercial [Member] | Allowance for loan losses [Member]
Allowance for Loan Losses and Recorded Investment in Loans
Individual evaluated for impairment	2,115	2,152
Collectively evaluated for impairment	3,893	4,132
Total	6,008	6,284
Commercial [Member] | Loans [Member]
Allowance for Loan Losses and Recorded Investment in Loans
Individual evaluated for impairment	15,271	14,097
Collectively evaluated for impairment	353,100	351,617
Total	368,371	365,714
Agricultural [Member] | Allowance for loan losses [Member]
Allowance for Loan Losses and Recorded Investment in Loans
Individual evaluated for impairment	133	822
Collectively evaluated for impairment	300	181
Total	433	1,003
Agricultural [Member] | Loans [Member]
Allowance for Loan Losses and Recorded Investment in Loans
Individual evaluated for impairment	2,955	3,384
Collectively evaluated for impairment	78,267	71,261
Total	81,222	74,645
Residential Real Estate [Member] | Allowance for loan losses [Member]
Allowance for Loan Losses and Recorded Investment in Loans
Individual evaluated for impairment	1,308	1,146
Collectively evaluated for impairment	2,361	1,834
Total	3,669	2,980
Residential Real Estate [Member] | Loans [Member]
Allowance for Loan Losses and Recorded Investment in Loans
Individual evaluated for impairment	8,248	7,664
Collectively evaluated for impairment	265,754	270,696
Total	274,002	278,360
Consumer [Member] | Allowance for loan losses [Member]
Allowance for Loan Losses and Recorded Investment in Loans
Individual evaluated for impairment
Collectively evaluated for impairment	667	633
Total	667	633
Consumer [Member] | Loans [Member]
Allowance for Loan Losses and Recorded Investment in Loans
Individual evaluated for impairment	82	105
Collectively evaluated for impairment	31,275	31,467
Total	31,357	31,572
Unallocated [Member] | Allowance for loan losses [Member]
Allowance for Loan Losses and Recorded Investment in Loans
Individual evaluated for impairment
Collectively evaluated for impairment	1,541	1,475
Total	$ 1,541	$ 1,475

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Federal Income Taxes (Tables)

6 Months Ended

Jun. 30, 2012

Federal Income Taxes [Abstract]

Summary of federal income tax expense

The reconciliation of the provision for federal income taxes and the amount computed at the federal statutory tax rate of 34% of income before federal income tax expense is as follows for the three and six month periods ended June 30:

	Three Months Ended June 30						Six Months Ended June 30
	2012			2011			2012			2011
Income taxes at 34% statutory rate	$	1,250		$	1,076			2,612		$	2,004
Effect of nontaxable income
Interest income on tax exempt municipal bonds		(388	)		(385	)		(779	)		(768	)
Earnings on corporate owned life insurance		(60	)		(50	)		(118	)		(98	)
Other		(141	)		(162	)		(292	)		(256	)
Total effect of nontaxable income		(589	)		(597	)		(1,189	)		(1,122	)
Effect of nondeductible expenses		11			13			22			23
Federal income tax expense	$	672		$	492		$	1,445		$	905

Summary of other comprehensive income (loss)

A summary of OCI follows for the three and six month periods ended June 30:

	Three Months Ended
	June 30, 2012									June 30, 2011
	Auction									Auction
	Rate									Rate
	Money									Money
	Market									Market
	Preferreds			All						Preferreds		All
	and			Other						and		Other
	Preferred Stocks			AFS Securities			Total			Preferred Stocks		AFS Securities			Total
Unrealized (losses) gains arising during the period	$	(185	)	$	1,605		$	1,420		$	8	$	3,568		$	3,576
Tax effect		—			(546	)		(546	)		—		(1,212	)		(1,212	)
Other comprehensive (loss) income, net of tax	$	(185	)	$	1,059		$	874		$	8	$	2,356		$	2,364

	Six Months Ended
	June 30, 2012								June 30, 2011
	Auction								Auction
	Rate								Rate
	Money								Money
	Market								Market
	Preferreds		All						Preferreds		All
	and		Other						and		Other
	Preferred Stocks		AFS Securities			Total			Preferred Stocks		AFS Securities			Total
Unrealized gains arising during the period	$	1,419	$	800		$	2,219		$	603	$	4,726		$	5,329
Reclassification adjustment for net realized gains included in net income		—		(1,003	)		(1,003	)		—		—			—
Reclassification adjustment for impairment loss included in net income		—		282			282			—		—			—
Net unrealized gains		1,419		79			1,498			603		4,726			5,329
Tax effect		—		(27	)		(27	)		—		(1,607	)		(1,607	)
Other comprehensive income, net of tax	$	1,419	$	52		$	1,471		$	603	$	3,119		$	3,722

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Defined Benefit Pension Plan (Tables)

6 Months Ended

Jun. 30, 2012

Defined Benefit Pension Plan [Abstract]

Components of net periodic benefit cost

Following are the components of net periodic benefit cost for the three and six month periods ended June 30:

	Three Months Ended						Six Months Ended
	June 30						June 30
	2012			2011			2012			2011
Interest cost on PBO	$	117		$	127		$	235		$	254
Expected return on plan assets		(127	)		(130	)		(254	)		(261	)
Amortization of unrecognized actuarial net loss		73			39			146			77
Net periodic benefit cost	$	63		$	36		$	127		$	70

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Interim Condensed Consolidated Statements of Cash Flows (USD $) In Thousands, unless otherwise specified	6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011
OPERATING ACTIVITIES
Net income	$ 6,238	$ 4,988
Reconciliation of net income to net cash provided by operations:
Provision for loan losses	900	1,420
Impairment of foreclosed assets	17	35
Depreciation	1,195	1,282
Amortization and impairment of originated mortgage servicing rights	287	193
Amortization of acquisition intangibles	133	152
Net amortization of available-for-sale securities	1,076	693
Available-for-sale security impairment loss	282
Gain on sale of available-for-sale securities	(1,003)
Net unrealized losses on trading securities	32	27
Net gain on sale of mortgage loans	(658)	(182)
Net unrealized gains on borrowings measured at fair value	(33)	(117)
Increase in cash value of corporate owned life insurance	(348)	(287)
Share-based payment awards under equity compensation plan	295	307
Origination of loans held for sale	(46,386)	(17,247)
Proceeds from loan sales	47,902	17,847
Net changes in operating assets and liabilities which provided (used) cash:
Trading securities	2,680	900
Accrued interest receivable	631	(123)
Other assets	(1,132)	653
Accrued interest payable and other liabilities	(161)	684
Net cash provided by operating activities	11,947	11,225
INVESTING ACTIVITIES
Net change in certificates of deposit held in other financial institutions	2,044	4,934
Activity in available-for-sale securities
Sales	24,241
Maturities and calls	37,922	33,799
Purchases	(112,835)	(78,664)
Loan principal originations, net	(6,768)	(13,462)
Proceeds from sales of foreclosed assets	647	859
Purchases of premises and equipment	(1,298)	(884)
Net cash used in investing activities	(56,047)	(53,418)
FINANCING ACTIVITIES
Acceptances and withdrawals of deposits, net	20,664	46,860
Increase in other borrowed funds	18,029	1,680
Cash dividends paid on common stock	(3,034)	(2,881)
Proceeds from issuance of common stock	1,322	1,092
Common stock repurchased	(995)	(648)
Common stock purchased for deferred compensation obligations	(225)	(227)
Net cash provided by financing activities	35,761	45,876
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS	(8,339)	3,683
Cash and cash equivalents at beginning of period	28,590	18,109
CASH AND CASH EQUIVALENTS AT END OF PERIOD	20,251	21,792
SUPPLEMENTAL CASH FLOWS INFORMATION:
Interest paid	7,291	8,156
Federal income taxes paid	836	365
SUPPLEMENTAL NONCASH INFORMATION:
Transfers of loans to foreclosed assets	1,150	1,057
Common stock issued for deferred compensation obligations		12
Common stock repurchased from an associated Rabbi Trust		$ (266)

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Fair Value (Tables)

6 Months Ended

Jun. 30, 2012

Fair Value, Liabilities Measured on Recurring Basis, Unobservable Input Reconciliation [Line Items]

Activity in borrowings which the Corporation has elected to carry at fair value

The activity in borrowings which the Corporation has elected to carry at fair value was as follows:

	Three Months Ended					Six Months Ended
	June 30					June 30
	2012		2011			2012			2011
Borrowings carried at fair value—beginning of year	$	—	$	10,343		$	5,242		$	10,423
Paydowns and maturities		—		—			(5,209	)		—
Net unrealized change in fair value		—		(37	)		(33	)		(117	)
Borrowings carried at fair value—June 30	$	—	$	10,306		$	—		$	10,306
Unpaid principal balance—June 30	$	—	$	10,000		$	—		$	10,000

Carrying amount and estimated fair value of financial instruments not recorded at fair value

The carrying amount and estimated fair value of financial instruments not recorded at fair value in their entirety on a recurring basis on our consolidated balance sheets are as follows as of:

	June 30, 2012
	Carrying			Estimated
	Value			Fair Value			(Level 1)		(Level 2)			(Level 3)
ASSETS
Cash and demand deposits due from banks	$	20,251		$	20,251		$	20,251	$	—		$	—
Certicates of deposit held in other financial institutions		6,880			6,906			—		6,906			—
Mortgage loans available-for-sale		2,347			2,413			—		2,413			—
Total loans		754,952			768,354			—		741,798			26,556
Less allowance for loan losses		(12,318	)		(12,318	)		—		(8,762	)		(3,556	)
Net loans		742,634			756,036			—		733,036			23,000
Accrued interest receivable		5,217			5,217			5,217		—			—
Equity securities without readily determinable fair values (1)		17,708			17,708			—		—			—
Originated mortgage servicing rights		2,424			2,424			—		2,424			—
LIABILITIES
Deposits without stated maturities		499,900			499,900			499,900		—			—
Deposits with stated maturities		478,928			491,475			—		491,475			—
Borrowed funds		234,132			240,869			—		240,869			—
Accrued interest payable		809			809			809		—			—

(1) Due to the characteristics of equity securities without readily determinable fair values, they are not disclosed under a specific fair value hierarchy.

	December 31, 2011
	Carrying			Estimated
	Value			Fair Value
ASSETS
Cash and demand deposits due from banks	$	28,590		$	28,590
Certificates of deposit held in other financial institutions		8,924			8,977
Mortgage loans available-for-sale		3,205			3,252
Total loans		750,291			769,177
Less allowance for loan losses		(12,375	)		(12,375	)
Net loans		737,916			756,802
Accrued interest receivable		5,848			5,848
Equity securities without readily determinable fair values		17,189			17,189
Originated mortgage servicing rights		2,374			2,374
LIABILITIES
Deposits without stated maturities		476,627			476,627
Deposits with stated maturities		481,537			499,644
Borrowed funds		210,894			222,538
Accrued interest payable		967			967

Assets and liabilities measured at fair value

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

	June 30, 2012											December 31, 2011
Description	Total		(Level 1)			(Level 2)			(Level 3)			Total		(Level 1)			(Level 2)			(Level 3)
Recurring items
Trading securities
States and political subdivisions	$	1,998	$	—		$	1,998		$	—		$	4,710	$	—		$	4,710		$	—
Available-for-sale investment securities
Government sponsored enterprises		2,231		—			2,231			—			397		—			397			—
States and political subdivisions		178,654		—			178,654			—			174,938		—			174,938			—
Auction rate money market preferred		2,574		—			2,574			—			2,049		—			2,049			—
Preferred stocks		5,927		5,927			—			—			5,033		5,033			—			—
Mortgage-backed securities		164,497		—			164,497			—			143,602		—			143,602			—
Collateralized mortgage obligations		123,052		—			123,052			—			99,101		—			99,101			—
Total available-for-sale investment securities		476,935		5,927			471,008			—			425,120		5,033			420,087			—
Borrowed funds		—		—			—			—			5,242		—			5,242			—
Nonrecurring items
Impaired loans (net of the allowance for loan losses)		23,000		—			—			23,000			21,130		—			—			21,130
Originated mortgage servicing rights		2,424		—			2,424			—			2,374		—			2,374			—
Foreclosed assets		2,362		—			2,362			—			1,876		—			1,876			—
	$	506,719	$	5,927		$	477,792		$	23,000		$	460,452	$	5,033		$	434,289		$	21,130
Percent of assets and liabilities measured at fair value				1.17	%		94.29	%		4.54	%				1.09	%		94.32	%		4.59	%

Changes in fair value of assets and liabilities recorded at fair value

	Three Months Ended June 30
	2012									2011
Description	Trading Gains and (Losses)			Other Gains and (Losses)			Total			Trading Gains and (Losses)			Other Gains and (Losses)			Total
Recurring Items
Trading securities	$	(16	)	$	—		$	(16	)	$	(8	)	$	—		$	(8	)
Borrowed funds		—			—			—			—			37			37
Nonrecurring Items
Foreclosed assets		—			—			—			—			(25	)		(25	)
Originated mortgage servicing rights		—			(32	)		(32	)		—			(25	)		(25	)
Total	$	(16	)	$	(32	)	$	(48	)	$	(8	)	$	(13	)	$	(21	)
	Six Months Ended June 30
	2012									2011
Description	Trading Losses			Other Gains and (Losses)			Total			Trading Losses			Other Gains and (Losses)			Total
Recurring items
Trading securities	$	(32	)	$	—		$	(32	)	$	(27	)	$	—		$	(27	)
Borrowed funds		—			33			33			—			117			117
Nonrecurring items
Foreclosed assets		—			(17	)		(17	)		—			(35	)		(35	)
Originated mortgage servicing rights		—			42			42			—			(18	)		(18	)
Total	$	(32	)	$	58		$	26		$	(27	)	$	64		$	37

Level 3 [Member]

Fair Value, Liabilities Measured on Recurring Basis, Unobservable Input Reconciliation [Line Items]

Available-for-sale investment securities measured with Level 3 inputs on a recurring basis

The table below represents the activity in preferred stock available-for-sale investment securities measured with Level 3 inputs on a recurring basis for the:

	Three Months			Six Months
	Ended			Ended
	June 30, 2011			June 30, 2011
Level 3 inputs at beginning of period	$	7,593		$	6,936
Net unrealized (losses) gains		(23	)		634
Level 3 inputs—June 30	$	7,570		$	7,570

impaired loans measured utilizing Level 3 fair value measurements

The table below lists the quantitative information about impaired loans measured utilizing Level 3 fair value measurements as of June 30, 2012:

Valuation Techniques	Fair Value		Unobservable Input	Range
			Duration of cash flows		20 - 120 Months
Discounted cash flow	$	6,750	Reduction in interest rate from original loan terms		2.13% - 3.38%
			Discount applied to
			collateral appraisal:
			Real Estate		20% - 30%
			Equipment		50%
Discounted appraisal value	$	16,250	Livestock		50%
			Cash crop inventory		50%
			Other inventory		75%
			Accounts receivable		75%
			Estimated liquidation costs		10%

Auction rate money market preferred [Member]

Fair Value, Liabilities Measured on Recurring Basis, Unobservable Input Reconciliation [Line Items]

Available-for-sale investment securities measured with Level 3 inputs on a recurring basis

The table below represents the activity in auction rate money market preferred available-for-sale investment securities measured with Level 3 inputs on a recurring basis for the:

	Three Months		Six Months
	Ended		Ended
	June 30, 2011		June 30, 2011
Level 3 inputs at beginning of period	$	2,803	$	2,865
Net unrealized gains (losses)		31		(31	)
Level 3 inputs—June 30	$	2,834	$	2,834
				`

