10-K

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the fiscal year ended December 31, 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 North Main Street, Mount Pleasant, Michigan 48858

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code (989) 772-9471

Securities registered pursuant to Section 12(b) of the Act:

Title of each class Name of each exchange on which registered

Securities registered pursuant to Section 12(g) of the Act:

Common Stock - No Par Value

(Title of Class)

Indicated by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    ¨  Yes    x  No

Indicated by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.     ¨  Yes    x  No

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

Indicate by check mark whether the registrant has submitted electronically 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   x

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 definition 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	¨	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

The aggregate market value of the voting stock held by non-affiliates of the registrant was $188,923,000 as of the last business day of the registrant’s most recently completed second fiscal quarter.

The number of shares outstanding of the registrant’s Common Stock (no par value) was 7,669,684 as of March 7, 2013.

DOCUMENTS INCORPORATED BY REFERENCE

(Such documents are incorporated herein only to the extent specifically set forth in response to an item herein.)

Documents	Part of Form 10-K Incorporated into
Isabella Bank Corporation Proxy Statement for its Annual Meeting of Shareholders to be held May 7, 2013	Part III

ISABELLA BANK CORPORATION

ANNUAL REPORT ON FORM 10-K

Table of Contents

PART I
Item 1	Business	2
Item 1A	Risk Factors	5
Item 1B	Unresolved Staff Comments	8
Item 2	Properties	8
Item 3	Legal Proceedings	8
Item 4	Mine Safety Disclosures	Not Applicable
PART II
Item 5	Market for Registrant’s Common Equity, Related Shareholders’ Matters and Issuer Purchases of Equity Securities	9
Item 6	Selected Financial Data	12
Item 7	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14
Item 7A	Quantitative and Qualitative Disclosures about Market Risk	37
Item 8	Financial Statements and Supplementary Data	37
Item 9	Changes in and Disagreements with Accountants on Accounting and Financial Disclosures	87
Item 9A	Controls and Procedures	87
Item 9B	Other Information	88
PART III
Item 10	Directors, Executive Officers and Corporate Governance	89
Item 11	Executive Compensation	89
Item 12	Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters	89
Item 13	Certain Relationships and Related Transactions, and Director Independence	90
Item 14	Principal Accounting Fees and Services	90
PART IV
Item 15	Exhibits and Financial Statement Schedules	91
SIGNATURES		93

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 Reform Act of 1995, and are including this statement for purposes of these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe our 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 our operations and future prospects include, but are not limited to, changes in interest rates, general economic conditions, legislative/regulatory changes, monetary and fiscal policies of the U.S. Government including policies of the U.S. Treasury, the FRB, the FDIC, the quality or composition of the loan or investment portfolios, demand for loan products, 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 us and our business, including additional factors that could materially affect our financial results, is included in our filings with the SEC.

The acronyms and abbreviations identified below are used in throughout this 10-K. You may find it helpful to refer back to this page as you read this report.

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

Part I

Item 1. Business (All dollars in thousands)

General

Isabella Bank Corporation is a registered financial services holding company incorporated in September 1988 under Michigan law. The Corporation has two subsidiaries: Isabella Bank and Financial Group Information Services. Isabella Bank has 26 banking offices located throughout Clare, Gratiot, Isabella, Mecosta, Midland, Montcalm, and Saginaw counties. The area includes significant agricultural production, light manufacturing, retail, gaming and tourism, and five colleges and universities. Financial Group Information Services renders computer services to the Corporation and its subsidiaries.

As used in Management’s Discussion and Analysis of Financial Condition and Results of Operations as well as in the Financial Statements and Supplementary Data, 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 the “Bank” refers to Isabella Bank Corporation’s subsidiary, Isabella Bank.

Our reportable segments are based on legal entities that account for at least 10% of net operating results. Retail banking operations for 2012, 2011, and 2010 represent approximately 90% or greater of total assets and operating results. As such, we have only one reportable segment.

We are a community bank with a focus on providing high quality, personalized service at a fair price. We offer a broad array of banking services to businesses, institutions, and individuals. We compete with other commercial banks, many of which are subsidiaries of other bank holding companies, savings and loan associations, mortgage brokers, finance companies, credit unions, and retail brokerage firms.

Lending activities include loans made pursuant to commercial and agricultural operating and real estate purposes, residential real estate loans, and consumer loans. We limit lending activities primarily to local markets and have not purchased any loans from the secondary market. We do not make loans to fund leveraged buyouts, have no foreign corporate or government loans, and have limited holdings of corporate debt securities. Our general lending philosophy is to limit concentrations to individuals and business segments. For additional information related to our lending strategies and policies, see “Note 6—Loans and Allowance for Loan Losses” of the Notes to Consolidated Financial Statements.

Deposit services offered include checking accounts, savings accounts, certificates of deposit, direct deposits, cash management services, mobile and internet banking, electronic bill pay services, and automated teller machines. We also offer full service trust and brokerage services.

As of December 31, 2012, we had 356 full-time equivalent employees. We provide group life, health, accident, disability, and other insurance programs as well as a number of other employee benefit programs. We believe our relationship with our employees to be good. None of our workforce is subject to collective bargaining agreements.

AVAILABLE INFORMATION

Our SEC filings (including our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Definitive Proxy Statements, Current Reports on Form 8-K and amendments to those reports) are available through our website (www.isabellabank.com). We will provide paper copies of our SEC reports free of charge upon request of a shareholder.

The SEC maintains an internet site (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding Isabella Bank Corporation (CIK #0000842517) and other issuers.