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Available-For-Sale Securities (Details 4)	6 Months Ended
	Jun. 30, 2012
Key valuation assumptions
Seniority	Senior
Discount rate	LIBOR + 6.35%
Credit discount rate	LIBOR + 4.00%
Average observed discounts based on closed transactions	14.00%
Moody's [Member]
Key valuation assumptions
Ratings by credit quality indicator	Caa3
S&P [Member]
Key valuation assumptions
Ratings by credit quality indicator	A

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Borrowed Funds (Details) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2012	Dec. 31, 2011
Summary of borrowed funds
Federal Home Loan Bank advances, Amount	$ 154,000	$ 142,242
Federal Home Loan Bank advances, Rate	2.18%	3.16%
Federal funds purchased	120,878
Total, Amount	234,132	216,136
Total, Rate	1.75%	2.42%
Federal funds purchased [Member]
Summary of borrowed funds
Federal funds purchased	9,600
Total, Rate	0.50%
Without stated maturity dates [Member]
Summary of borrowed funds
Securities sold under agreements to repurchase, Amount	53,284	57,198
Securities sold under agreements to repurchase, Rate	0.20%	0.25%
With stated maturity dates [Member]
Summary of borrowed funds
Securities sold under agreements to repurchase, Amount	$ 16,708	$ 16,696
Securities sold under agreements to repurchase, Rate	3.51%	3.51%

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Operating Segments (Details)	3 Months Ended		6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011
Operating Segments (Textual) [Abstract]
Minimum percentage of reportable segments net operating results			10.00%
Maximum percentage of reportable segments total assets and operating results	90.00%	90.00%	90.00%	90.00%
Maximum percentage of reportable segment assets and operating results during the period	90.00%	90.00%	90.00%	90.00%

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Interim Condensed Consolidated Balance Sheets (USD $) In Thousands, unless otherwise specified	Jun. 30, 2012	Dec. 31, 2011
Cash and cash equivalents
Cash and demand deposits due from banks	$ 19,492	$ 24,514
Interest bearing balances due from banks	759	4,076
Total cash and cash equivalents	20,251	28,590
Certificates of deposit held in other financial institutions	6,880	8,924
Trading securities	1,998	4,710
Available-for-sale securities (amortized cost of $464931 in 2012 and $414,614 in 2011)	476,935	425,120
Mortgage loans available-for-sale	2,347	3,205
Loans
Agricultural	81,222	74,645
Commercial	368,371	365,714
Consumer	31,357	31,572
Residential real estate	274,002	278,360
Total loans	754,952	750,291
Less allowance for loan losses	12,318	12,375
Net loans	742,634	737,916
Premises and equipment	24,729	24,626
Corporate owned life insurance	22,423	22,075
Accrued interest receivable	5,217	5,848
Equity securities without readily determinable fair values	17,708	17,189
Goodwill and other intangible assets	46,659	46,792
Other assets	13,715	12,930
TOTAL ASSETS	1,381,496	1,337,925
Deposits
Noninterest bearing	124,230	119,072
NOW accounts	163,000	163,653
Certificates of deposit under $100 and other savings	450,159	440,123
Certificates of deposit over $100	241,439	235,316
Total deposits	978,828	958,164
Borrowed funds	234,132	216,136
Accrued interest payable and other liabilities	8,681	8,842
Total liabilities	1,221,641	1,183,142
Shareholders' equity
Common stock - no par value 15,000,000 shares authorized; issued and outstanding 7602545 shares (including 19990 shares held in the Rabbi Trust) in 2012 and 7,589,226 shares (including 16,585 shares held in the Rabbi Trust) in 2011	134,931	134,734
Shares to be issued for deferred compensation obligations	4,724	4,524
Retained earnings	16,240	13,036
Accumulated other comprehensive income	3,960	2,489
Total shareholders' equity	159,855	154,783
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$ 1,381,496	$ 1,337,925

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Loans and Allowance for Loan Losses (Details 2) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2012	Dec. 31, 2011
Credit quality indicators for commercial and agricultural credit exposures
Total	$ 742,634	$ 737,916
Commercial real estate [Member]
Credit quality indicators for commercial and agricultural credit exposures
Total	266,819	258,095
Commercial other [Member]
Credit quality indicators for commercial and agricultural credit exposures
Total	101,552	107,619
Total commercial [Member]
Credit quality indicators for commercial and agricultural credit exposures
Total	368,371	365,714
Agricultural real estate [Member]
Credit quality indicators for commercial and agricultural credit exposures
Total	46,697	44,683
Agricultural other [Member]
Credit quality indicators for commercial and agricultural credit exposures
Total	34,525	29,962
Total agricultural [Member]
Credit quality indicators for commercial and agricultural credit exposures
Total	81,222	74,645
2 - High quality [Member] | Commercial real estate [Member]
Credit quality indicators for commercial and agricultural credit exposures
Total	27,077	11,113
2 - High quality [Member] | Commercial other [Member]
Credit quality indicators for commercial and agricultural credit exposures
Total	14,143	11,013
2 - High quality [Member] | Total commercial [Member]
Credit quality indicators for commercial and agricultural credit exposures
Total	41,220	22,126
2 - High quality [Member] | Agricultural real estate [Member]
Credit quality indicators for commercial and agricultural credit exposures
Total	2,578	3,583
2 - High quality [Member] | Agricultural other [Member]
Credit quality indicators for commercial and agricultural credit exposures
Total	2,199	1,390
2 - High quality [Member] | Total agricultural [Member]
Credit quality indicators for commercial and agricultural credit exposures
Total	4,777	4,973
3 - High satisfactory [Member] | Commercial real estate [Member]
Credit quality indicators for commercial and agricultural credit exposures
Total	81,883	90,064
3 - High satisfactory [Member] | Commercial other [Member]
Credit quality indicators for commercial and agricultural credit exposures
Total	28,314	29,972
3 - High satisfactory [Member] | Total commercial [Member]
Credit quality indicators for commercial and agricultural credit exposures
Total	110,197	120,036
3 - High satisfactory [Member] | Agricultural real estate [Member]
Credit quality indicators for commercial and agricultural credit exposures
Total	15,964	11,154
3 - High satisfactory [Member] | Agricultural other [Member]
Credit quality indicators for commercial and agricultural credit exposures
Total	8,273	5,186
3 - High satisfactory [Member] | Total agricultural [Member]
Credit quality indicators for commercial and agricultural credit exposures
Total	24,237	16,340
4 - Low satisfactory [Member] | Commercial real estate [Member]
Credit quality indicators for commercial and agricultural credit exposures
Total	124,323	118,611
4 - Low satisfactory [Member] | Commercial other [Member]
Credit quality indicators for commercial and agricultural credit exposures
Total	51,092	57,572
4 - Low satisfactory [Member] | Total commercial [Member]
Credit quality indicators for commercial and agricultural credit exposures
Total	175,415	176,183
4 - Low satisfactory [Member] | Agricultural real estate [Member]
Credit quality indicators for commercial and agricultural credit exposures
Total	25,173	24,253
4 - Low satisfactory [Member] | Agricultural other [Member]
Credit quality indicators for commercial and agricultural credit exposures
Total	19,382	15,750
4 - Low satisfactory [Member] | Total agricultural [Member]
Credit quality indicators for commercial and agricultural credit exposures
Total	44,555	40,003
5 - Special mention [Member] | Commercial real estate [Member]
Credit quality indicators for commercial and agricultural credit exposures
Total	12,303	15,482
5 - Special mention [Member] | Commercial other [Member]
Credit quality indicators for commercial and agricultural credit exposures
Total	2,691	4,200
5 - Special mention [Member] | Total commercial [Member]
Credit quality indicators for commercial and agricultural credit exposures
Total	14,994	19,682
5 - Special mention [Member] | Agricultural real estate [Member]
Credit quality indicators for commercial and agricultural credit exposures
Total	1,088	3,863
5 - Special mention [Member] | Agricultural other [Member]
Credit quality indicators for commercial and agricultural credit exposures
Total	3,022	2,907
5 - Special mention [Member] | Total agricultural [Member]
Credit quality indicators for commercial and agricultural credit exposures
Total	4,110	6,770
6 - Substandard [Member] | Commercial real estate [Member]
Credit quality indicators for commercial and agricultural credit exposures
Total	17,658	19,017
6 - Substandard [Member] | Commercial other [Member]
Credit quality indicators for commercial and agricultural credit exposures
Total	5,196	4,819
6 - Substandard [Member] | Total commercial [Member]
Credit quality indicators for commercial and agricultural credit exposures
Total	22,854	23,836
6 - Substandard [Member] | Agricultural real estate [Member]
Credit quality indicators for commercial and agricultural credit exposures
Total	1,704	1,640
6 - Substandard [Member] | Agricultural other [Member]
Credit quality indicators for commercial and agricultural credit exposures
Total	1,363	4,314
6 - Substandard [Member] | Total agricultural [Member]
Credit quality indicators for commercial and agricultural credit exposures
Total	3,067	5,954
7 - Vulnerable [Member] | Commercial real estate [Member]
Credit quality indicators for commercial and agricultural credit exposures
Total	2,556	187
7 - Vulnerable [Member] | Commercial other [Member]
Credit quality indicators for commercial and agricultural credit exposures
Total	92
7 - Vulnerable [Member] | Total commercial [Member]
Credit quality indicators for commercial and agricultural credit exposures
Total	2,648	187
7 - Vulnerable [Member] | Agricultural real estate [Member]
Credit quality indicators for commercial and agricultural credit exposures
Total
7 - Vulnerable [Member] | Agricultural other [Member]
Credit quality indicators for commercial and agricultural credit exposures
Total
7 - Vulnerable [Member] | Total agricultural [Member]
Credit quality indicators for commercial and agricultural credit exposures
Total
8 - Doubtful [Member] | Commercial real estate [Member]
Credit quality indicators for commercial and agricultural credit exposures
Total	1,019	3,621
8 - Doubtful [Member] | Commercial other [Member]
Credit quality indicators for commercial and agricultural credit exposures
Total	24	43
8 - Doubtful [Member] | Total commercial [Member]
Credit quality indicators for commercial and agricultural credit exposures
Total	1,043	3,664
8 - Doubtful [Member] | Agricultural real estate [Member]
Credit quality indicators for commercial and agricultural credit exposures
Total	190	190
8 - Doubtful [Member] | Agricultural other [Member]
Credit quality indicators for commercial and agricultural credit exposures
Total	286	415
8 - Doubtful [Member] | Total agricultural [Member]
Credit quality indicators for commercial and agricultural credit exposures
Total	$ 476	$ 605

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Interim Condensed Consolidated Statements of Income (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011
Interest income
Loans, including fees	$ 10,849	$ 11,464	$ 21,789	$ 22,825
Investment securities
Taxable	1,988	1,836	3,877	3,349
Nontaxable	1,216	1,189	2,420	2,368
Trading account securities	22	47	64	98
Federal funds sold and other	113	133	242	267
Total interest income	14,188	14,669	28,392	28,907
Interest expense
Deposits	2,368	2,776	4,880	5,561
Borrowings	1,061	1,325	2,253	2,593
Total interest expense	3,429	4,101	7,133	8,154
Net interest income	10,759	10,568	21,259	20,753
Provision for loan losses	439	603	900	1,420
Net interest income after provision for loan losses	10,320	9,965	20,359	19,333
Noninterest income
Service charges and fees	1,628	1,617	3,257	3,093
Gain on sale of mortgage loans	279	53	658	182
Net loss on trading securities	(16)	(8)	(32)	(27)
Net gain on borrowings measured at fair value		37	33	117
Gain on sale of available-for-sale investment securities			1,003
Other	653	279	1,166	561
Total noninterest income	2,544	1,978	6,085	3,926
Noninterest expenses
Compensation and benefits	5,232	4,746	10,533	9,751
Occupancy	599	613	1,240	1,259
Furniture and equipment	1,170	1,127	2,260	2,233
Other	2,187	2,293	4,446	4,123
Available-for-sale impairment loss
Total other-than-temporary impairment loss			486
Portion of loss reported in other comprehensive income			(204)
Net available-for-sale impairment loss			282
Total noninterest expenses	9,188	8,779	18,761	17,366
Income before federal income tax expense	3,676	3,164	7,683	5,893
Federal income tax expense	672	492	1,445	905
NET INCOME	$ 3,004	$ 2,672	$ 6,238	$ 4,988
Earnings per share
Basic	$ 0.40	$ 0.35	$ 0.82	$ 0.66
Diluted	$ 0.39	$ 0.34	$ 0.80	$ 0.64
Cash dividends per basic share	$ 0.20	$ 0.19	$ 0.40	$ 0.38

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Federal Income Taxes (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011
Summary of federal income tax expense
Income taxes at 34% statutory rate	$ 1,250	$ 1,076	$ 2,612	$ 2,004
Effect of nontaxable income
Interest income on tax exempt municipal bonds	(388)	(385)	(779)	(768)
Earnings on corporate owned life insurance	(60)	(50)	(118)	(98)
Other	(141)	(162)	(292)	(256)
Total effect of nontaxable income	(589)	(597)	(1,189)	(1,122)
Effect of nondeductible expenses	11	13	22	23
Federal income tax expense	$ 672	$ 492	$ 1,445	$ 905

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Trading Securities (Details Textual) (USD $) In Thousands, unless otherwise specified	6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011
Trading Securities (Textual) [Abstract]
Net realized trading losses	$ 32	$ 27
Net unrealized trading losses	$ 10	$ 32

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Fair Value (Details 1) (Preferred stock [Member], Level 3 [Member], USD $) In Thousands, unless otherwise specified	3 Months Ended	6 Months Ended
	Jun. 30, 2011	Jun. 30, 2011
Preferred stock [Member] | Level 3 [Member]
Available-for-sale investment securities measured with Level 3 inputs on a recurring basis
Level 3 inputs at beginning of period	$ 7,593	$ 6,936
Net unrealized losses	(23)	634
Level 3 inputs - June 30	$ 7,570	$ 7,570

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Recently Adopted Accounting Standards Updates (Policies)

6 Months Ended

Jun. 30, 2012

Recently Adopted Accounting Standards Updates [Abstract]

Transfers and Servicing

ASU No. 2011-03: “Reconsideration of Effective Control for Repurchase Agreements”

In April 2011, ASU No. 2011-03 amended ASC Topic 310, “Transfers and Servicing” to eliminate from the assessment of effective control, the criteria calling for the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed upon terms, even in the event of the transferee’s default. The assessment of effective control should instead focus on the transferor’s contractual rights and obligations. The new authoritative guidance was effective for interim and annual periods beginning on or after December 15, 2011 and did not impact our consolidated financial statements.

Fair Value Measurement

ASU No. 2011-04: “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS”

In May 2011, ASU No. 2011-04 amended ASC Topic 820, “Fair Value Measurement” to align fair value measurements and disclosures in GAAP and IFRS. The ASU changes the wording used to describe the requirements in GAAP for measuring fair value and disclosures about fair value.

The ASU clarifies the application of existing fair value measurements and disclosure requirements related to:

• The application of highest and best use and valuation premise concepts.

• Measuring the fair value of an instrument classified in a reporting entity’s stockholders’ equity.

• Disclosure about fair value measurements within Level 3 of the fair value hierarchy.

The ASU also changes particular principles or requirements for measuring fair value and disclosing information measuring fair value and disclosures related to:

• Measuring the fair value of financial instruments that are managed within a portfolio.

• Application of premiums and discounts in a fair value measurement.

The new authoritative guidance was effective for interim and annual periods beginning on or after December 15, 2011 and did not have a financial impact but increased the level of disclosures related to fair value measurements in our interim condensed consolidated financial statements in 2012.

Comprehensive Income

ASU No. 2011-05: “Presentation of Comprehensive Income”

In June 2011, ASU No. 2011-05 amended ASC Topic 220, “Comprehensive Income” to improve the comparability, consistency, and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income. In addition, to increase the prominence of items reported in other comprehensive income, and to facilitate the convergence of GAAP and IFRS, the FASB eliminated the option to present components of other comprehensive income as part of the statement of changes in shareholders’ equity.

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Available-For-Sale Securities (Details) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2012	Dec. 31, 2011
Amortized cost and fair value of available-for-sale securities
Amortized Cost	$ 464,931	$ 414,614
Gross Unrealized Gains	14,112	13,522
Gross Unrealized Losses	2,108	3,016
Fair Value	476,935	425,120
Auction rate money market preferred [Member]
Amortized cost and fair value of available-for-sale securities
Amortized Cost	3,200	3,200
Gross Unrealized Gains
Gross Unrealized Losses	626	1,151
Fair Value	2,574	2,049
Collateralized mortgage obligations [Member]
Amortized cost and fair value of available-for-sale securities
Amortized Cost	120,255	96,545
Gross Unrealized Gains	2,844	2,556
Gross Unrealized Losses	47
Fair Value	123,052	99,101
Government sponsored enterprises [Member]
Amortized cost and fair value of available-for-sale securities
Amortized Cost	2,197	395
Gross Unrealized Gains	34	2
Gross Unrealized Losses
Fair Value	2,231	397
States and political subdivisions [Member]
Amortized cost and fair value of available-for-sale securities
Amortized Cost	170,958	166,832
Gross Unrealized Gains	8,243	8,157
Gross Unrealized Losses	547	51
Fair Value	178,654	174,938
Preferred stocks [Member]
Amortized cost and fair value of available-for-sale securities
Amortized Cost	6,800	6,800
Gross Unrealized Gains
Gross Unrealized Losses	873	1,767
Fair Value	5,927	5,033
Mortgage-backed securities [Member]
Amortized cost and fair value of available-for-sale securities
Amortized Cost	161,521	140,842
Gross Unrealized Gains	2,991	2,807
Gross Unrealized Losses	15	47
Fair Value	$ 164,497	$ 143,602

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Trading Securities (Tables)

6 Months Ended

Jun. 30, 2012

Trading Securities [Abstract]

Schedule of trading securities, at fair value

Trading securities, at fair value, consist of the following investments at:

	June 30 2012		December 31 2011
States and political subdivisions	$	1,998	$	4,710

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Fair Value (Details 4) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2012	Mar. 31, 2012	Dec. 31, 2011	Jun. 30, 2011	Mar. 31, 2011	Dec. 31, 2010
ASSETS
Cash and demand deposits due from banks	$ 19,492		$ 24,514
Certificates of deposit held in other financial institutions	6,880		8,924
Total loans	754,952		750,291
Less allowance for loan losses	(12,318)	(12,375)	(12,375)	(12,378)	(12,381)	(12,373)
Net loans	742,634		737,916
Accrued interest receivable	5,217		5,848
Equity securities without readily determinable fair values	17,708		17,189
LIABILITIES
Borrowed funds	234,132		216,136
Accrued interest payable	8,681		8,842
Level 1 [Member]
ASSETS
Cash and demand deposits due from banks	20,251
Certificates of deposit held in other financial institutions
Mortgage loans available-for-sale
Total loans
Less allowance for loan losses
Net loans
Accrued interest receivable	5,217
Equity securities without readily determinable fair values
Originated mortgage servicing rights
LIABILITIES
Deposits without stated maturities	499,900
Deposits with stated maturities
Borrowed funds
Accrued interest payable	809
Level 2 [Member]
ASSETS
Cash and demand deposits due from banks
Certificates of deposit held in other financial institutions	6,906
Mortgage loans available-for-sale	2,413
Total loans	741,798
Less allowance for loan losses	(8,762)
Net loans	733,036
Accrued interest receivable
Equity securities without readily determinable fair values
Originated mortgage servicing rights	2,424
LIABILITIES
Deposits without stated maturities
Deposits with stated maturities	491,475
Borrowed funds	240,869
Accrued interest payable
Level 3 [Member]
ASSETS
Cash and demand deposits due from banks
Certificates of deposit held in other financial institutions
Mortgage loans available-for-sale
Total loans	26,556
Less allowance for loan losses	(3,556)
Net loans	23,000
Accrued interest receivable
Equity securities without readily determinable fair values
Originated mortgage servicing rights
LIABILITIES
Deposits without stated maturities
Deposits with stated maturities
Borrowed funds
Accrued interest payable
Carrying Value [Member]
ASSETS
Cash and demand deposits due from banks	20,251		28,590
Certificates of deposit held in other financial institutions	6,880		8,924
Mortgage loans available-for-sale	2,347		3,205
Total loans	754,952		750,291
Less allowance for loan losses	(12,318)		(12,375)
Net loans	742,634		737,916
Accrued interest receivable	5,217		5,848
Equity securities without readily determinable fair values	17,708		17,189
Originated mortgage servicing rights	2,424		2,374
LIABILITIES
Deposits without stated maturities	499,900		476,627
Deposits with stated maturities	478,928		481,537
Borrowed funds	234,132		210,894
Accrued interest payable	809		967
Estimated Fair Value [Member]
ASSETS
Cash and demand deposits due from banks	20,251		28,590
Certificates of deposit held in other financial institutions	6,906		8,977
Mortgage loans available-for-sale	2,413		3,252
Total loans	768,354		769,177
Less allowance for loan losses	(12,318)		(12,375)
Net loans	756,036		756,802
Accrued interest receivable	5,217		5,848
Equity securities without readily determinable fair values	17,708		17,189
Originated mortgage servicing rights	2,424		2,374
LIABILITIES
Deposits without stated maturities	499,900		476,627
Deposits with stated maturities	491,475		499,644
Borrowed funds	240,869		222,538
Accrued interest payable	$ 809		$ 967

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Interim Condensed Consolidated Statements of Comprehensive Income (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011
Interim Condensed Consolidated Statements of Comprehensive Income [Abstract]
Net income	$ 3,004	$ 2,672	$ 6,238	$ 4,988
Unrealized holding gains on available-for-sale securities:
Unrealized holding gains arising during the period	1,420	3,576	2,219	5,329
Reclassification adjustment for net realized gains included in net income			(1,003)
Reclassification adjustment for impairment loss included in net income			282
Net unrealized gains	1,420	3,576	1,498	5,329
Tax effect	(546)	(1,212)	(27)	(1,607)
Other comprehensive income, net of tax	874	2,364	1,471	3,722
COMPREHENSIVE INCOME	$ 3,878	$ 5,036	$ 7,709	$ 8,710

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Interim Condensed Consolidated Balance Sheets (Parenthetical) (USD $) In Thousands, except Share data, unless otherwise specified	Jun. 30, 2012	Dec. 31, 2011
Interim Condensed Consolidated Balance Sheets [Abstract]
Available-for-sale securities, amortized cost	$ 464,931	$ 414,614
Borrowed funds at fair value	$ 0	$ 5,242
Common stock, par value
Common stock, shares authorized	15,000,000	15,000,000
Common stock, shares issued	7,602,545	7,589,226
Common stock, shares outstanding	7,602,545	7,589,226
Common stock, shares to be issued	19,990	16,585

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Other Noninterest Expenses

6 Months Ended

Jun. 30, 2012

Other Noninterest Expenses [Abstract]

OTHER NONINTEREST EXPENSES

NOTE 9 – OTHER NONINTEREST EXPENSES

A summary of expenses included in other noninterest expenses are as follows for the three month and six month periods ended:

	Three Months Ended June  30					Six Months Ended June  30
	2012			2011		2012		2011
Marketing and donations	$	535		$	527	$	1,029	$	750
FDIC insurance premiums		213			331		428		665
Directors fees		209			206		419		417
Audit fees		154			167		330		323
Education and travel		139			99		266		204
Consulting fees		71			67		258		100
Printing and supplies		110			89		219		189
Postage and freight		94			96		195		196
Foreclosed asset and collection		(18	)		177		79		277
Amortization of deposit premium		67			76		133		152
Legal fees		81			54		143		116
Other Losses		107			10		137		11
All other		425			394		810		723
Total	$	2,187		$	2,293	$	4,446	$	4,123

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Document and Entity Information	6 Months Ended
	Jun. 30, 2012	Jul. 23, 2012
Document and Entity Information [Abstract]
Entity Registrant Name	ISABELLA BANK CORP
Entity Central Index Key	0000842517
Document Type	10-Q
Document Period End Date	Jun. 30, 2012
Amendment Flag	false
Document Fiscal Year Focus	2012
Document Fiscal Period Focus	Q2
Current Fiscal Year End Date	--12-31
Entity Filer Category	Accelerated Filer
Entity Common Stock, Shares Outstanding		7,617,345

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Federal Income Taxes

6 Months Ended

Jun. 30, 2012

Federal Income Taxes [Abstract]

FEDERAL INCOME TAXES

NOTE 10 – FEDERAL INCOME TAXES

The reconciliation of the provision for federal income taxes and the amount computed at the federal statutory tax rate of 34% of income before federal income tax expense is as follows for the three and six month periods ended June 30:

	Three Months Ended June 30						Six Months Ended June 30
	2012			2011			2012			2011
Income taxes at 34% statutory rate	$	1,250		$	1,076			2,612		$	2,004
Effect of nontaxable income
Interest income on tax exempt municipal bonds		(388	)		(385	)		(779	)		(768	)
Earnings on corporate owned life insurance		(60	)		(50	)		(118	)		(98	)
Other		(141	)		(162	)		(292	)		(256	)
Total effect of nontaxable income		(589	)		(597	)		(1,189	)		(1,122	)
Effect of nondeductible expenses		11			13			22			23
Federal income tax expense	$	672		$	492		$	1,445		$	905

Included in OCI for the three and six month periods ended June 30, 2012 and 2011 are changes in unrealized holding gains, related to auction rate money market preferred and preferred stocks. For federal income tax purposes, these securities are considered equity investments. As such, no deferred federal income taxes related to unrealized holding gains or losses are expected or recorded.

A summary of OCI follows for the three and six month periods ended June 30:

	Three Months Ended
	June 30, 2012									June 30, 2011
	Auction									Auction
	Rate									Rate
	Money									Money
	Market									Market
	Preferreds			All						Preferreds		All
	and			Other						and		Other
	Preferred Stocks			AFS Securities			Total			Preferred Stocks		AFS Securities			Total
Unrealized (losses) gains arising during the period	$	(185	)	$	1,605		$	1,420		$	8	$	3,568		$	3,576
Tax effect		—			(546	)		(546	)		—		(1,212	)		(1,212	)
Other comprehensive (loss) income, net of tax	$	(185	)	$	1,059		$	874		$	8	$	2,356		$	2,364

	Six Months Ended
	June 30, 2012								June 30, 2011
	Auction								Auction
	Rate								Rate
	Money								Money
	Market								Market
	Preferreds		All						Preferreds		All
	and		Other						and		Other
	Preferred Stocks		AFS Securities			Total			Preferred Stocks		AFS Securities			Total
Unrealized gains arising during the period	$	1,419	$	800		$	2,219		$	603	$	4,726		$	5,329
Reclassification adjustment for net realized gains included in net income		—		(1,003	)		(1,003	)		—		—			—
Reclassification adjustment for impairment loss included in net income		—		282			282			—		—			—
Net unrealized gains		1,419		79			1,498			603		4,726			5,329
Tax effect		—		(27	)		(27	)		—		(1,607	)		(1,607	)
Other comprehensive income, net of tax	$	1,419	$	52		$	1,471		$	603	$	3,119		$	3,722

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Interim Condensed Consolidated Statements of Changes in Shareholders' Equity (USD $) In Thousands, except Share data	Total	Common Stock	Shares to be Issued for Deferred Compensation Obligations	Retained Earnings	Accumulated Other Comprehensive (Loss) Income
Beginning balance at Dec. 31, 2010	$ 145,161	$ 133,592	$ 4,682	$ 8,596	$ (1,709)
Beginning balance, shares at Dec. 31, 2010		7,550,074
Comprehensive income	8,710			4,988	3,722
Issuance of common stock	1,346	1,346
Issuance of common stock, shares		61,218
Common stock issued for deferred compensation obligations	12	266	(254)
Common stock issued for deferred compensation obligations, shares		14,842
Share based payment awards under equity compensation plan	307		307
Common stock purchased for deferred compensation obligations	(227)	(227)
Common stock repurchased pursuant to publicly announced repurchase plan	(914)	(914)
Common stock repurchased pursuant to publicly announced repurchase plan, shares		(50,458)
Cash dividends	(2,881)			(2,881)
Ending Balance at Jun. 30, 2011	151,514	134,063	4,735	10,703	2,013
Ending balance, shares at Jun. 30, 2011		7,575,676
Beginning balance at Dec. 31, 2011	154,783	134,734	4,524	13,036	2,489
Beginning balance, shares at Dec. 31, 2011		7,589,226
Comprehensive income	7,709			6,238	1,471
Comprehensive income, shares
Issuance of common stock	1,322	1,322
Issuance of common stock, shares		54,900
Common stock issued for deferred compensation obligations
Common stock transferred from the Rabbi Trust to satisfy deferred compensation obligations		95	(95)
Share based payment awards under equity compensation plan	295		295
Common stock purchased for deferred compensation obligations	(225)	(225)
Common stock repurchased pursuant to publicly announced repurchase plan	(995)	(995)
Common stock repurchased pursuant to publicly announced repurchase plan, shares		(41,581)
Cash dividends	(3,034)			(3,034)
Ending Balance at Jun. 30, 2012	$ 159,855	$ 134,931	$ 4,724	$ 16,240	$ 3,960
Ending balance, shares at Jun. 30, 2012		7,602,545

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Trading Securities

6 Months Ended

Jun. 30, 2012

Trading Securities [Abstract]

TRADING SECURITIES

NOTE 4 – TRADING SECURITIES

Trading securities, at fair value, consist of the following investments at:

	June 30 2012		December 31 2011
States and political subdivisions	$	1,998	$	4,710

Included in the net trading losses of $32 during the first six months of 2012 were $10 of net unrealized trading losses on securities that were held in our trading portfolio as of June 30, 2012. Included in the net trading losses of $27 during the first six months of 2011 were $32 of net unrealized trading losses on securities that were held in the trading portfolio as of June 30, 2011.

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Recently Adopted Accounting Standards Updates

6 Months Ended

Jun. 30, 2012

Recently Adopted Accounting Standards Updates [Abstract]

RECENTLY ADOPTED ACCOUNTING STANDARDS UPDATES

NOTE 3 – RECENTLY ADOPTED ACCOUNTING STANDARDS UPDATES

ASU No. 2011-03: “Reconsideration of Effective Control for Repurchase Agreements”

In April 2011, ASU No. 2011-03 amended ASC Topic 310, “Transfers and Servicing” to eliminate from the assessment of effective control, the criteria calling for the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed upon terms, even in the event of the transferee’s default. The assessment of effective control should instead focus on the transferor’s contractual rights and obligations. The new authoritative guidance was effective for interim and annual periods beginning on or after December 15, 2011 and did not impact our consolidated financial statements.

ASU No. 2011-04: “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS”

In May 2011, ASU No. 2011-04 amended ASC Topic 820, “Fair Value Measurement” to align fair value measurements and disclosures in GAAP and IFRS. The ASU changes the wording used to describe the requirements in GAAP for measuring fair value and disclosures about fair value.

The ASU clarifies the application of existing fair value measurements and disclosure requirements related to:

• The application of highest and best use and valuation premise concepts.

• Measuring the fair value of an instrument classified in a reporting entity’s stockholders’ equity.

• Disclosure about fair value measurements within Level 3 of the fair value hierarchy.

The ASU also changes particular principles or requirements for measuring fair value and disclosing information measuring fair value and disclosures related to:

• Measuring the fair value of financial instruments that are managed within a portfolio.

• Application of premiums and discounts in a fair value measurement.