2

SUPERVISION AND REGULATION

The earnings and growth of the banking industry and, therefore, our earnings are affected by the credit policies of monetary authorities, including the FRB. An important function of the FRB is to regulate the national supply of bank credit in order to combat recessions and curb inflationary pressures. Among the instruments of monetary policy used by the FRB to implement these objectives are open market operations in U.S. Treasury and U.S. Government Agency securities, changes in the discount rate on member bank borrowings, and changes in reserve requirements against member bank deposits. These methods are used in varying combinations to influence overall growth of bank loans, investments and deposits and also affect interest rates charged on loans or paid for deposits. The monetary policies of the FRB have had a significant effect on the operating results of commercial banks and related financial service providers in the past and are expected to continue to do so in the future. The effect of such policies upon our future business and earnings cannot be predicted.

We, as a financial holding company, are regulated under the BHC Act, and are subject to the supervision of the FRB. We are registered as a financial services holding company with the FRB and are subject to annual reporting requirements and inspections and audits. Under FRB policy, we are expected to act as a source of financial strength to the Bank and to commit resources to support our subsidiaries. This support may be required at times when, in the absence of such FRB policy, we would not otherwise be required to provide it.

Under Michigan law, if the capital of a Michigan state chartered bank (such as the Bank) has become impaired by losses or otherwise, the Commissioner of the OFIR may require that the deficiency in capital be met by assessment upon the bank’s shareholders pro rata on the amount of capital stock held by each, and if any such assessment is not paid by any shareholder within 30 days of the date of mailing of notice thereof to such shareholder, cause the sale of the stock of such shareholder to pay such assessment and the costs of sale of such stock.

Any capital loans by a bank holding company to any of its subsidiary banks are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary bank. In the event of a bank holding company’s bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to a priority of payment. This priority would apply to guarantees of capital plans under the FDIC Improvement Act of 1991.

SOX contains important requirements for public companies in the area of financial disclosure and corporate governance. In accordance with Section 302(a) of SOX, written certifications by our principal executive, financial, and accounting officers are required. These certifications attest that our quarterly and annual reports filed with the SEC do not contain any untrue statement of a material fact. See the Certifications filed as Exhibits 31 (a) and (b) to this Form 10-K for such certification of the financial statements and other information for this 2012 Form 10-K. We have also implemented a program designed to comply with Section 404 of SOX, which included the identification of significant processes and accounts, documentation of the design of control effectiveness over process and entity level controls, and testing of the operating effectiveness of key controls. See Item 9A, “Controls and Procedures” for our evaluation of disclosure controls and procedures and internal controls over financial reporting.

Certain additional information concerning regulatory guidelines for capital adequacy and other regulatory matters is presented herein under the caption “Capital” on page 32 and in “Note 15—Commitments and Other Matters” and “Note 16—Minimum Regulatory Capital Requirements” of the Notes to Consolidated Financial Statements.

Isabella Bank

The Bank is supervised and regulated by OFIR and the FRB. The agencies and federal and state laws extensively regulate various aspects of the banking business including, among other things, permissible types and amounts of loans, investments and other activities, capital adequacy, branching, interest rates on loans and on deposits and the safety and soundness of banking practices.

3

Our deposits are insured up to applicable limits by the DIF of the FDIC and are subject to deposit insurance assessments to maintain the DIF. The FDIC utilizes a risk-based assessment system that assesses insurance premiums based upon a risk matrix that takes into account capital levels and supervisory ratings.

Banking laws and regulations also restrict transactions by insured banks owned by a bank holding company, including loans to and certain purchases from the parent holding company, non-bank and bank subsidiaries of the parent holding company, principal shareholders, officers, directors and their affiliates, and investments by the subsidiary bank in the shares or securities of the parent holding company (or any of the other non-bank or bank affiliates), or acceptance of such shares or securities as collateral security for loans to any borrower.

The Bank is also subject to legal limitations on the frequency and amount of dividends that can be paid to the Corporation. For example, a Michigan state chartered bank may not declare a cash dividend or a dividend in kind except out of net profits then on hand after deducting all losses and bad debts, and then only if it will have a surplus amounting to not less than 20% of its capital after the payment of the dividend. Moreover, a Michigan state chartered bank may not declare or pay any cash dividend or dividend in kind until the cumulative dividends on its preferred stock, if any, have been paid in full. Further, if the surplus of a Michigan state chartered bank is at any time less than the amount of its capital, before the declaration of a cash dividend or dividend in kind, it must transfer to surplus not less than 10% of its net profits for the preceding six months (in the case of quarterly or semiannual dividends) or the preceding two consecutive six month periods (in the case of annual dividends).

The payment of dividends by the Corporation and the Bank is also affected by various regulatory requirements and policies, such as the requirement to keep adequate capital in compliance with regulatory guidelines. Federal laws impose further restrictions on the payment of dividends by insured banks that fail to meet specified capital levels. The FDIC may prevent an insured bank from paying dividends if the bank is in default of payment of any assessment due to the FDIC. In addition, payment of dividends by a bank may be prevented by the applicable federal regulatory authority if such payment is determined, by reason of the financial condition of such bank, to be an unsafe and unsound banking practice. The FRB and the FDIC have issued policy statements providing that bank holding companies and insured banks should generally pay dividends only out of current operating earnings. Additionally, the FRB Board of Governors requires a bank to notify the FRB prior to increasing its cash dividend by more than 10% over the prior year.

In 2010, the President signed into law the Dodd-Frank Act. The Dodd-Frank Act made sweeping changes in the regulation of financial institutions aimed at strengthening the sound operation of the financial services sector. Many of the provisions in the Dodd-Frank Act will not become effective until future years. In particular, many provisions of the Dodd-Frank Act are subject to rulemaking, which make it difficult to predict the impact of the Dodd-Frank Act on us, our customers and the financial services industry as a whole. While the overall effects of the Dodd-Frank Act remain unclear, we anticipate that it will be substantial as we have experienced increased compensation costs as a result of staff additions necessary to comply with the initial wave of new regulations.