The new authoritative guidance was effective for interim and annual periods beginning on or after December 15, 2011 and did not have a financial impact but increased the level of disclosures related to fair value measurements in our interim condensed consolidated financial statements in 2012.

ASU No. 2011-05: “Presentation of Comprehensive Income”

In June 2011, ASU No. 2011-05 amended ASC Topic 220, “Comprehensive Income” to improve the comparability, consistency, and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income. In addition, to increase the prominence of items reported in other comprehensive income, and to facilitate the convergence of GAAP and IFRS, the FASB eliminated the option to present components of other comprehensive income as part of the statement of changes in shareholders’ equity.

The new authoritative guidance was effective for interim and annual periods beginning on or after December 15, 2011 and did not have an impact on our consolidated financial statements as we have historically elected to present a separate statement of comprehensive income.

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Computation of Earnings Per Share (Tables)

6 Months Ended

Jun. 30, 2012

Computation of Earnings Per Share [Abstract]

Computation of earnings per common share

Earnings per common share have been computed based on the following:

	Three Months Ended June 30				Six Months Ended June 30
	2012		2011		2012		2011
Average number of common shares outstanding for basic calculation		7,592,668		7,570,752		7,593,462		7,564,060
Average potential effect of shares in the Directors Plan (1)		203,603		194,964		201,743		194,051
Average number of common shares outstanding used to calculate diluted earnings per common share		7,796,271		7,765,716		7,795,205		7,758,111
Net income	$	3,004	$	2,672	$	6,238	$	4,988
Earnings per share
Basic	$	0.40	$	0.35	$	0.82	$	0.66
Diluted	$	0.39	$	0.34	$	0.80	$	0.64

(1) Exclusive of shares held in the Rabbi Trust

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Defined Benefit Pension Plan

6 Months Ended

Jun. 30, 2012

Defined Benefit Pension Plan [Abstract]

DEFINED BENEFIT PENSION PLAN

NOTE 11 – 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 and plan benefits are based on years of service and the employees’ five highest consecutive years of compensation out of the last ten years of service through March 1, 2007. We contributed $709 to the pension plan during the six month period ended June 30, 2012 and made no contributions to the plan in the six month period ended June 30, 2011. We do not anticipate any additional contributions to the plan over the remainder of 2012.

Following are the components of net periodic benefit cost for the three and six month periods ended June 30:

	Three Months Ended						Six Months Ended
	June 30						June 30
	2012			2011			2012			2011
Interest cost on PBO	$	117		$	127		$	235		$	254
Expected return on plan assets		(127	)		(130	)		(254	)		(261	)
Amortization of unrecognized actuarial net loss		73			39			146			77
Net periodic benefit cost	$	63		$	36		$	127		$	70

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Equity Securities Without Readily Determinable Fair Values

6 Months Ended

Jun. 30, 2012

Equity Securities Without Readily Determinable Fair Values [Abstract]

EQUITY SECURITIES WITHOUT READILY DETERMINABLE FAIR VALUES

NOTE 7 – EQUITY SECURITIES WITHOUT READILY DETERMINABLE FAIR VALUES

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

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

	June 30		December 31
	2012		2011
Federal Home Loan Bank Stock	$	7,700	$	7,380
Investment in Corporate Settlement Solutions		6,810		6,611
Federal Reserve Bank Stock		1,879		1,879
Investment in Valley Financial Corporation		1,000		1,000
Other		319		319
Total	$	17,708	$	17,189

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Federal Income Taxes (Details 1) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011
Summary of other comprehensive income (loss)
Unrealized gains arising during the period	$ 1,420	$ 3,576	$ 2,219	$ 5,329
Reclassification adjustment for net realized gains included in net income			(1,003)
Reclassification adjustment for impairment loss included in net income			282
Net unrealized gains	1,420	3,576	1,498	5,329
Tax effect	(546)	(1,212)	(27)	(1,607)
Other comprehensive income, net of tax	874	2,364	1,471	3,722
Auction Rate Money Market Preferreds and Preferred Stocks [Member]
Summary of other comprehensive income (loss)
Unrealized gains arising during the period	(185)		1,419	603
Reclassification adjustment for net realized gains included in net income			0
Reclassification adjustment for impairment loss included in net income			0
Net unrealized gains			1,419	603
Tax effect			0
Other comprehensive income, net of tax	185		1,419	603
All Other Available-for-Sale Securities [Member]
Summary of other comprehensive income (loss)
Unrealized gains arising during the period	1,605	3,568	800	4,726
Reclassification adjustment for net realized gains included in net income			(1,003)
Reclassification adjustment for impairment loss included in net income			282
Net unrealized gains			79	4,726
Tax effect	(546)	(1,212)	(27)	(1,607)
Other comprehensive income, net of tax	$ 1,059	$ 2,356	$ 52	$ 3,119

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Available-For-Sale Securities

6 Months Ended

Jun. 30, 2012

Available-For-Sale Securities [Abstract]

AVAILABLE-FOR-SALE SECURITIES

NOTE 5 – AVAILABLE-FOR-SALE SECURITIES

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

	June 30, 2012
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Government sponsored enterprises	$	2,197	$	34	$	—	$	2,231
States and political subdivisions		170,958		8,243		547		178,654
Auction rate money market preferred		3,200		—		626		2,574
Preferred stocks		6,800		—		873		5,927
Mortgage-backed securities		161,521		2,991		15		164,497
Collateralized mortgage obligations		120,255		2,844		47		123,052
Total	$	464,931	$	14,112	$	2,108	$	476,935
	December 31, 2011
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Government sponsored enterprises	$	395	$	2	$	—	$	397
States and political subdivisions		166,832		8,157		51		174,938
Auction rate money market preferred		3,200		—		1,151		2,049
Preferred stocks		6,800		—		1,767		5,033
Mortgage-backed securities		140,842		2,807		47		143,602
Collateralized mortgage obligations		96,545		2,556		—		99,101
Total	$	414,614	$	13,522	$	3,016	$	425,120

The amortized cost and fair value of AFS securities by contractual maturity at June 30, 2012 are as follows:

	Maturing								Securities With Variable Monthly Payments or Continual Call Dates		Total
	Due in One Year or Less		After One Year But Within Five Years		After Five Years But Within Ten Years		After Ten Years
Government sponsored enterprises	$	—	$	—	$	72	$	2,125	$	—	$	2,197
States and political subdivisions		7,573		34,073		85,055		44,257		—		170,958
Auction rate money market preferred		—		—		—		—		3,200		3,200
Preferred stocks		—		—		—		—		6,800		6,800
Mortgage-backed securities		—		—		—		—		161,521		161,521
Collateralized mortgage obligations		—		—		—		—		120,255		120,255
Total amortized cost	$	7,573	$	34,073	$	85,127	$	46,382	$	291,776	$	464,931
Fair value	$	7,589	$	35,243	$	90,845	$	47,208	$	296,050	$	476,935

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

A summary of the activity related to sales of AFS securities was as follows for the six month period ended June 30, 2012:

Proceeds from sales of securities	$	24,241
Gross realized gains	$	1,003
Applicable income tax expense	$	341

There were no sales of AFS securities in the first six months of 2011. The cost basis used to determine the realized gains or losses of securities sold was the amortized cost of the individual investment security as of the trade date.

Information pertaining to AFS securities with gross unrealized losses at June 30, 2012 and December 31, 2011 aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows:

	June 30, 2012
	Less Than Twelve Months				Over Twelve Months				Total Unrealized Losses
	Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value
States and political subdivisions	$	55	$	6,768	$	492	$	2,482	$	547
Auction rate money market preferred		—		—		626		2,574		626
Preferred stocks		—		—		873		5,927		873
Mortgage-backed securities		15		15,283		—		—		15
Collateralized mortgage obligations		47		4,686		—		—		47
Total	$	117	$	26,737	$	1,991	$	10,983	$	2,108
Number of securities in an unrealized loss position:				24				8		32
	December 31, 2011
	Less Than Twelve Months				Over Twelve Months
	Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Total Unrealized Losses
States and political subdivisions	$	51	$	1,410	$	—	$	—	$	51
Auction rate money market preferred		—		—		1,151		2,049		1,151
Preferred stocks		—		—		1,767		5,033		1,767
Mortgage-backed securities		47		24,291		—		—		47
Total	$	98	$	25,701	$	2,918	$	7,082	$	3,016
Number of securities in an unrealized loss position:				6				6		12

As of June 30, 2012 and December 31, 2011, we conducted an analysis to determine whether any securities currently in an unrealized loss position should be other-than-temporarily impaired. Such analyses considered, among other factors, the following criteria:

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

• Is the issuer’s investment credit rating below investment grade?

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

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

• Has the duration of the investment been extended?

As of June 30, 2012, we held an auction rate money market preferred security and preferred stocks which continued to be in an unrealized loss position as a result of the securities’ interest rates, as they are currently lower than the offering rates of securities with similar characteristics. We determined that any declines in the fair value of these securities are the result of changes in interest rates and not risks related to the underlying credit quality of the security. Additionally, none of the issuers of these securities are deemed to be below investment grade, we do not intend to sell the securities in an unrealized loss position, and it is more likely than not that we will not have to sell the securities before recovery of their cost basis.

During the three month period ended March 31, 2012, we had one state issued student loan auction rate AFS investment security (which is included in states and political subdivisions) that was downgraded by Moody’s from A3 to Caa3. As a result of this downgrade, we engaged the services of an independent investment valuation firm to estimate the amount of credit losses (if any) related to this particular issue as of March 31, 2012. The evaluation calculated a range of estimated credit losses utilizing two different bifurcation methods: 1) Estimated Cash Flow Method and 2) Credit Yield Analysis Method. The two methods were then weighted, with a higher weighting applied to the Estimated Cash Flow Method, to determine the estimated credit related impairment. As a result of this analysis we, recognized an OTTI of $282 in the first quarter of 2012.

A summary of key valuation assumptions used in the aforementioned analysis as of March 31, 2012, follows:

	Discounted Cash Flow Method
Ratings
Fitch	Not Rated
Moody’s	Caa3
S&P	A
Seniority	Senior
Discount rate	LIBOR + 6.35%
	Credit Yield Analysis Method
Credit discount rate	LIBOR + 4.00%
Average observed discounts based on closed transactions	14.00%

To test for additional impairment of this security during the three months ended June 30, 2012, we obtained another investment valuation (from the same firm engaged to perform the March 31, 2012 valuation) as of June 30, 2012. Based on the results of this valuation, no additional OTTI was observed as of June 30, 2012.

A rollforward of credit related impairment recognized in earnings on available-for-sale securities in the three and six months ended June 30, 2012 was as follows:

	Three Months Ended June 30, 2012		Six Months Ended June 30, 2012
Balance at beginning of period	$	282	$	—
Additions to credit losses for which no previous OTTI was recognized		—		282
June 30, 2012	$	282	$	282

There were no credit losses recognized in on available-for-sale securities during 2011.

Based on our analysis using the above criteria, the fact that we have asserted that we do not have the intent to sell these securities in an unrealized loss position, and that it is more likely than not that we will not have to sell the securities before recovery of their cost basis, we do not believe that the values of any other securities are other-than-temporarily impaired as of as of June 30, 2012 or December 31, 2011.

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Loans and Allowance for Loan Losses

6 Months Ended

Jun. 30, 2012

Loans and Allowance for Loan Losses (ALLL) [Abstract]

LOANS AND ALLOWANCE FOR LOAN LOSSES (ALLL)

NOTE 6 – LOANS AND ALLOWANCE FOR LOAN LOSSES

We grant commercial, agricultural, residential real estate, and consumer loans to customers situated primarily in Clare, Gratiot, Isabella, Mecosta, Midland, Montcalm, and Saginaw counties in Michigan. The ability of the borrowers to honor their repayment obligations is often dependent upon the real estate, agricultural, light manufacturing, retail, gaming and tourism, higher education, and general economic conditions of this region. Substantially all of the 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 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 level yield method.

The accrual of interest on commercial, agricultural, and residential real estate loans is typically discontinued at the time the loan is 90 days or more past due unless the credit is well-secured and in the process of collection. Consumer loans are typically charged off no later than 180 days past due. Past due status is based on contractual terms of the loan. In all cases, loans are placed on nonaccrual 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 allowance for loan losses. The interest on these loans is accounted for on the cash basis, until qualifying for return to accrual status. Loans are typically returned to accrual status after six months of continuous performance. For impaired loans not classified as nonaccrual, interest income continues to be accrued over the term of the loan based on the principal amount outstanding.

Commercial and agricultural loans include loans for commercial real estate, commercial operating loans, farmland and agricultural production, and state and political subdivisions. Repayment of these loans is often dependent upon the successful operation and management of a business; thus, these loans generally involve greater risk than other types of lending. We minimize our risk by limiting the amount of loans to any one borrower to $12,500. Borrowers with credit needs of more than $12,500 are serviced through the use of loan participations with other commercial banks. Commercial and agricultural real estate loans generally require loan-to-value limits of less than 80%. Depending upon the type of loan, past credit history, and current operating results, we may require the borrower to pledge accounts receivable, inventory, and property and equipment. Personal guarantees are generally required from the owners of closely held corporations, partnerships, and sole proprietorships. In addition, we require annual financial statements, prepare cash flow analyses, and review credit reports as deemed necessary.

We offer adjustable rate mortgages, fixed rate balloon mortgages, construction loans, and fixed rate mortgage loans which typically have amortization periods up to a maximum of 30 years. Fixed rate loans with an amortization of greater than 15 years are generally sold upon origination to Freddie Mac. Fixed rate residential real estate loans with an amortization of 15 years or less may be held in our portfolio, held for future sale, or sold upon origination. We consider the direction of interest rates, the sensitivity of our balance sheet to changes in interest rates, and overall loan demand to determine whether or not to sell loans to Freddie Mac.

Our lending policies generally limit the maximum loan-to-value ratio on residential real estate loans to 95% of the lower of the appraised value of the property or the purchase price, with the condition that private mortgage insurance is required on loans with loan to value ratios in excess of 80%. Substantially all loans upon origination have a loan to value ratio of less than 80%. Underwriting criteria for residential real estate loans include: evaluation of the borrower’s ability to make monthly payments, the value of the property securing the loan, ensuring the payment of principal, interest, taxes, and hazard insurance does not exceed 28% of a borrower’s gross income, all debt servicing does not exceed 36% of income, acceptable credit reports, verification of employment, income, and financial information. Appraisals are performed by independent appraisers and reviewed internally. All mortgage loan requests are reviewed by our mortgage loan committee or through a secondary market automated underwriting system; loans in excess of $400 require the approval of our Internal Loan Committee, the Board of Directors’ Loan Committee, or the Board of Directors.

Consumer loans include automobile loans, secured and unsecured personal loans, and overdraft protection related loans. Loans are amortized generally for a period of up to 6 years. 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 uncollectibility of the loan balance is confirmed. Subsequent recoveries, if any, are credited to the ALLL.

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

The primary factors behind the determination of the level of the ALLL are specific allocations for impaired loans, historical loss percentages, as well as unallocated components. Specific allocations for impaired loans are primarily determined based on the difference between the net realizable value of the loan’s underlying collateral or the net present value of the projected payment stream and our recorded investment. Historical loss allocations were calculated at the loan class and segment levels based on a migration analysis of the loan portfolio over the preceding four years. An unallocated component is maintained to cover uncertainties that we believe affect our estimate of probable losses based on qualitative factors. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.

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

	Allowance for Loan Losses Three Months Ended June 30, 2012
	Commercial			Agricultural			Residential Real Estate			Consumer			Unallocated		Total
Allowance for loan losses
April 1, 2012	$	5,728		$	859		$	3,702		$	625		$	1,461	$	12,375
Loans charged off		(237	)		—			(238	)		(146	)		—		(621	)
Recoveries		42			—			20			63			—		125
Provision for loan losses		475			(426	)		185			125			80		439
June 30, 2012	$	6,008		$	433		$	3,669		$	667		$	1,541	$	12,318

	Allowance for Loan Losses Six Months Ended June 30, 2012
	Commercial			Agricultural			Residential Real Estate			Consumer			Unallocated		Total
Allowance for loan losses
January 1, 2012	$	6,284		$	1,003		$	2,980		$	633		$	1,475	$	12,375
Loans charged off		(686	)		—			(353	)		(237	)		—		(1,276	)
Recoveries		128			—			61			130			—		319
Provision for loan losses		282			(570	)		981			141			66		900
June 30, 2012	$	6,008		$	433		$	3,669		$	667		$	1,541	$	12,318

	Allowance for Loan Losses and Recorded Investment in Loans As of June 30, 2012
	Commercial		Agricultural		Residential Real Estate		Consumer		Unallocated		Total
Allowance for loan losses
Individually evaluated for impairment	$	2,115	$	133	$	1,308	$	—	$	—	$	3,556
Collectively evaluated for impairment		3,893		300		2,361		667		1,541		8,762
Total	$	6,008	$	433	$	3,669	$	667	$	1,541	$	12,318
Loans
Individually evaluated for impairment		15,271		2,955		8,248		82				26,556
Collectively evaluated for impairment		353,100		78,267		265,754		31,275				728,396
Total	$	368,371	$	81,222	$	274,002	$	31,357			$	754,952

	Allowance for Loan Losses
	Three Months Ended June 30, 2011
	Commercial			Agricultural			Residential Real Estate			Consumer			Unallocated		Total
Allowance for loan losses
April 1, 2011	$	6,246		$	776		$	3,422		$	622		$	1,315	$	12,381
Loans charged off		(214	)		(1	)		(555	)		(139	)		—		(909	)
Recoveries		209			—			29			65			—		303
Provision for loan losses		497			(11	)		(11	)		112			16		603
June 30, 2011	$	6,738		$	764		$	2,885		$	660		$	1,331	$	12,378

	Allowance for Loan Losses
	Six Months Ended June 30, 2011
	Commercial			Agricultural			Residential Real Estate			Consumer			Unallocated			Total
Allowance for loan losses
January 1, 2011	$	6,048		$	1,033		$	3,198		$	605		$	1,489		$	12,373
Loans charged off		(869	)		(1	)		(878	)		(284	)		—			(2,032	)
Recoveries		346			—			103			168			—			617
Provision for loan losses		1,213			(268	)		462			171			(158	)		1,420
June 30, 2011	$	6,738		$	764		$	2,885		$	660		$	1,331		$	12,378

	Allowance for Loan Losses and Recorded Investment in Loans
	As of December 31, 2011
	Commercial		Agricultural		Residential Real Estate		Consumer		Unallocated		Total
Allowance for loan losses
Individually evaluated for impairment	$	2,152	$	822	$	1,146	$	—	$	—	$	4,120
Collectively evaluated for impairment		4,132		181		1,834		633		1,475		8,255
Total	$	6,284	$	1,003	$	2,980	$	633	$	1,475	$	12,375
Loans
Individually evaluated for impairment	$	14,097	$	3,384	$	7,664	$	105			$	25,250
Collectively evaluated for impairment		351,617		71,261		270,696		31,467				725,041
Total	$	365,714	$	74,645	$	278,360	$	31,572			$	750,291

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

	June 30, 2012
	Commercial						Agricultural
	Real Estate		Other		Total		Real Estate		Other		Total
Rating
2 – High quality	$	27,077	$	14,143	$	41,220	$	2,578	$	2,199	$	4,777
3 – High satisfactory		81,883		28,314		110,197		15,964		8,273		24,237
4 – Low satisfactory		124,323		51,092		175,415		25,173		19,382		44,555
5 – Special mention		12,303		2,691		14,994		1,088		3,022		4,110
6 – Substandard		17,658		5,196		22,854		1,704		1,363		3,067
7 – Vulnerable		2,556		92		2,648		—		—		—
8 – Doubtful		1,019		24		1,043		190		286		476
Total	$	266,819	$	101,552	$	368,371	$	46,697	$	34,525	$	81,222

	December 31, 2011
	Commercial						Agricultural
	Real Estate		Other		Total		Real Estate		Other		Total
Rating
2 – High quality	$	11,113	$	11,013	$	22,126	$	3,583	$	1,390	$	4,973
3 – High satisfactory		90,064		29,972		120,036		11,154		5,186		16,340
4 – Low satisfactory		118,611		57,572		176,183		24,253		15,750		40,003
5 – Special mention		15,482		4,200		19,682		3,863		2,907		6,770
6 – Substandard		19,017		4,819		23,836		1,640		4,314		5,954
7 – Vulnerable		187		—		187		—		—		—
8 – Doubtful		3,621		43		3,664		190		415		605
Total	$	258,095	$	107,619	$	365,714	$	44,683	$	29,962	$	74,645

Internally assigned 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 risk ratings for commercial and agricultural loans are as follows:

1. EXCELLENT – Substantially Risk Free

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

• High liquidity, strong cash flow, low leverage.

• Unquestioned ability to meet all obligations when due.

• Experienced management, with management succession in place.

• Secured by cash.

2. HIGH QUALITY – Limited Risk

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

• Favorable liquidity and leverage ratios.

• Ability to meet all obligations when due.

• Management with successful track record.

• Steady and satisfactory earnings history.

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

• Access to alternative financing.

• Well defined primary and secondary source of repayment.

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

3. HIGH SATISFACTORY – Reasonable Risk

Credit with satisfactory financial condition and further characterized by:

• Working capital adequate to support operations.

• Cash flow sufficient to pay debts as scheduled.

• Management experience and depth appear favorable.

• Loan performing according to terms.

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

4. LOW SATISFACTORY – Acceptable Risk

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

• Would include most start-up businesses.

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

• Management’s abilities are apparent, yet unproven.

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

• Loan structure generally in accordance with policy.

• If secured, loan collateral coverage is marginal.

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

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

5. SPECIAL MENTION – Criticized

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

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

• Impaired working capital position.

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

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

• Shrinking equity cushion.

• Diminishing primary source of repayment and questionable secondary source.

• Management abilities are questionable.

• Weak industry conditions.

• Litigation pending against the borrower.

• Collateral or guaranty offers limited protection.

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

6. SUBSTANDARD – Classified

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

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

• Deteriorating liquidity.

• Serious management problems or internal fraud.

• Original repayment terms liberalized.

• Likelihood of bankruptcy.

• Inability to access other funding sources.

• Reliance on secondary source of repayment.

• Litigation filed against borrower.

• Collateral provides little or no value.

• Requires excessive attention of the loan officer.

• Borrower is uncooperative with loan officer.

7. VULNERABLE – Classified

Credit is considered “Substandard” and warrants placing on nonaccrual. 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

Credits are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification is for charged off loans but does not mean that the asset has absolutely no recovery or salvage value. These loans are further characterized by:

• Liquidation or reorganization under bankruptcy, with poor prospects of collection.

• Fraudulently overstated assets and/or earnings.

• Collateral has marginal or no value.

• Debtor cannot be located.

• Over 120 days delinquent.

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

	June 30, 2012
	Accruing Interest and Past Due:				Nonaccrual		Total Past Due and Nonaccrual		Current		Total
	30-89 Days		90 Days or More
Commercial
Commercial real estate	$	3,505	$	309	$	3,818	$	7,632	$	259,186	$	266,818
Commercial other		411		50		199		660		100,893		101,553
Total commercial		3,916		359		4,017		8,292		360,079		368,371
Agricultural
Agricultural real estate		206		—		356		562		46,135		46,697
Agricultural other		319		—		286		605		33,920		34,525
Total agricultural		525		—		642		1,167		80,055		81,222
Residential real estate
Senior liens		2,463		346		876		3,685		212,392		216,077
Junior liens		239		33		65		337		18,293		18,630
Home equity lines of credit		284		—		190		474		38,821		39,295
Total residential real estate		2,986		379		1,131		4,496		269,506		274,002
Consumer
Secured		145		1		—		146		26,290		26,436
Unsecured		33		—		—		33		4,888		4,921
Total consumer		178		1		—		179		31,178		31,357
Total	$	7,605	$	739	$	5,790	$	14,134	$	740,818	$	754,952

	December 31, 2011
	Accruing Interest and Past Due:						Total Past  Due and Nonaccrual
	30-89 Days		90 Days or More		Nonaccrual				Current		Total
Commercial
Commercial real estate	$	1,721	$	364	$	4,176	$	6,261	$	251,834	$	258,095
Commercial other		426		3		25		454		107,165		107,619
Total commercial		2,147		367		4,201		6,715		358,999		365,714
Agricultural
Agricultural real estate		—		99		189		288		44,395		44,683
Agricultural other		2		—		415		417		29,545		29,962
Total agricultural		2		99		604		705		73,940		74,645
Residential real estate
Senior liens		3,004		124		1,292		4,420		213,181		217,601
Junior liens		235		40		94		369		20,877		21,246
Home equity lines of credit		185		125		198		508		39,005		39,513
Total residential real estate		3,424		289		1,584		5,297		273,063		278,360
Consumer
Secured		158		5		—		163		26,011		26,174
Unsecured		23		—		—		23		5,375		5,398
Total consumer		181		5		—		186		31,386		31,572
Total	$	5,754	$	760	$	6,389	$	12,903	$	737,388	$	750,291

Impaired Loans

Loans may be classified as impaired if they meet one or more of the following criteria:

1. There has been a chargeoff of its principal balance (in whole or in part);

2. The loan has been classified as a Troubled Debt Restructuring (TDR); or

3. The loan is in nonaccrual status.

Impairment is measured on a loan by loan basis for commercial, commercial real estate, agricultural, or agricultural real estate loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral, less cost to sell, if the loan is collateral dependent. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment.

Interest income is recognized on impaired loans in nonaccrual status on the cash basis, but only after all principal has been collected. For impaired loans not in nonaccrual status, interest income is recognized daily as earned according to the terms of the loan agreement.

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

	June 30, 2012						December 31, 2011
	Outstanding Balance		Unpaid Principal Balance		Valuation Allowance		Outstanding Balance		Unpaid Principal Balance		Valuation Allowance
Impaired loans with a valuation allowance
Commercial real estate	$	6,128	$	6,408	$	1,893	$	5,014	$	5,142	$	1,881
Commercial other		944		944		222		734		734		271
Agricultural other		2,046		2,046		133		2,689		2,689		822
Residential real estate senior liens		7,894		9,077		1,278		7,271		8,827		1,111
Residential real estate junior liens		164		268		30		195		260		35
Total impaired loans with a valuation allowance	$	17,176	$	18,743	$	3,556	$	15,903	$	17,652	$	4,120
Impaired loans without a valuation allowance
Commercial real estate	$	5,946	$	6,628			$	7,984	$	10,570
Commercial other		2,253		2,294				365		460
Agricultural real estate		357		357				190		190
Agricultural other		552		672				505		625
Home equity lines of credit		190		490				198		498
Consumer secured		82		95				105		114
Total impaired loans without a valuation allowance	$	9,380	$	10,536			$	9,347	$	12,457
Impaired loans
Commercial	$	15,271	$	16,274	$	2,115	$	14,097	$	16,906	$	2,152
Agricultural		2,955		3,075		133		3,384		3,504		822
Residential real estate		8,248		9,835		1,308		7,664		9,585		1,146
Consumer		82		95		—		105		114		—
Total impaired loans	$	26,556	$	29,279	$	3,556	$	25,250	$	30,109	$	4,120

	Three Months Ended June 30, 2012				Six Months Ended June 30, 2012
	Average Outstanding Balance		Interest Income Recognized		Average Outstanding Balance		Interest Income Recognized
Impaired loans with a valuation allowance
Commercial real estate	$	6,444	$	83	$	6,165	$	181
Commercial other		829		16		777		28
Agricultural other		2,145		36		2,306		73
Residential real estate senior liens		7,862		92		7,706		175
Residential real estate junior liens		175		2		183		4
Total impaired loans with a valuation allowance	$	17,455	$	229	$	17,137	$	461
Impaired loans without a valuation allowance
Commercial real estate	$	6,789	$	112	$	7,299	$	179
Commercial other		2,249		34		1,777		65
Agricultural real estate		274		—		232		—
Agricultural other		607		3		595		7
Home equity lines of credit		195		4		197		8
Consumer secured		89		1		95		3
Total impaired loans without a valuation allowance	$	10,203	$	154	$	10,195	$	262
Impaired loans
Commercial	$	16,311	$	245	$	16,018	$	453
Agricultural		3,026		39		3,133		80
Residential real estate		8,232		98		8,086		187
Consumer		89		1		95		3
Total impaired loans	$	27,658	$	383	$	27,332	$	723

	Three Months Ended June 30, 2011					Six Months Ended June 30, 2011
	Average Outstanding Balance		Interest Income Recognized			Average Outstanding Balance		Interest Income Recognized
Impaired loans with a valuation allowance
Commercial real estate	$	2,570	$	96		$	3,490	$	120
Commercial other		—		—			9		—
Agricultural other		1,776		9			1,776		42
Residential real estate senior liens		4,980		70			4,845		106
Residential real estate junior liens		184		3			186		4
Total impaired loans with a valuation allowance	$	9,510	$	178		$	10,306	$	272
Impaired loans without a valuation allowance
Commercial real estate	$	4,085	$	69		$	3,151	$	102
Commercial other		1,780		28			968		88
Agricultural real estate		190		—			95		(1	)
Agricultural other		641		39			641		39
Residential real estate senior liens		337		(6	)		201		—
Home equity lines of credit		1		—			—		—
Consumer secured		36		1			38		3
Total impaired loans without a valuation allowance	$	7,070	$	131		$	5,094	$	231
Impaired loans
Commercial	$	8,435	$	193		$	7,618	$	310
Agricultural		2,607		48			2,512		80
Residential real estate		5,502		67			5,232		110
Consumer		36		1			38		3
Total impaired loans	$	16,580	$	309		$	15,400	$	503

Impaired loans, which include TDRs, had $290 of unfunded commitments under lines of credit as of June 30, 2012.

Troubled Debt Restructurings

Loan modifications are considered to be TDR’s when a concession has been granted 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 debt with similar risk characteristics.

3. Forbearance of principal.

4. Forbearance of accrued interest.

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

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

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

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

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

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

The following is a summary of information pertaining to TDR’s for the three and six month periods ended June 30, 2012:

	Loans Restructured in the Three Month						Loans Restructured in the Six Month
	Period ended June 30, 2012						Period ended June 30, 2012
	Number of Loans		Pre- Modification Recorded Investment		Post- Modification Recorded Investment		Number of Loans		Pre- Modification Recorded Investment		Post- Modification Recorded Investment
Commercial other		5	$	305	$	305	$	26	$	4,891	$	4,891
Agricultural other		—		—		—		6		561		561
Residential real estate senior liens		7		684		684		12		1,405		1,405
Total	$	12	$	989	$	989	$	44	$	6,857	$	6,857

	Loans Restructured in the Three Month								Loans Restructured in the Six Month
	Period Ended June 30, 2012								Period Ended June 30, 2012
					Below Market Interest Rate and Extension of Amortization Period				Below Market Interest Rate				Below Market Interest Rate and Extension of Amortization Period
	Below Market
	Interest Rate
			Pre-				Pre-				Pre-				Pre-
	Number		Modification		Number		Modification		Number		Modification		Number		Modification
	of		Recorded		of		Recorded		of		Recorded		of		Recorded
	Loans		Investment		Loans		Investment		Loans		Investment		Loans		Investment
Commercial other		3	$	160		2	$	145		24	$	4,746		2	$	145
Agricultural other		—		—		—		—		6		561		—		—
Residential real estate senior liens		4		324		3		360		4		324		8		1,081
Total		7	$	484		5	$	505		34	$	5,631		10	$	1,226

We did not restructure any loans through the forbearance of principal or accrued interest in the three or six month periods ended June 30, 2012.