The aforementioned regulations and restrictions may limit our ability to obtain funds from the Bank for our cash needs, including payment of dividends and operating expenses.

The activities and operations of the Bank are also subject to other federal and state laws and regulations, including usury and consumer credit laws, the Federal Truth-in-Lending Act, the Truth-in-Saving and Regulation Z of the FRB, the Federal Bank Merger Act, and the Bank Secrecy Act.

4

Item 1A. Risk Factors

In the normal course of business we are exposed to various risks. These risks, if not managed correctly, could have a significant impact on our earnings, capital, share price, and ability to pay dividends. In order to effectively monitor and control the following risks, we utilize an enterprise risk model. We balance our strategic goals, including revenue and profitability objectives, with associated risks through the use of policies, systems, and procedures which have been adopted to identify, assess, control, monitor, and manage each risk area. We continually review the adequacy and effectiveness of these policies, systems, and procedures.

In order to effectively monitor and control the following risks, we utilize an enterprise risk process which covers each of the following areas.

Increases to loan losses and required allowance for loan losses

To manage the credit risk arising from lending activities, our most significant source of credit risk, we maintain what we believe are sound underwriting policies and procedures. We continuously monitor asset quality in order to manage our credit risk to determine the appropriateness of valuation allowances. These valuation allowances take into consideration various factors including, but not limited to, local, regional, and national economic conditions.

We maintain an allowance for loan losses, which is a reserve established through a provision for loan losses charged to expense, that represents our best estimate of probable losses within the existing portfolio of loans. The ALLL, in our judgment, is necessary to reserve for estimated loan losses and risks inherent in the loan portfolio. The level of the ALLL reflects our continued evaluation of industry concentrations; specific credit risks; loan loss experience; current loan portfolio quality; present economic, political and regulatory conditions; and unidentified losses inherent in the current loan portfolio. The determination of the appropriate level of the ALLL inherently involves a high degree of subjectivity and requires us to make significant estimates of current credit risks and economic trends, all of which may undergo material changes. Changes in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans and other factors, both within and outside of our control, may require an increase in the ALLL. In addition, bank regulatory agencies periodically review our ALLL and may require an increase in the provision for loan losses or the recognition of further loan charge offs, based on judgments different than our own.

Changes in economic conditions

An economic downturn within our local markets, as well as downturns in the state or national markets, could negatively impact household and corporate incomes. This could lead to decreased demand for both loan and deposit products and lead to an increase of customers who fail to pay interest or principal on their loans. We continually monitor key economic indicators in an effort to anticipate the possible effects of downturns in the local, regional, and national economies.

Our success depends primarily on the general economic conditions of the State of Michigan and the specific local markets in which we operate. Unlike larger national or other regional banks that are more geographically diversified, we provide banking and financial services to customers located primarily in the Clare, Gratiot, Isabella, Mecosta, Midland, Montcalm, and Saginaw counties in Michigan. The local economic conditions in these areas have a significant impact on the demand for our products and services, as well as the ability of our customers to repay loans, the value of the collateral securing loans and the stability of our deposit funding sources. A significant decline in general economic conditions, caused by inflation, recession, acts of terrorism, outbreak of hostilities or other international or domestic occurrences, unemployment, changes in securities markets or other factors could impact these local economic conditions and, in turn, have a material adverse effect on our financial condition and results of operations.

5

Interest Rate Risk

IRR is the timing differences in the maturity or repricing frequency of a financial institution’s interest earning assets and its interest bearing liabilities. We monitor the potential effects of changes in interest rates through simulations and gap analyses. To help mitigate the effects of changes in interest rates, we make significant efforts to ladder projected cash flows and maturities of interest sensitive assets and liabilities.

Liquidity risk

Liquidity risk is the risk to earnings or capital arising from our inability to meet our obligations when they come due without incurring unacceptable costs. Liquidity risk includes the inability to manage unplanned decreases or changes in funding sources, or failure to recognize or address changes in market conditions that affect the ability to liquidate assets quickly and with minimal loss in value. We have significant borrowing capacity through correspondent banks and the ability to sell certain investments to fund potential cash shortages, which we may use to help mitigate this risk.

The value of investment securities may be negatively impacted by fluctuations in the market

A volatile, illiquid market could require us to recognize an OTTI loss related to the investment securities held in our portfolio. We consider many factors in determining whether OTTI exists including the length of time and extent to which fair value has been less than cost, the investment credit rating, and the probability the issuer will be unable to pay the amount when due. The presence of these factors could lead to impairment charges. These risks are mitigated by the fact that we assert that we do not intend to sell the security in an unrealized loss position and it is more likely than not that we will not have to sell the security before recovery of its cost basis.

Operational risk

Operational risk is the risk of loss resulting from inadequate or failed internal processes, people, and systems, or external events and includes reputation risk and transaction risk. Reputation risk is developing and retaining marketplace confidence in handling customers’ financial transactions in an appropriate manner and protecting our safety and soundness. Transaction risk includes losses from fraud, error, the inability to deliver products or services, and loss or theft of information. Transaction risk also encompasses product development and delivery, transaction processing, information technology systems, and the internal control environment.

To minimize the potential losses due to operational risks, we have established a robust system of internal controls that is regularly tested by our internal audit department in conjunction with the services of a certified public accounting firm who assists in performing such internal audit work. The focus of these internal audit procedures is to verify the validity and appropriateness of various transactions, processes, and controls. The results of these procedures are reported to our Audit Committee.

The adoption of, violations of, or nonconformance with laws, rules, regulations, or prescribed practices

The financial services industry and public companies are extensively regulated and must meet regulatory standards set by the FDIC, OFIR, the FRB, FASB, SEC, PCAOB, the CFPB, and other regulatory bodies. Federal and state laws and regulations are designed primarily to protect the deposit insurance funds and consumers, and not necessarily to benefit our shareholders. The nature, extent, and timing of the adoption of significant new laws, changes in existing laws, or repeal of existing laws may have a material impact on our business, results of operations, and financial condition, the effect of which is impossible to predict at this time.

Our compliance department annually assesses the adequacy and effectiveness of our processes for controlling and managing our principal compliance risks.

6

We may not adjust to changes in the financial services industry

Our financial performance depends in part on our ability to maintain and grow our core deposit customer base and expand our financial services to our existing and new customers. The increasingly competitive environment is, in part, a result of changes in technology and product delivery systems and the accelerating pace of consolidation among financial service providers. New competitors may emerge to increase the degree of competition for our products and services. Financial services and products are also constantly changing. Our financial performance is also dependent upon customer demand for our products and services and our ability to develop and offer competitive financial products and services.

We may be required to recognize an impairment of goodwill

Goodwill represents the excess of the amounts paid to acquire subsidiaries over the fair value of their net assets at the date of acquisition. The majority of the recorded goodwill is related to acquisitions of other banks, which were subsequently merged into Isabella Bank. If it is determined that the goodwill has been impaired, we must write-down the goodwill by the amount of the impairment.

We may face increasing pressure from purchasers of our residential mortgage loans to repurchase loans sold or reimburse purchasers for losses related to such loans

We generally sell the fixed rate long term residential mortgage loans we originate to the secondary market. In response to the financial crisis, the purchasers of residential mortgage loans, such as government sponsored entities, have increased their efforts to require sellers of residential mortgage loans to either repurchase loans previously sold, or reimburse the purchasers for losses incurred on foreclosed loans due to actual or alleged failure to strictly conform to the terms of the contract.

Consumers may decide not to use banks to complete their financial transactions

Technology and other changes are allowing customers to complete financial transactions without the involvement of banks. For example, consumers can now pay bills and transfer funds directly without banks. The process of eliminating banks as intermediaries in financial transactions could result in the loss of fee income, as well as the loss of customer deposits and income generated from those deposits.

Changes to the financial services industry as a result of regulatory changes or actions, or significant litigation

The financial services industry is extensively regulated. We are subject to extensive state and federal regulation, supervision and legislation that govern almost all aspects of our operations. Laws and regulations may change from time to time and are primarily intended for the protection of consumers, depositors, and the deposit insurance funds. The impact of any changes to laws and regulations or other actions by regulatory agencies may negatively impact us or our ability to increase the value of our business. Regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities, including the imposition of restrictions on the operation of an institution, the classification of assets by the institution and the adequacy of an institution’s allowance for loan losses. Future regulatory changes or accounting pronouncements may increase our regulatory capital requirements or adversely affect our regulatory capital levels. Additionally, actions by regulatory agencies or significant litigation against us could require the dedication of significant time and resources to defending our business and may lead to penalties.

Unauthorized disclosure of sensitive or confidential client or customer information, whether through a breach of computer systems or otherwise

As part of our business, we collect and retain sensitive and confidential client and customer information on our behalf and other third parties. Despite the security measures we have in place for our facilities and systems, and

7

the security measures of our third party service providers, we may be vulnerable to security breaches, acts of vandalism, computer viruses, misplaced or lost data, human errors or other similar events. Any security breach involving the misappropriation, loss or other unauthorized disclosure of confidential customer information, whether by us or by our vendors, could severely damage our reputation, expose us to the risks of litigation and liability, disrupt our operations and have a material adverse effect on our business.

Our estimates and assumptions may be incorrect

Our consolidated financial statements conform with United States generally accepted accounting principles, which require us to make estimates and assumptions that affect the amounts reported in the consolidated financial statements. These estimates are based on information available to us at the time the estimates are made. Actual results could differ from those estimates. For further discussion regarding significant accounting estimates, see “Note 1- Nature of Operations and Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements.

Disruption of infrastructure

Our operations depend upon our technological and physical infrastructure, including our equipment and facilities. Extended disruption of our vital infrastructure by fire, power loss, natural disaster, telecommunications failure, computer hacking and viruses, or other events outside of our control, could have a significant impact on our operations. We have developed disaster recovery plans, which provide detailed instructions covering all significant aspects of our operations.

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

Our executive offices are located at 401 North Main Street in Mount Pleasant, Michigan. We own 26 branches, an operations center, and a mortgage operations center. Our facilities current, planned, and best use is for conducting our current activities, with the exception of approximately 75% of our previous main office location, approximately 25% of the building that houses the Lake Isabella branch, and approximately 25% of the building that houses our mortgage processing operations which are leased to non-related parties. We continually monitor and assess the need for expansion and/or improvement for all facilities. In our opinion, each facility has sufficient capacity and is in good condition.

Item 3. Legal Proceedings

We are not involved in any material pending legal proceedings. We, because of the nature of our business, are at times subject to numerous pending and threatened legal actions that arise out of the normal course of operating our business.

8

Part II

Item 5. Market for Registrant’s Common Equity, Related Shareholders’ Matters and Issuer Purchases of Equity Securities

Common Stock and Dividend Information

Our common stock is traded in the over the counter market. The common stock is quoted on the OTCQB market tier of the OTC Markets Group, Inc.’s electronic quotation system (www.otcmarkets.com) under the symbol “ISBA”. Other trades in the common stock occur in privately negotiated transactions from time to time of which we may have little or no information.

Our authorized common stock consists of 15,000,000 shares, of which 7,671,846 shares are issued and outstanding as of December 31, 2012. As of that date, there were 3,049 shareholders of record.