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

Following is a summary of loans that defaulted in the three and six month periods ended June 30, 2012, which were modified within 12 months prior to the default date:

	Three Months Ended June 30, 2012								Six Months Ended June 30, 2012
			Pre-				Post-				Pre-				Post-
	Number		Default		Charge Off		Default		Number		Default		Charge Off		Default
	of		Recorded		Recorded		Recorded		of		Recorded		Recorded		Recorded
	Loans		Investment		Upon Default		Investment		Loans		Investment		Upon Default		Investment
Commercial other		2	$	50	$	25	$	25		3	$	132	$	67	$	65
Residential real estate senior liens		—		—		—		—		1		47		43		4
Consumer secured		1		8		8		—		1		8		8		—
Total		3	$	58	$	33	$	25		5	$	187	$	118	$	69

We had no loans that defaulted during the first six months of 2011, which were modified within 12 months prior to the default date.

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

	June 30		December 31
	2012		2011
Troubled debt restructurings	$	22,543	$	18,756

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Borrowed Funds

6 Months Ended

Jun. 30, 2012

Borrowed Funds [Abstract]

BORROWED FUNDS

NOTE 8 – BORROWED FUNDS

Borrowed funds consist of the following obligations as of:

	June 30, 2012					December 31, 2011
	Amount		Rate			Amount		Rate
Federal Home Loan Bank advances	$	154,000		2.18	%	$	142,242		3.16	%
Securities sold under agreements to repurchase without stated maturity dates		53,824		0.20	%		57,198		0.25	%
Securities sold under agreements to repurchase with stated maturity dates		16,708		3.51	%		16,696		3.51	%
Federal funds purchased		9,600		0.50	%		—		—
Total	$	234,132		1.75	%	$	216,136		2.42	%

The FHLB advances are collateralized by a blanket lien on all qualified 1-4 family residential real estate loans and certain mortgage-backed securities and collateralized mortgage obligations. Advances are also secured by our holdings of FHLB stock. We had the ability to borrow up to an additional $100,781 based on assets currently pledged as collateral as of June 30, 2012. During the first quarter of 2012, we reduced funding costs by modifying the terms of $60,000 of FHLB advances.

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

	June 30					December 31
	2012					2011
	Amount		Rate			Amount		Rate
Fixed rate advances due 2012	$	2,000		4.90	%	$	17,000		2.97	%
One year putable fixed rate advances due 2012		5,000		3.48	%		15,000		4.10	%
Variable rate advances due 2012		5,000		0.50	%		—		—
Fixed rate advances due 2013		—		—			5,242		4.14	%
One year putable fixed rate advances due 2013		—		—			5,000		3.15	%
Fixed rate advances due 2014		—		—			25,000		3.16	%
Fixed rate advances due 2015		42,000		1.12	%		45,000		3.30	%
Fixed rate advances due 2016		10,000		2.15	%		10,000		2.15	%
Fixed rate advances due 2017		40,000		2.15	%		20,000		2.56	%
Fixed rate advances due 2018		20,000		2.86	%		—		—
Fixed rate advances due 2019		20,000		3.73	%		—		—
Fixed rate advances due 2020		10,000		1.98	%		—		—
Total	$	154,000		2.18	%	$	142,242		3.16	%

Securities sold under agreements to repurchase are classified as secured borrowings. Securities sold under agreements to repurchase without stated maturity dates generally mature within one to four days from the transaction date. Securities sold under agreements to repurchase 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 $120,878 and $99,869 at June 30, 2012 and December 31, 2011, respectively. Such securities remain under our control. We may be required to provide additional collateral based on the fair value of underlying securities.

The following table provides a summary of short term borrowings for the three and six month periods ended June 30:

	Three Months Ended June 30
	2012							2011
	Maximum Month-End Balance		Quarter to Date Average Balance		Weighted Average Interest Rate During the Period			Maximum Month- End Balance		Quarter to Date Average Balance		Weighted Average Interest Rate During the Period
Securities sold under agreements to repurchase without stated maturity dates	$	58,584	$	58,045		0.20	%	$	43,138	$	44,680		0.25	%
Federal funds purchased		17,900		7,025		0.47	%		18,300		4,539		0.54	%

	Six Months Ended June 30
	2012							2011
	Maximum Month-End Balance		YTD Average Balance		Weighted Average Interest Rate During the Period			Maximum Month- End Balance		YTD Average Balance		Weighted Average Interest Rate During the Period
Securities sold under agreements to repurchase without stated maturity dates	$	58,584	$	55,436		0.11	%	$	43,138	$	40,715		0.25	%
Federal funds purchased		17,900		3,552		0.23	%		18,300		2,906		0.53	%

We had pledged certificates of deposit held in other financial institutions, trading securities, available-for-sale securities, and 1-4 family residential real estate loans in the following amounts at:

	June 30 2012		December 31 2011
Pledged to secure borrowed funds	$	316,349	$	292,092
Pledged to secure repurchase agreements		120,878		99,869
Pledged for public deposits and for other purposes necessary or required by law		24,177		26,761
Total	$	461,404	$	418,722

We had no investment securities that are restricted to be pledged for specific purposes.

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Fair Value (Details) (Auction rate money market preferred [Member], Level 3 [Member], USD $) In Thousands, unless otherwise specified	3 Months Ended	6 Months Ended
	Jun. 30, 2011	Jun. 30, 2011
Auction rate money market preferred [Member] | Level 3 [Member]
Available-for-sale investment securities measured with Level 3 inputs on a recurring basis
Level 3 inputs at beginning of period	$ 2,803	$ 2,865
Net unrealized losses	31	(31)
Level 3 inputs - June 30	$ 2,834	$ 2,834

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Fair Value (Details 2) (USD $) In Thousands, unless otherwise specified	6 Months Ended
	Jun. 30, 2012
Maximum [Member] | Reduction in interest rate from original loan terms [Member]
Impaired loans measured utilizing Level 3 fair value measurements
Fair Value Inputs, Discount Rate	3.38%
Discounted cash flow [Member] | Level 3 [Member]
Impaired loans measured utilizing Level 3 fair value measurements
Discounted cash flow at fair value	6,750
Discounted cash flow [Member] | Maximum [Member] | Level 3 [Member]
Impaired loans measured utilizing Level 3 fair value measurements
Duration of cash flows	120 months
Discounted cash flow [Member] | Minimum [Member] | Level 3 [Member]
Impaired loans measured utilizing Level 3 fair value measurements
Duration of cash flows	20 months
Discounted cash flow [Member] | Minimum [Member] | Reduction in interest rate from original loan terms [Member] | Level 3 [Member]
Impaired loans measured utilizing Level 3 fair value measurements
Fair Value Inputs, Discount Rate	2.13%
Discounted appraisal value [Member] | Level 3 [Member]
Impaired loans measured utilizing Level 3 fair value measurements
Discounted appraisal value at fair value	16,250
Discounted appraisal value [Member] | Equipment [Member] | Level 3 [Member]
Impaired loans measured utilizing Level 3 fair value measurements
Fair Value Inputs, Discount Rate	50.00%
Discounted appraisal value [Member] | Livestock [Member] | Level 3 [Member]
Impaired loans measured utilizing Level 3 fair value measurements
Fair Value Inputs, Discount Rate	50.00%
Discounted appraisal value [Member] | Cash crop inventory [Member] | Level 3 [Member]
Impaired loans measured utilizing Level 3 fair value measurements
Fair Value Inputs, Discount Rate	50.00%
Discounted appraisal value [Member] | Other inventory [Member] | Level 3 [Member]
Impaired loans measured utilizing Level 3 fair value measurements
Fair Value Inputs, Discount Rate	75.00%
Discounted appraisal value [Member] | Accounts receivable [Member] | Level 3 [Member]
Impaired loans measured utilizing Level 3 fair value measurements
Fair Value Inputs, Discount Rate	75.00%
Discounted appraisal value [Member] | Estimated liquidation costs [Member] | Level 3 [Member]
Impaired loans measured utilizing Level 3 fair value measurements
Fair Value Inputs, Discount Rate	10.00%
Discounted appraisal value [Member] | Maximum [Member] | Real Estate [Member] | Level 3 [Member]
Impaired loans measured utilizing Level 3 fair value measurements
Fair Value Inputs, Discount Rate	30.00%
Discounted appraisal value [Member] | Minimum [Member] | Real Estate [Member] | Level 3 [Member]
Impaired loans measured utilizing Level 3 fair value measurements
Fair Value Inputs, Discount Rate	20.00%

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Defined Benefit Pension Plan (Details Textual) (USD $) In Thousands, unless otherwise specified	6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011
Defined Benefit Pension Plan (Textual) [Abstract]
Defined benefit pension plan, effective curtailment date	Mar. 01, 2007
Contribution to the pension plan by corporation	$ 709	$ 0
Anticipated additional contribution to the pension plan by employer	$ 0

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Trading Securities (Details) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2012	Dec. 31, 2011
Schedule of trading securities, at fair value
States and political subdivisions	$ 1,998	$ 4,710

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Loans and Allowance for Loan Losses (Details Textual) (USD $) In Thousands, unless otherwise specified	6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011
Loans and Allowance for Loan Losses (ALLL) (Textual) [Abstract]
Amortized periods	6 Years
Loans and Allowance for Loan Losses (ALLL) (Additional Textual) [Abstract]
Time of accrual of interest of loan discontinued	90 days or more
Maximum days of consumer loans charged off	180 days
Maximum amount of loans	$ 12,500
Maximum amount without Corporation approval	400
Maximum percentage of private mortgage insurance required	80.00%
Maximum percentage of principal, interest, taxes and hazard insurance on property over gross income	28.00%
Maximum percentage of debt servicing over gross income	36.00%
Advance in connection to impaired loans	0
Loans defaulted		0
Installment period	12 months
Loans delinquent period	120 days
Line of Credit [Member]
Loans and Allowance for Loan Losses (ALLL) (Textual) [Abstract]
Advances made through pledge	$ 290
Maximum [Member]
Loans and Allowance for Loan Losses (ALLL) (Textual) [Abstract]
Amortized periods	30 Years
Minimum [Member]
Loans and Allowance for Loan Losses (ALLL) (Textual) [Abstract]
Amortized periods	15 Years
Residential Real Estate [Member]
Loans and Allowance for Loan Losses (ALLL) (Textual) [Abstract]
Maximum percentage of loan	95.00%
Commercial and agricultural real estate [Member]
Loans and Allowance for Loan Losses (ALLL) (Textual) [Abstract]
Maximum percentage of loan	80.00%

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Operating Segments

6 Months Ended

Jun. 30, 2012

Operating Segments [Abstract]

OPERATING SEGMENTS

NOTE 13 – OPERATING SEGMENTS

Our reportable segments are based on legal entities that account for at least 10% of net operating results. The operations of Isabella Bank as of June 30, 2012 and 2011 and each of the three and six month periods then ended, represented 90% or more of the our consolidated total assets and operating results. As such, no additional segment reporting is presented.

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Loans and Allowance for Loan Losses (Tables)

6 Months Ended

Jun. 30, 2012

Loans and Allowance for Loan Losses (ALLL) [Abstract]

Summary of changes in the ALLL and the recorded investment

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

	Allowance for Loan Losses Three Months Ended June 30, 2012
	Commercial			Agricultural			Residential Real Estate			Consumer			Unallocated		Total
Allowance for loan losses
April 1, 2012	$	5,728		$	859		$	3,702		$	625		$	1,461	$	12,375
Loans charged off		(237	)		—			(238	)		(146	)		—		(621	)
Recoveries		42			—			20			63			—		125
Provision for loan losses		475			(426	)		185			125			80		439
June 30, 2012	$	6,008		$	433		$	3,669		$	667		$	1,541	$	12,318

	Allowance for Loan Losses Six Months Ended June 30, 2012
	Commercial			Agricultural			Residential Real Estate			Consumer			Unallocated		Total
Allowance for loan losses
January 1, 2012	$	6,284		$	1,003		$	2,980		$	633		$	1,475	$	12,375
Loans charged off		(686	)		—			(353	)		(237	)		—		(1,276	)
Recoveries		128			—			61			130			—		319
Provision for loan losses		282			(570	)		981			141			66		900
June 30, 2012	$	6,008		$	433		$	3,669		$	667		$	1,541	$	12,318

Allowance for Loan Losses and Recorded Investment in Loans

	Allowance for Loan Losses and Recorded Investment in Loans As of June 30, 2012
	Commercial		Agricultural		Residential Real Estate		Consumer		Unallocated		Total
Allowance for loan losses
Individually evaluated for impairment	$	2,115	$	133	$	1,308	$	—	$	—	$	3,556
Collectively evaluated for impairment		3,893		300		2,361		667		1,541		8,762
Total	$	6,008	$	433	$	3,669	$	667	$	1,541	$	12,318
Loans
Individually evaluated for impairment		15,271		2,955		8,248		82				26,556
Collectively evaluated for impairment		353,100		78,267		265,754		31,275				728,396
Total	$	368,371	$	81,222	$	274,002	$	31,357			$	754,952

	Allowance for Loan Losses
	Three Months Ended June 30, 2011
	Commercial			Agricultural			Residential Real Estate			Consumer			Unallocated		Total
Allowance for loan losses
April 1, 2011	$	6,246		$	776		$	3,422		$	622		$	1,315	$	12,381
Loans charged off		(214	)		(1	)		(555	)		(139	)		—		(909	)
Recoveries		209			—			29			65			—		303
Provision for loan losses		497			(11	)		(11	)		112			16		603
June 30, 2011	$	6,738		$	764		$	2,885		$	660		$	1,331	$	12,378

	Allowance for Loan Losses
	Six Months Ended June 30, 2011
	Commercial			Agricultural			Residential Real Estate			Consumer			Unallocated			Total
Allowance for loan losses
January 1, 2011	$	6,048		$	1,033		$	3,198		$	605		$	1,489		$	12,373
Loans charged off		(869	)		(1	)		(878	)		(284	)		—			(2,032	)
Recoveries		346			—			103			168			—			617
Provision for loan losses		1,213			(268	)		462			171			(158	)		1,420
June 30, 2011	$	6,738		$	764		$	2,885		$	660		$	1,331		$	12,378

	Allowance for Loan Losses and Recorded Investment in Loans
	As of December 31, 2011
	Commercial		Agricultural		Residential Real Estate		Consumer		Unallocated		Total
Allowance for loan losses
Individually evaluated for impairment	$	2,152	$	822	$	1,146	$	—	$	—	$	4,120
Collectively evaluated for impairment		4,132		181		1,834		633		1,475		8,255
Total	$	6,284	$	1,003	$	2,980	$	633	$	1,475	$	12,375
Loans
Individually evaluated for impairment	$	14,097	$	3,384	$	7,664	$	105			$	25,250
Collectively evaluated for impairment		351,617		71,261		270,696		31,467				725,041
Total	$	365,714	$	74,645	$	278,360	$	31,572			$	750,291

Credit quality indicators for commercial and agricultural credit exposures

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

	June 30, 2012
	Commercial						Agricultural
	Real Estate		Other		Total		Real Estate		Other		Total
Rating
2 – High quality	$	27,077	$	14,143	$	41,220	$	2,578	$	2,199	$	4,777
3 – High satisfactory		81,883		28,314		110,197		15,964		8,273		24,237
4 – Low satisfactory		124,323		51,092		175,415		25,173		19,382		44,555
5 – Special mention		12,303		2,691		14,994		1,088		3,022		4,110
6 – Substandard		17,658		5,196		22,854		1,704		1,363		3,067
7 – Vulnerable		2,556		92		2,648		—		—		—
8 – Doubtful		1,019		24		1,043		190		286		476
Total	$	266,819	$	101,552	$	368,371	$	46,697	$	34,525	$	81,222