We have reviewed the information available as to the range of reported high and low bid quotations, including high and low bid information as reported by OTC Markets and as reported by the parties to privately negotiated transactions. The following table sets forth our compilation of that information for the periods indicated. Price information obtained from OTC Markets reflects inter-dealer prices, without retail mark-up, mark-down, or commissions and may not necessarily represent actual transactions. Price information obtained from parties to privately negotiated transactions reflects actual closing prices that were disclosed to us, which we have not independently verified. The following compiled data is provided for information purposes only and should not be viewed as indicative of the actual or market value of our common stock.

	Number of Shares		Sale Price
			Low		High
2012
First Quarter		64,873	$	22.15	$	24.25
Second Quarter		63,656		23.45		24.98
Third Quarter		97,706		22.50		24.90
Fourth Quarter		87,966		21.60		23.45
		314,201
2011
First Quarter		48,909	$	17.00	$	19.75
Second Quarter		65,090		17.00		18.50
Third Quarter		92,953		17.41		18.95
Fourth Quarter		106,210		17.74		24.45
		313,162

The following table sets forth the cash dividends paid for the following quarters:

	Per Share
	2012		2011
First Quarter	$	0.20	$	0.19
Second Quarter		0.20		0.19
Third Quarter		0.20		0.19
Fourth Quarter		0.20		0.19
Total	$	0.80	$	0.76

9

Our Board has authorized a common stock repurchase plan, which was last amended in April 2012. These authorizations do not have expiration dates. As shares are repurchased under this plan, they revert back to the status of authorized, but unissued shares.

The following table provides information for the three month period ended December 31, 2012, with respect to this plan:

	Shares Repurchased				Total Number of Shares Purchased as Part of  Publicly Announced Plan or Program		Maximum Number of Shares That May Yet Be Purchased Under the Plans or Programs
	Number		Average Price Per Share
Balance, September 30, 2012								105,893
October 1 - 31, 2012		9,014	$	22.52		9,014		96,879
November 1 - 30, 2012		5,457		22.91		5,457		91,422
December 1 - 31, 2012		6,012		22.79		6,012		85,410
Balance, December 31, 2012		20,483	$	22.70		20,483		85,410

Information concerning securities authorized for issuance under equity compensation plans appears under “Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters” included in this annual report on Form 10-K.

10

Stock Performance

The following graph compares the cumulative total shareholder return on our common stock for the last five years with the cumulative total return on (1) NASDAQ, which is comprised of all United States common shares traded on the NASDAQ and (2) the NASDAQ Banks , which is comprised of bank and bank holding company common shares traded on the NASDAQ over the same period. The graph assumes the value of an investment in ISBA and each index was $100 at December 31, 2007 and all dividends are reinvested.

The dollar values for total shareholder return plotted in the graph above are shown in the table below:

Comparison of Five Year Cumulative

Among ISBA, NASDAQ Stock Market,

and NASDAQ Bank Stock

Year	ISBA		NASDAQ		NASDAQ Banks
12/31/2007		100.00		100.00		100.00
12/31/2008		65.10		60.20		78.80
12/31/2009		50.20		87.33		65.86
12/31/2010		47.80		103.05		75.08
12/31/2011		68.10		102.26		67.22
12/31/2012		64.70		120.36		79.73

11

Item 6. Selected Financial Data

RESULTS OF OPERATIONS

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

SUMMARY OF SELECTED FINANCIAL DATA

(Dollars in thousands except per share data)

	2012			2011			2010			2009			2008
INCOME STATEMENT DATA
Interest income	$	56,401		$	57,905		$	57,217		$	58,105		$	61,385
Interest expense		13,423			16,203			17,204			19,839			25,606
Net interest income		42,978			41,702			40,013			38,266			35,779
Provision for loan losses		2,300			3,826			4,857			6,093			9,500
Noninterest income		11,530			8,218			9,300			10,156			7,802
Noninterest expenses		37,639			34,530			33,807			33,683			30,704
Federal income tax expense		2,363			1,354			1,604			846			(724	)
Net Income	$	12,206		$	10,210		$	9,045		$	7,800		$	4,101
PER SHARE
Basic earnings	$	1.61		$	1.35		$	1.20		$	1.04		$	0.55
Diluted earnings		1.56			1.31			1.17			1.01			0.53
Dividends		0.80			0.76			0.72			0.70			0.65
Market value*		21.75			23.70			17.30			18.95			25.50
Tangible book value*		14.72			13.90			13.22			12.67			12.27
BALANCE SHEET DATA
At end of period
Loans	$	772,753		$	750,291		$	735,304		$	723,316		$	735,385
Total assets		1,430,639			1,337,925			1,225,810			1,143,944			1,139,263
Deposits		1,017,667			958,164			877,339			802,652			775,630
Shareholders’ equity		164,489			154,783			145,161			140,803			134,476
Average balance
Loans	$	754,304		$	743,441		$	725,534		$	725,299		$	717,040
Total assets		1,381,083			1,287,195			1,182,930			1,127,634			1,113,102
Deposits		984,927			927,186			840,392			786,714			817,041
Shareholders’ equity		160,682			151,379			145,304			137,910			142,597
PERFORMANCE RATIOS
Return on average total assets		0.88	%		0.79	%		0.76	%		0.69	%		0.37	%
Return on average shareholders’ equity		7.60	%		6.74	%		6.22	%		5.66	%		2.88	%
Return on average tangible equity		11.41	%		10.30	%		9.51	%		8.53	%		4.41	%
Net interest margin yield (FTE)		3.70	%		3.87	%		4.04	%		4.06	%		3.87	%
Loan to deposit*		75.93	%		78.31	%		83.81	%		90.12	%		94.81	%
Nonperforming loans to total loans*		1.00	%		0.95	%		0.83	%		1.28	%		1.69	%
Nonperforming assets to total assets*		0.68	%		0.67	%		0.67	%		0.91	%		1.35	%
ALLL to nonperforming loans*		154.39	%		173.10	%		202.97	%		139.71	%		96.42	%
CAPITAL RATIOS
Shareholders’ equity to assets*		11.50	%		11.57	%		11.84	%		12.31	%		11.80	%
Tier 1 capital to average assets*		8.29	%		8.18	%		8.24	%		8.60	%		8.42	%
Tier 1 risk-based capital*		13.23	%		12.92	%		12.44	%		12.80	%		12.30	%
Total risk-based capital*		14.48	%		14.17	%		13.69	%		14.06	%		13.50	%