	December 31, 2011
	Commercial						Agricultural
	Real Estate		Other		Total		Real Estate		Other		Total
Rating
2 – High quality	$	11,113	$	11,013	$	22,126	$	3,583	$	1,390	$	4,973
3 – High satisfactory		90,064		29,972		120,036		11,154		5,186		16,340
4 – Low satisfactory		118,611		57,572		176,183		24,253		15,750		40,003
5 – Special mention		15,482		4,200		19,682		3,863		2,907		6,770
6 – Substandard		19,017		4,819		23,836		1,640		4,314		5,954
7 – Vulnerable		187		—		187		—		—		—
8 – Doubtful		3,621		43		3,664		190		415		605
Total	$	258,095	$	107,619	$	365,714	$	44,683	$	29,962	$	74,645

Credit quality indicators for residential real estate and consumer loans is the individual loans past due again

The following tables summarize the past due and current loans as of:

	June 30, 2012
	Accruing Interest and Past Due:				Nonaccrual		Total Past Due and Nonaccrual		Current		Total
	30-89 Days		90 Days or More
Commercial
Commercial real estate	$	3,505	$	309	$	3,818	$	7,632	$	259,186	$	266,818
Commercial other		411		50		199		660		100,893		101,553
Total commercial		3,916		359		4,017		8,292		360,079		368,371
Agricultural
Agricultural real estate		206		—		356		562		46,135		46,697
Agricultural other		319		—		286		605		33,920		34,525
Total agricultural		525		—		642		1,167		80,055		81,222
Residential real estate
Senior liens		2,463		346		876		3,685		212,392		216,077
Junior liens		239		33		65		337		18,293		18,630
Home equity lines of credit		284		—		190		474		38,821		39,295
Total residential real estate		2,986		379		1,131		4,496		269,506		274,002
Consumer
Secured		145		1		—		146		26,290		26,436
Unsecured		33		—		—		33		4,888		4,921
Total consumer		178		1		—		179		31,178		31,357
Total	$	7,605	$	739	$	5,790	$	14,134	$	740,818	$	754,952

	December 31, 2011
	Accruing Interest and Past Due:						Total Past  Due and Nonaccrual
	30-89 Days		90 Days or More		Nonaccrual				Current		Total
Commercial
Commercial real estate	$	1,721	$	364	$	4,176	$	6,261	$	251,834	$	258,095
Commercial other		426		3		25		454		107,165		107,619
Total commercial		2,147		367		4,201		6,715		358,999		365,714
Agricultural
Agricultural real estate		—		99		189		288		44,395		44,683
Agricultural other		2		—		415		417		29,545		29,962
Total agricultural		2		99		604		705		73,940		74,645
Residential real estate
Senior liens		3,004		124		1,292		4,420		213,181		217,601
Junior liens		235		40		94		369		20,877		21,246
Home equity lines of credit		185		125		198		508		39,005		39,513
Total residential real estate		3,424		289		1,584		5,297		273,063		278,360
Consumer
Secured		158		5		—		163		26,011		26,174
Unsecured		23		—		—		23		5,375		5,398
Total consumer		181		5		—		186		31,386		31,572
Total	$	5,754	$	760	$	6,389	$	12,903	$	737,388	$	750,291

Information pertaining to impaired loans

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

	June 30, 2012						December 31, 2011
	Outstanding Balance		Unpaid Principal Balance		Valuation Allowance		Outstanding Balance		Unpaid Principal Balance		Valuation Allowance
Impaired loans with a valuation allowance
Commercial real estate	$	6,128	$	6,408	$	1,893	$	5,014	$	5,142	$	1,881
Commercial other		944		944		222		734		734		271
Agricultural other		2,046		2,046		133		2,689		2,689		822
Residential real estate senior liens		7,894		9,077		1,278		7,271		8,827		1,111
Residential real estate junior liens		164		268		30		195		260		35
Total impaired loans with a valuation allowance	$	17,176	$	18,743	$	3,556	$	15,903	$	17,652	$	4,120
Impaired loans without a valuation allowance
Commercial real estate	$	5,946	$	6,628			$	7,984	$	10,570
Commercial other		2,253		2,294				365		460
Agricultural real estate		357		357				190		190
Agricultural other		552		672				505		625
Home equity lines of credit		190		490				198		498
Consumer secured		82		95				105		114
Total impaired loans without a valuation allowance	$	9,380	$	10,536			$	9,347	$	12,457
Impaired loans
Commercial	$	15,271	$	16,274	$	2,115	$	14,097	$	16,906	$	2,152
Agricultural		2,955		3,075		133		3,384		3,504		822
Residential real estate		8,248		9,835		1,308		7,664		9,585		1,146
Consumer		82		95		—		105		114		—
Total impaired loans	$	26,556	$	29,279	$	3,556	$	25,250	$	30,109	$	4,120

	Three Months Ended June 30, 2012				Six Months Ended June 30, 2012
	Average Outstanding Balance		Interest Income Recognized		Average Outstanding Balance		Interest Income Recognized
Impaired loans with a valuation allowance
Commercial real estate	$	6,444	$	83	$	6,165	$	181
Commercial other		829		16		777		28
Agricultural other		2,145		36		2,306		73
Residential real estate senior liens		7,862		92		7,706		175
Residential real estate junior liens		175		2		183		4
Total impaired loans with a valuation allowance	$	17,455	$	229	$	17,137	$	461
Impaired loans without a valuation allowance
Commercial real estate	$	6,789	$	112	$	7,299	$	179
Commercial other		2,249		34		1,777		65
Agricultural real estate		274		—		232		—
Agricultural other		607		3		595		7
Home equity lines of credit		195		4		197		8
Consumer secured		89		1		95		3
Total impaired loans without a valuation allowance	$	10,203	$	154	$	10,195	$	262
Impaired loans
Commercial	$	16,311	$	245	$	16,018	$	453
Agricultural		3,026		39		3,133		80
Residential real estate		8,232		98		8,086		187
Consumer		89		1		95		3
Total impaired loans	$	27,658	$	383	$	27,332	$	723

	Three Months Ended June 30, 2011					Six Months Ended June 30, 2011
	Average Outstanding Balance		Interest Income Recognized			Average Outstanding Balance		Interest Income Recognized
Impaired loans with a valuation allowance
Commercial real estate	$	2,570	$	96		$	3,490	$	120
Commercial other		—		—			9		—
Agricultural other		1,776		9			1,776		42
Residential real estate senior liens		4,980		70			4,845		106
Residential real estate junior liens		184		3			186		4
Total impaired loans with a valuation allowance	$	9,510	$	178		$	10,306	$	272
Impaired loans without a valuation allowance
Commercial real estate	$	4,085	$	69		$	3,151	$	102
Commercial other		1,780		28			968		88
Agricultural real estate		190		—			95		(1	)
Agricultural other		641		39			641		39
Residential real estate senior liens		337		(6	)		201		—
Home equity lines of credit		1		—			—		—
Consumer secured		36		1			38		3
Total impaired loans without a valuation allowance	$	7,070	$	131		$	5,094	$	231
Impaired loans
Commercial	$	8,435	$	193		$	7,618	$	310
Agricultural		2,607		48			2,512		80
Residential real estate		5,502		67			5,232		110
Consumer		36		1			38		3
Total impaired loans	$	16,580	$	309		$	15,400	$	503

Information pertaining to TDR's

The following is a summary of information pertaining to TDR’s for the three and six month periods ended June 30, 2012:

	Loans Restructured in the Three Month						Loans Restructured in the Six Month
	Period ended June 30, 2012						Period ended June 30, 2012
	Number of Loans		Pre- Modification Recorded Investment		Post- Modification Recorded Investment		Number of Loans		Pre- Modification Recorded Investment		Post- Modification Recorded Investment
Commercial other		5	$	305	$	305	$	26	$	4,891	$	4,891
Agricultural other		—		—		—		6		561		561
Residential real estate senior liens		7		684		684		12		1,405		1,405
Total	$	12	$	989	$	989	$	44	$	6,857	$	6,857

	Loans Restructured in the Three Month								Loans Restructured in the Six Month
	Period Ended June 30, 2012								Period Ended June 30, 2012
					Below Market Interest Rate and Extension of Amortization Period				Below Market Interest Rate				Below Market Interest Rate and Extension of Amortization Period
	Below Market
	Interest Rate
			Pre-				Pre-				Pre-				Pre-
	Number		Modification		Number		Modification		Number		Modification		Number		Modification
	of		Recorded		of		Recorded		of		Recorded		of		Recorded
	Loans		Investment		Loans		Investment		Loans		Investment		Loans		Investment
Commercial other		3	$	160		2	$	145		24	$	4,746		2	$	145
Agricultural other		—		—		—		—		6		561		—		—
Residential real estate senior liens		4		324		3		360		4		324		8		1,081
Total		7	$	484		5	$	505		34	$	5,631		10	$	1,226

Summary of defaulted loans

Following is a summary of loans that defaulted in the three and six month periods ended June 30, 2012, which were modified within 12 months prior to the default date:

	Three Months Ended June 30, 2012								Six Months Ended June 30, 2012
			Pre-				Post-				Pre-				Post-
	Number		Default		Charge Off		Default		Number		Default		Charge Off		Default
	of		Recorded		Recorded		Recorded		of		Recorded		Recorded		Recorded
	Loans		Investment		Upon Default		Investment		Loans		Investment		Upon Default		Investment
Commercial other		2	$	50	$	25	$	25		3	$	132	$	67	$	65
Residential real estate senior liens		—		—		—		—		1		47		43		4
Consumer secured		1		8		8		—		1		8		8		—
Total		3	$	58	$	33	$	25		5	$	187	$	118	$	69

Summary of TDR loan balances

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

	June 30		December 31
	2012		2011
Troubled debt restructurings	$	22,543	$	18,756

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Loans and Allowance for Loan Losses (Details 6) (USD $) In Thousands, unless otherwise specified	3 Months Ended	6 Months Ended
	Jun. 30, 2012 NumberofLoan	Jun. 30, 2012 NumberofLoan
Summary of defaulted loans
Number of Loans	3	5
Pre-Default Recorded Investment	$ 58	$ 187
Charge Off Recorded Upon Default	33	118
Post- Default Recorded Investment	25	69
Commercial other [Member]
Summary of defaulted loans
Number of Loans	2	3
Pre-Default Recorded Investment	50	132
Charge Off Recorded Upon Default	25	67
Post- Default Recorded Investment	25	65
Residential real estate senior liens [Member]
Summary of defaulted loans
Number of Loans		1
Pre-Default Recorded Investment		47
Charge Off Recorded Upon Default		43
Post- Default Recorded Investment		4
Consumer secured [Member]
Summary of defaulted loans
Number of Loans	1	1
Pre-Default Recorded Investment	8	8
Charge Off Recorded Upon Default	8	8
Post- Default Recorded Investment

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Available-For-Sale Securities (Details 5) (USD $) In Thousands, unless otherwise specified	3 Months Ended	6 Months Ended
	Jun. 30, 2012	Jun. 30, 2012
Impairment recognized in earnings on available-for-sale securities
Balance at beginning of period	$ 282
Additions to credit losses for which no previous OTTI was recognized		282
June 30, 2012	$ 282	$ 282

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Interim Condensed Consolidated Statements of Changes in Shareholders' Equity (Parenthetical) (USD $)	6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011
Cash dividends per share	$ 0.40	$ 0.38
Retained Earnings
Cash dividends per share	$ 0.40	$ 0.38

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Computation of Earnings Per Share

6 Months Ended

Jun. 30, 2012

Computation of Earnings Per Share [Abstract]

COMPUTATION OF EARNINGS PER SHARE

NOTE 2 – COMPUTATION OF EARNINGS PER SHARE

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

Earnings per common share have been computed based on the following:

	Three Months Ended June 30				Six Months Ended June 30
	2012		2011		2012		2011
Average number of common shares outstanding for basic calculation		7,592,668		7,570,752		7,593,462		7,564,060
Average potential effect of shares in the Directors Plan (1)		203,603		194,964		201,743		194,051
Average number of common shares outstanding used to calculate diluted earnings per common share		7,796,271		7,765,716		7,795,205		7,758,111
Net income	$	3,004	$	2,672	$	6,238	$	4,988
Earnings per share
Basic	$	0.40	$	0.35	$	0.82	$	0.66
Diluted	$	0.39	$	0.34	$	0.80	$	0.64

(1) Exclusive of shares held in the Rabbi Trust

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Other Noninterest Expenses (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011
Summary of expenses included in other noninterest expenses
Marketing and community relations	$ 535	$ 527	$ 1,029	$ 750
FDIC insurance premiums	213	331	428	665
Directors fees	209	206	419	417
Audit fees	154	167	330	323
Education and travel	139	99	266	204
Consulting fees	71	67	258	100
Printing and supplies	110	89	219	189
Postage and freight	94	96	195	196
Foreclosed asset and collection	(18)	177	79	277
Amortization of deposit premium	67	76	133	152
Legal fees	81	54	143	116
Other Losses	107	10	137	11
All other	425	394	810	723
Total	$ 2,187	$ 2,293	$ 4,446	$ 4,123