* At end of period

12

			2012								2011
	4th		3rd		2nd		1st		4th		3rd		2nd		1st
QUARTERLY INCOME STATEMENT DATA
Total interest income	$	13,845	$	14,164	$	14,188	$	14,204	$	14,466	$	14,532	$	14,669	$	14,238
Interest expense		3,051		3,239		3,429		3,704		3,979		4,070		4,101		4,053
Net interest income		10,794		10,925		10,759		10,500		10,487		10,462		10,568		10,185
Provision for loan losses		1,200		200		439		461		1,443		963		603		817
Noninterest income		2,686		2,759		2,544		3,541		2,433		1,859		1,978		1,948
Noninterest expenses		9,750		9,128		9,188		9,573		8,651		8,513		8,779		8,587
Federal income tax expense		19		899		672		773		115		334		492		413
Net income	$	2,511	$	3,457	$	3,004	$	3,234	$	2,711	$	2,511	$	2,672	$	2,316
PER SHARE
Basic earnings	$	0.33	$	0.45	$	0.40	$	0.43	$	0.36	$	0.33	$	0.35	$	0.31
Diluted earnings		0.32		0.44		0.39		0.41		0.35		0.32		0.34		0.30
Dividends		0.20		0.20		0.20		0.20		0.19		0.19		0.19		0.19
Market value*		21.75		22.50		24.85		24.00		23.70		18.75		17.48		18.00
Tangible book value*		14.72		14.65		14.37		14.15		13.90		13.70		13.54		13.35
Book value*		21.44		21.57		21.03		20.71		20.40		20.53		20.00		19.52

* At end of period

13

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

ISABELLA BANK CORPORATION FINANCIAL REVIEW

(Dollars in thousands except per share data)

The following is management’s discussion and analysis of the financial condition and results of our operations. This discussion and analysis is intended to provide a better understanding of the consolidated financial statements and statistical data included elsewhere in the Annual Report.

Executive Summary

Despite the challenges and uncertainty of the current economic environment, we are pleased to report our strongest earnings ever. There continues to be slight improvements in the local, regional, and national economies, but a large degree of economic uncertainty remains. 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. This focus has enabled us to continue to meet the needs of the communities we serve. Carefully managed growth is an important part of our strategy to maintain shareholder value. We are excited about the prospects of our new Freeland, Michigan office which was opened in October 2012. The new location complements our existing office locations, increases our brand awareness in the Freeland area, and is expected to provide additional shareholder value for years to come.

Recent Legislation

The Health Care and Education Act of 2010, the Patient Protection and Affordable Care Act, the Dodd-Frank Act, and the JOBS Act, have had, and are expected to continue to have, a significant impact on our 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, the extent 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. This particular Act made sweeping changes in the regulation of financial institutions aimed at strengthening the 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.

Other

We have not received any notices of regulatory actions as of March 1, 2013.

CRITICAL ACCOUNTING POLICIES:

Our significant accounting policies are set forth in “Note 1 –Nature of Operations and Summary of Significant Accounting Policies” of the Consolidated Financial Statements. Of these significant accounting policies, we consider our policies regarding the ALLL, acquisition intangibles and goodwill, and the determination of the fair value and assessment of OTTI of investment securities to be our most critical accounting policies.

The ALLL requires our most subjective and complex judgment. Changes in economic conditions can have a significant impact on the ALLL and, therefore, the provision for loan losses and results of operations. We have developed policies and procedures for assessing the appropriateness of the ALLL, recognizing that this process

14

requires a number of assumptions and estimates with respect to our loan portfolio. Our assessments may be impacted in future periods by changes in economic conditions, and the discovery of information with respect to borrowers which is not known to us at the time of the issuance of the consolidated financial statements. For additional discussion concerning our ALLL and related matters, see the detailed discussion to follow under the heading “Allowance for Loan Losses” and “Note 6 – Loans and Allowance for Loan Losses” of the Notes to Consolidated Financial Statements.

United States generally accepted accounting principles require that we determine the fair value of the assets and liabilities of an acquired entity, and record their fair value on the date of acquisition. We employ a variety of measures in the determination of the fair value, including the use of discounted cash flow analysis, market appraisals, and projected future revenue streams. For certain items that we believe we have the appropriate expertise to determine the fair value, we may choose to use our own calculations of the value. In other cases, where the value is not easily determined, we consult with outside parties to determine the fair value of the identified asset or liability. Once valuations have been adjusted, the net difference between the price paid for the acquired entity and the net value of assets acquired on our balance sheet, including identifiable intangibles, is recorded as goodwill. Acquisition intangibles and goodwill are qualitatively evaluated to determine if it is more likely than not that the carrying balance is impaired on a quarterly basis.

We currently have both AFS and trading investment securities that are carried at fair value. Changes in the fair value of AFS investment securities are included as a component of other comprehensive income, while declines in the fair value of these securities below their cost that are other-than-temporary are reflected as realized losses in the consolidated statements of income. The change in value of trading investment securities is included in current earnings. We evaluate AFS securities for indications of losses that are considered other-than-temporary, if any, on a regular basis. The market values for AFS and trading investment securities are typically obtained from outside sources and applied to individual securities within the portfolio.

15

DISTRIBUTION OF ASSETS, LIABILITIES, AND SHAREHOLDERS’ EQUITY

INTEREST RATE AND INTEREST DIFFERENTIAL

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 for the last three years. These schedules also present an analysis of interest income and interest expense for the years indicated. All interest income is reported on an FTE basis using a 34% federal income tax rate. Nonaccruing loans, for the purpose of the following computations, are included in the average loan amounts outstanding. FRB and FHLB stock holdings, which are restricted, are included in accrued income and other assets.

	Year Ended December 31
	2012								2011								2010
	Average Balance			Tax Equivalent Interest		Average Yield / Rate			Average Balance			Tax Equivalent Interest		Average Yield / Rate			Average Balance			Tax Equivalent Interest		Average Yield / Rate
INTEREST EARNING ASSETS
Loans	$	754,304		$	43,396		5.75	%	$	743,441		$	45,463		6.12	%	$	725,534		$	46,794		6.45	%
Taxable investment securities		309,681			7,555		2.44	%		235,437			6,941		2.95	%		160,514			5,271		3.28	%
Nontaxable investment securities		145,502			7,941		5.46	%		136,356			7,847		5.75	%		120,999			7,095		5.86	%
Trading securities		2,624			142		5.41	%		5,087			286		5.62	%		8,097			436		5.38	%
Other		33,359			486		1.46	%		37,539			506		1.35	%		45,509			479		1.05	%
Total earning assets		1,245,470			59,520		4.78	%		1,157,860			61,043		5.27	%		1,060,653			60,075		5.66	%
NONEARNING ASSETS
Allowance for loan losses		(12,408	)							(12,522	)							(13,262	)
Cash and demand deposits due from banks		19,409								20,195								18,070
Premises and equipment		25,244								24,397								24,624
Accrued income and other assets		103,368								97,265								92,845
Total assets	$	1,381,083							$	1,287,195							$	1,182,930
INTEREST BEARING LIABILITIES
Interest bearing demand deposits	$	170,851			204		0.12	%	$	152,530			189		0.12	%	$	137,109			151		0.11	%
Savings deposits		214,958			451		0.21	%		192,999			488		0.25	%		169,579			391		0.23	%
Time deposits		473,675			8,476		1.79	%		467,931			10,258		2.19	%		430,892			10,988		2.55	%
Borrowed funds		225,689			4,292		1.90	%		198,828			5,268		2.65	%		188,512			5,674		3.01	%
Total interest bearing liabilities		1,085,173			13,423		1.24	%		1,012,288			16,203		1.60	%		926,092			17,204		1.86	%
NONINTEREST BEARING LIABILITIES
Demand deposits		125,443								113,726								102,812
Other		9,785								9,802								8,722
Shareholders’ equity		160,682								151,379								145,304
Total liabilities and shareholders’ equity	$	1,381,083							$	1,287,195							$	1,182,930
Net interest income (FTE)				$	46,097							$	44,840							$	42,871
Net yield on interest earning assets (FTE)							3.70	%							3.87	%							4.04	%

16

Net Interest Income

Our primary sources of revenues are interest earned on loans and investments, while our most significant expense is interest expense on deposits and borrowings. Net interest income is the amount by which interest income on earning assets exceeds the interest expenses on interest bearing liabilities. Net interest income is influenced by changes in the balance and mix of assets and liabilities and market interest rates. We exert some control over these factors; however, FRB monetary policy and competition have a significant impact. Interest income includes loan fees of $3,178 in 2012, $2,385 in 2011, and $2,196 in 2010. For analytical purposes, net interest income is adjusted to an FTE basis by adding the income tax savings from interest on tax exempt securities, thus making year to year comparisons more meaningful.

VOLUME AND RATE VARIANCE ANALYSIS

The following table details the dollar amount of changes in FTE net interest income for each major category of interest earning assets and interest bearing liabilities and the amount of change attributable to changes in average balances (volume) or average rates. 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.

	2012 Compared to 2011 Increase (Decrease) Due to									2011 Compared to 2010 Increase (Decrease) Due to
	Volume			Rate			Net			Volume			Rate			Net
CHANGES IN INTEREST INCOME:
Loans	$	656		$	(2,723	)	$	(2,067	)	$	1,136		$	(2,467	)	$	(1,331	)
Taxable AFS securities		1,945			(1,331	)		614			2,254			(584	)		1,670
Nontaxable AFS securities		511			(417	)		94			886			(134	)		752
Trading securities		(134	)		(10	)		(144	)		(168	)		18			(150	)
Other		(59	)		39			(20	)		(93	)		120			27
Total changes in interest income		2,919			(4,442	)		(1,523	)		4,015			(3,047	)		968
CHANGES IN INTEREST EXPENSE:
Interest bearing demand deposits		22			(7	)		15			18			20			38
Savings deposits		52			(89	)		(37	)		57			40			97
Time deposits		124			(1,906	)		(1,782	)		894			(1,624	)		(730	)
Borrowed funds		647			(1,623	)		(976	)		299			(705	)		(406	)
Total changes in interest expense		845			(3,625	)		(2,780	)		1,268			(2,269	)		(1,001	)
Net change in interest margin (FTE)	$	2,074		$	(817	)	$	1,257		$	2,747		$	(778	)	$	1,969

We, like all financial institutions, are experiencing downward pressure on our net yield on interest earning assets. This pressure is a direct result of FRB monetary policy which has reduced yields on interest earning assets more than rates on interest bearing liabilities. A key benchmark for lending is the 10 year US Treasury, which is currently trading below 2.0%. As a result of the persistent low interest rate environment, our net yield on interest earning assets is at historically low levels. However, as shown in the following table, our net yield on interest earning assets remained relatively flat throughout 2012. This is a direct result of our restructuring of $60,000 of FHLB advances in the first quarter of 2012, which reduced 2012 interest expense by approximately $450.