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Fair Value (Details 5) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2012	Dec. 31, 2011
Available-for-sale investment securities
Total available-for-sale investment securities	$ 476,935	$ 425,120
Borrowed funds	0	5,242
Impaired loans (net of the allowance for loan losses)	0
Fair value, total	506,719	460,452
Level 1 [Member]
Available-for-sale investment securities
Fair value, total	5,927	5,033
Percent of assets and liabilities measured at fair value	1.17%	1.09%
Level 2 [Member]
Available-for-sale investment securities
Fair value, total	477,792	434,289
Percent of assets and liabilities measured at fair value	94.29%	94.32%
Level 3 [Member]
Available-for-sale investment securities
Fair value, total	23,000	21,130
Percent of assets and liabilities measured at fair value	4.54%	4.59%
Recurring items [Member]
Available-for-sale investment securities
Total available-for-sale investment securities	476,935	425,120
Borrowed funds		5,242
Recurring items [Member] | Government sponsored enterprises [Member]
Available-for-sale investment securities
Total available-for-sale investment securities	2,231	397
Recurring items [Member] | States and political subdivisions [Member]
Trading securities
Trading securities	1,998	4,710
Available-for-sale investment securities
Total available-for-sale investment securities	178,654	174,938
Recurring items [Member] | Auction rate money market preferred [Member]
Available-for-sale investment securities
Total available-for-sale investment securities	2,574	2,049
Recurring items [Member] | Preferred stocks [Member]
Available-for-sale investment securities
Total available-for-sale investment securities	5,927	5,033
Recurring items [Member] | Mortgage-backed securities [Member]
Available-for-sale investment securities
Total available-for-sale investment securities	164,497	143,602
Recurring items [Member] | Collateralized mortgage obligations [Member]
Available-for-sale investment securities
Total available-for-sale investment securities	123,052	99,101
Recurring items [Member] | Level 1 [Member]
Available-for-sale investment securities
Total available-for-sale investment securities	5,927	5,033
Borrowed funds
Recurring items [Member] | Level 1 [Member] | Government sponsored enterprises [Member]
Available-for-sale investment securities
Total available-for-sale investment securities
Recurring items [Member] | Level 1 [Member] | States and political subdivisions [Member]
Trading securities
Trading securities
Available-for-sale investment securities
Total available-for-sale investment securities
Recurring items [Member] | Level 1 [Member] | Auction rate money market preferred [Member]
Available-for-sale investment securities
Total available-for-sale investment securities
Recurring items [Member] | Level 1 [Member] | Preferred stocks [Member]
Available-for-sale investment securities
Total available-for-sale investment securities	5,927	5,033
Recurring items [Member] | Level 1 [Member] | Mortgage-backed securities [Member]
Available-for-sale investment securities
Total available-for-sale investment securities
Recurring items [Member] | Level 1 [Member] | Collateralized mortgage obligations [Member]
Available-for-sale investment securities
Total available-for-sale investment securities
Recurring items [Member] | Level 2 [Member]
Available-for-sale investment securities
Total available-for-sale investment securities	471,008	420,087
Borrowed funds		5,242
Recurring items [Member] | Level 2 [Member] | Government sponsored enterprises [Member]
Available-for-sale investment securities
Total available-for-sale investment securities		397
Recurring items [Member] | Level 2 [Member] | States and political subdivisions [Member]
Trading securities
Trading securities		4,710
Available-for-sale investment securities
Total available-for-sale investment securities		174,938
Recurring items [Member] | Level 2 [Member] | Auction rate money market preferred [Member]
Available-for-sale investment securities
Total available-for-sale investment securities		2,049
Recurring items [Member] | Level 2 [Member] | Preferred stocks [Member]
Available-for-sale investment securities
Total available-for-sale investment securities
Recurring items [Member] | Level 2 [Member] | Mortgage-backed securities [Member]
Available-for-sale investment securities
Total available-for-sale investment securities		143,602
Recurring items [Member] | Level 2 [Member] | Collateralized mortgage obligations [Member]
Available-for-sale investment securities
Total available-for-sale investment securities		99,101
Recurring items [Member] | Level 3 [Member]
Available-for-sale investment securities
Total available-for-sale investment securities
Borrowed funds
Recurring items [Member] | Level 3 [Member] | Government sponsored enterprises [Member]
Available-for-sale investment securities
Total available-for-sale investment securities
Recurring items [Member] | Level 3 [Member] | States and political subdivisions [Member]
Trading securities
Trading securities
Available-for-sale investment securities
Total available-for-sale investment securities
Recurring items [Member] | Level 3 [Member] | Auction rate money market preferred [Member]
Available-for-sale investment securities
Total available-for-sale investment securities
Recurring items [Member] | Level 3 [Member] | Preferred stocks [Member]
Available-for-sale investment securities
Total available-for-sale investment securities
Recurring items [Member] | Level 3 [Member] | Mortgage-backed securities [Member]
Available-for-sale investment securities
Total available-for-sale investment securities
Recurring items [Member] | Level 3 [Member] | Collateralized mortgage obligations [Member]
Available-for-sale investment securities
Total available-for-sale investment securities
Nonrecurring items [Member]
Available-for-sale investment securities
Impaired loans (net of the allowance for loan losses)	23,000	21,130
Originated mortgage servicing right	2,424	2,374
Foreclosed assets	2,362	1,876
Nonrecurring items [Member] | Level 1 [Member]
Available-for-sale investment securities
Impaired loans (net of the allowance for loan losses)
Originated mortgage servicing right
Foreclosed assets
Nonrecurring items [Member] | Level 2 [Member]
Available-for-sale investment securities
Impaired loans (net of the allowance for loan losses)
Originated mortgage servicing right	2,424	2,374
Foreclosed assets	2,362	1,876
Nonrecurring items [Member] | Level 3 [Member]
Available-for-sale investment securities
Impaired loans (net of the allowance for loan losses)	23,000	21,130
Originated mortgage servicing right
Foreclosed assets

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Equity Securities Without Readily Determinable Fair Values (Tables)

6 Months Ended

Jun. 30, 2012

Equity Securities Without Readily Determinable Fair Values [Abstract]

Schedule of equity securities without fair values

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

	June 30		December 31
	2012		2011
Federal Home Loan Bank Stock	$	7,700	$	7,380
Investment in Corporate Settlement Solutions		6,810		6,611
Federal Reserve Bank Stock		1,879		1,879
Investment in Valley Financial Corporation		1,000		1,000
Other		319		319
Total	$	17,708	$	17,189

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Available-For-Sale Securities (Details 2) (USD $) In Thousands, unless otherwise specified	6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011
Summary of the activity related to sales of available-for-sale securities
Proceeds from sales of securities	$ 24,241	$ 0
Gross realized gains	1,003
Applicable income tax expense	$ 341

XML

Fair Value

6 Months Ended

Jun. 30, 2012

Fair Value [Abstract]

FAIR VALUE

NOTE 12 – FAIR VALUE

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

Cash and demand deposits due from banks: The carrying amounts of cash and short term investments, including Federal funds sold, approximate fair values. As such, we classify cash and demand deposits due from banks as Level 1.

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

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

Due to the limited trading activity of certain auction rate money market preferred securities and preferred stocks we measured these securities using Level 3 inputs as of June 30, 2011. As the markets for these securities normalized and established regular trading patterns, we measured preferred stocks utilizing Level 1 inputs and an auction rate money market preferred security utilizing Level 2 inputs as of December 31, 2011 and continued to measure at these levels as of June 30, 2012.

The table below represents the activity in auction rate money market preferred available-for-sale investment securities measured with Level 3 inputs on a recurring basis for the:

	Three Months		Six Months
	Ended		Ended
	June 30, 2011		June 30, 2011
Level 3 inputs at beginning of period	$	2,803	$	2,865
Net unrealized gains (losses)		31		(31	)
Level 3 inputs—June 30	$	2,834	$	2,834
				`

The table below represents the activity in preferred stock available-for-sale investment securities measured with Level 3 inputs on a recurring basis for the:

	Three Months			Six Months
	Ended			Ended
	June 30, 2011			June 30, 2011
Level 3 inputs at beginning of period	$	7,593		$	6,936
Net unrealized (losses) gains		(23	)		634
Level 3 inputs—June 30	$	7,570		$	7,570

We had no financial instruments measured with Level 3 inputs on a recurring basis during 2012.

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

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

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 collateral value, market value of similar debt, enterprise value, liquidation value, or discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans.

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, management utilizes independent appraisals, broker price opinions, or internal evaluations. These valuations are reviewed to determine whether an additional discount should be applied given the age of market information that may have been considered as well as other factors such as costs to carry and sell an asset if it is determined that the collateral will be liquidated in connection with the ultimate settlement of the loan. We use these valuations to determine if any charge offs or specific reserves are necessary. We may obtain new valuations in certain circumstances, including when there has been significant deterioration in the condition of the collateral, if the foreclosure process has begun, or if the existing valuation is deemed to be outdated.

Impaired loans where an allowance is established based on the net realizable value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraisal value, we record the loan as nonrecurring Level 2. When a current appraised value is not available or we determine the fair value of collateral is further impaired below the appraised value, the impaired loan is classified as nonrecurring Level 3.

The table below lists the quantitative information about impaired loans measured utilizing Level 3 fair value measurements as of June 30, 2012:

Valuation Techniques	Fair Value		Unobservable Input	Range
			Duration of cash flows		20 - 120 Months
Discounted cash flow	$	6,750	Reduction in interest rate from original loan terms		2.13% - 3.38%
			Discount applied to
			collateral appraisal:
			Real Estate		20% - 30%
			Equipment		50%
Discounted appraisal value	$	16,250	Livestock		50%
			Cash crop inventory		50%
			Other inventory		75%
			Accounts receivable		75%
			Estimated liquidation costs		10%

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

Goodwill and other intangible assets: Acquisition intangibles and goodwill are evaluated for potential impairment on at least an annual basis. Goodwill is typically qualitatively evaluated to determine if it is more likely than not that the carrying balance is impaired. If it is determined that the carrying balance of goodwill is more likely than not to be impaired, we perform a cash flow valuation to determine the extent of the potential impairment. Acquisition intangibles are tested for impairment with a cash flow valuation. This valuation method requires a significant degree of 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. If the testing resulted in impairment, we would classify goodwill and other acquisition intangibles subjected to nonrecurring fair value adjustments as Level 3. During 2012 and 2011 there were no impairments recorded on goodwill and other acquisition intangibles.

Equity securities without readily determinable fair values: We have investments in equity securities without readily determinable fair values as well as investments in joint ventures. The assets are individually reviewed for impairment on an annual basis, or more frequently if an indication of impairment exists, by comparing the carrying value to the estimated fair value. The lack of an independent source to validate fair value estimates, including the impact of future capital calls and transfer restrictions, is an inherent limitation in the valuation process. We classify nonmarketable equity securities and investments in joint ventures subjected to nonrecurring fair value adjustments as Level 3. During 2012 and 2011, there were no impairments recorded on equity securities without readily determinable fair values.

Foreclosed assets: Upon transfer from the loan portfolio, foreclosed assets are adjusted to and subsequently carried at the lower of carrying value or fair value less costs to sell. Net realizable value is based upon independent market prices, appraised values of the collateral, or management’s estimation of the value of the collateral and as such, we classify foreclosed assets as a nonrecurring Level 2. When the net realizable value of the collateral is further impaired below the appraised value but there is no observable market price, we record the foreclosed asset as nonrecurring Level 3.

Originated mortgage servicing rights: OMSR is subject to impairment testing. A valuation model, which utilizes a discounted cash flow analysis using interest rates and prepayment speed assumptions currently quoted for comparable instruments and a discount rate determined by management, is used for impairment testing. If the valuation model reflects a value less than the carrying value, originated mortgage servicing rights are adjusted to fair value through a valuation allowance as determined by the model. As such, we classify loan servicing rights subject to nonrecurring fair value adjustments as Level 2.

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

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

We elected to measure a portion of borrowed funds at fair value as of December 31, 2011. These borrowings were recorded at fair value on a recurring basis, with the fair value measurement estimated using discounted cash flow analysis based on current incremental borrowing rates for similar types of borrowing arrangements. Changes in the fair value of these borrowings are included in noninterest income. As such, other borrowed funds are classified as Level 2.

The activity in borrowings which the Corporation has elected to carry at fair value was as follows:

	Three Months Ended					Six Months Ended
	June 30					June 30
	2012		2011			2012			2011
Borrowings carried at fair value—beginning of year	$	—	$	10,343		$	5,242		$	10,423
Paydowns and maturities		—		—			(5,209	)		—
Net unrealized change in fair value		—		(37	)		(33	)		(117	)
Borrowings carried at fair value—June 30	$	—	$	10,306		$	—		$	10,306
Unpaid principal balance—June 30	$	—	$	10,000		$	—		$	10,000

Commitments to extend credit, standby letters of credit and undisbursed loans: Fair values for off balance sheet lending commitments are based on fees currently charged to enter into similar agreements, taking into consideration the remaining terms of the agreements and the counterparties’ credit standings. As we do not charge fees for lending commitments outstanding, it is not practicable to estimate the fair value of these instruments.

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. Furthermore, although we believe our valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement.

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

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

The carrying amount and estimated fair value of financial instruments not recorded at fair value in their entirety on a recurring basis on our consolidated balance sheets are as follows as of:

	June 30, 2012
	Carrying			Estimated
	Value			Fair Value			(Level 1)		(Level 2)			(Level 3)
ASSETS
Cash and demand deposits due from banks	$	20,251		$	20,251		$	20,251	$	—		$	—
Certicates of deposit held in other financial institutions		6,880			6,906			—		6,906			—
Mortgage loans available-for-sale		2,347			2,413			—		2,413			—
Total loans		754,952			768,354			—		741,798			26,556
Less allowance for loan losses		(12,318	)		(12,318	)		—		(8,762	)		(3,556	)
Net loans		742,634			756,036			—		733,036			23,000
Accrued interest receivable		5,217			5,217			5,217		—			—
Equity securities without readily determinable fair values (1)		17,708			17,708			—		—			—
Originated mortgage servicing rights		2,424			2,424			—		2,424			—
LIABILITIES
Deposits without stated maturities		499,900			499,900			499,900		—			—
Deposits with stated maturities		478,928			491,475			—		491,475			—
Borrowed funds		234,132			240,869			—		240,869			—
Accrued interest payable		809			809			809		—			—

(1) Due to the characteristics of equity securities without readily determinable fair values, they are not disclosed under a specific fair value hierarchy.

	December 31, 2011
	Carrying			Estimated
	Value			Fair Value
ASSETS
Cash and demand deposits due from banks	$	28,590		$	28,590
Certificates of deposit held in other financial institutions		8,924			8,977
Mortgage loans available-for-sale		3,205			3,252
Total loans		750,291			769,177
Less allowance for loan losses		(12,375	)		(12,375	)
Net loans		737,916			756,802
Accrued interest receivable		5,848			5,848
Equity securities without readily determinable fair values		17,189			17,189
Originated mortgage servicing rights		2,374			2,374
LIABILITIES
Deposits without stated maturities		476,627			476,627
Deposits with stated maturities		481,537			499,644
Borrowed funds		210,894			222,538
Accrued interest payable		967			967

Financial Instruments Recorded at Fair Value

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

	June 30, 2012											December 31, 2011
Description	Total		(Level 1)			(Level 2)			(Level 3)			Total		(Level 1)			(Level 2)			(Level 3)
Recurring items
Trading securities
States and political subdivisions	$	1,998	$	—		$	1,998		$	—		$	4,710	$	—		$	4,710		$	—
Available-for-sale investment securities
Government sponsored enterprises		2,231		—			2,231			—			397		—			397			—
States and political subdivisions		178,654		—			178,654			—			174,938		—			174,938			—
Auction rate money market preferred		2,574		—			2,574			—			2,049		—			2,049			—
Preferred stocks		5,927		5,927			—			—			5,033		5,033			—			—
Mortgage-backed securities		164,497		—			164,497			—			143,602		—			143,602			—
Collateralized mortgage obligations		123,052		—			123,052			—			99,101		—			99,101			—
Total available-for-sale investment securities		476,935		5,927			471,008			—			425,120		5,033			420,087			—
Borrowed funds		—		—			—			—			5,242		—			5,242			—
Nonrecurring items
Impaired loans (net of the allowance for loan losses)		23,000		—			—			23,000			21,130		—			—			21,130
Originated mortgage servicing rights		2,424		—			2,424			—			2,374		—			2,374			—
Foreclosed assets		2,362		—			2,362			—			1,876		—			1,876			—
	$	506,719	$	5,927		$	477,792		$	23,000		$	460,452	$	5,033		$	434,289		$	21,130
Percent of assets and liabilities measured at fair value				1.17	%		94.29	%		4.54	%				1.09	%		94.32	%		4.59	%

The changes in fair value of assets and liabilities recorded at fair value through earnings on a recurring basis and changes in assets and liabilities recorded at fair value on a nonrecurring basis, for which an impairment, or reduction of an impairment, was recognized in the three and six month periods ended June 30, 2012 and 2011, are summarized as follows:

	Three Months Ended June 30
	2012									2011
Description	Trading Gains and (Losses)			Other Gains and (Losses)			Total			Trading Gains and (Losses)			Other Gains and (Losses)			Total
Recurring Items
Trading securities	$	(16	)	$	—		$	(16	)	$	(8	)	$	—		$	(8	)
Borrowed funds		—			—			—			—			37			37
Nonrecurring Items
Foreclosed assets		—			—			—			—			(25	)		(25	)
Originated mortgage servicing rights		—			(32	)		(32	)		—			(25	)		(25	)
Total	$	(16	)	$	(32	)	$	(48	)	$	(8	)	$	(13	)	$	(21	)
	Six Months Ended June 30
	2012									2011
Description	Trading Losses			Other Gains and (Losses)			Total			Trading Losses			Other Gains and (Losses)			Total
Recurring items
Trading securities	$	(32	)	$	—		$	(32	)	$	(27	)	$	—		$	(27	)
Borrowed funds		—			33			33			—			117			117
Nonrecurring items
Foreclosed assets		—			(17	)		(17	)		—			(35	)		(35	)
Originated mortgage servicing rights		—			42			42			—			(18	)		(18	)
Total	$	(32	)	$	58		$	26		$	(27	)	$	64		$	37