	Average Yield / Rate For The Three Month Periods Ended:
	December 31 2012			September 30 2012			June 30 2012			March 31 2012			December 31 2011
Total earning assets		4.61	%		4.76	%		4.84	%		4.91	%		5.12	%
Total interest bearing liabilities		1.12	%		1.18	%		1.27	%		1.38	%		1.53	%
Net yield on interest earning assets (FTE)		3.65	%		3.73	%		3.73	%		3.70	%		3.78	%

17

Given that the historically low interest rate environment is expected to continue for the foreseeable future, the net yield on interest earning assets is not likely to increase in future periods. We anticipate continued reduction in rates earned on loans without a proportionate decline in funding rates. Any additional interest income will most likely be contingent upon increases in volume and probably at interest margins lower than those earned in the fourth quarter of 2012.

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 specifically 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 years ended December 31:

	2012			2011			2010			2009			2008
ALLL - January 1	$	12,375		$	12,373		$	12,979		$	11,982		$	7,301
ALLL of acquired bank		—			—			—			—			822
Loans charged-off
Commercial and agricultural		1,672			1,984			3,731			3,081			2,137
Residential real estate		1,142			2,240			2,524			2,627			3,334
Consumer		542			552			596			934			854
Total loans charged-off		3,356			4,776			6,851			6,642			6,325
Recoveries
Commercial and agricultural		240			461			453			623			160
Residential real estate		122			177			638			546			240
Consumer		255			314			297			377			284
Total recoveries		617			952			1,388			1,546			684
Provision for loan losses		2,300			3,826			4,857			6,093			9,500
ALLL - December 31	$	11,936		$	12,375		$	12,373		$	12,979		$	11,982
Net loans charged-off	$	2,739		$	3,824		$	5,463		$	5,096		$	5,641
Year to date average loans		754,304			743,441			725,534			725,299			717,040
Net loans charged off to average loans outstanding		0.36	%		0.51	%		0.75	%		0.70	%		0.79	%
Total loans	$	772,753		$	750,291		$	735,304		$	723,316		$	735,385
ALLL as a % of loans		1.54	%		1.65	%		1.68	%		1.79	%		1.63	%

18

The following table summarizes our charge-off and recovery activity for the three months ended:

	Three Months Ended
	December 31 2012			September 30 2012			June 30 2012			March 31 2012			December 31 2011
Total loans charged-off	$	1,469		$	611		$	621		$	655		$	1,170
Total recoveries		143			155			125			194			202
Net loans charged-off		1,326			456			496			461			968
Average loans outstanding		764,004			761,069			748,223			743,921			749,840
Net loans charged-off to average loans outstanding		0.17	%		0.06	%		0.07	%		0.06	%		0.13	%

In the fourth quarter of 2012, we experienced a significant increase in charge-offs. Of the $1,469 of total loans charged-off during the quarter, $356 had previously been identified through specific impairment valuation allowances. The remaining charge-offs were identified in the fourth quarter as part of our credit risk management process. Of those not previously identified as impaired, two charge-offs totaling $357 individually exceeded $100.

Despite the increase in loans charged-off in the fourth quarter of 2012, the level of net loans charged-off has continued to trend downward since 2008. This trend, coupled with declines in loans past due and in nonaccrual status, has allowed us to reduce our provision, and has led to a decline in the ALLL in both amount and as a percentage of loans. For further discussion of the allocation of the ALLL, see “Note 6 – Loans and Allowance for Loan Losses” to the consolidated financial statements.

Loans Past Due in Nonaccrual Status

Increases in past due and nonaccrual loans can have a significant impact on the ALLL. To determine the potential impact, and corresponding estimated losses, we analyze our historical loss trends on loans past due 30-89 days, 90 days or more, and nonaccrual loans. We monitor all loans that are past due and in nonaccrual status for indicators of additional deterioration.

The following tables summarize our past due and nonaccrual loans as of December 31:

	Total Past Due and Nonaccrual
	2012		2011		2010		2009		2008
Commercial and agricultural	$	7,271	$	7,420	$	9,606	$	8,839	$	13,958
Residential real estate		5,431		5,297		8,119		10,296		12,418
Consumer		199		186		309		460		956
Total	$	12,901	$	12,903	$	18,034	$	19,595	$	27,332

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 the Notes to 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

19

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. At the time of the TDR, the loan is reviewed to determine whether or not to classify the loan as accrual or nonaccrual. The majority of new modifications result in terms that satisfy our criteria for continued interest accrual. TDR’s that have been placed in nonaccrual status may be placed back on accrual status after six months of continued performance.

We restructure debt with borrowers who due to temporary financial difficulties are unable to service their debt under the original terms. We may extend the amortization period, reduce interest rates, forgive principal, or a combination of these modifications. Typically, the modifications are for a period of five years or less. There are no TDR’s that were Government sponsored as of December 31, 2012.

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

The following tables provide a roll-forward of TDR’s for the years ended December 31, 2011 and 2012:

	Accruing Interest						Nonaccrual						Total
	Number of Loans			Balance			Number of Loans			Balance			Number of Loans			Balance
January 1, 2011		35		$	5,075			10		$	688			45		$	5,763
New modifications		93			17,334			3			481			96			17,815
Principal payments and pay-offs		(12	)		(4,381	)		(2	)		(254	)		(14	)		(4,635	)
Balances charged-off (1)		—			(15	)		—			(51	)		—			(66	)
Transfers to OREO		(2	)		(35	)		(1	)		(86	)		(3	)		(121	)
Transfers to accrual status		2			54			(2	)		(54	)		—			—
Transfers to nonaccrual status		(4	)		(293	)		4			293			—			—
December 31, 2011		112			17,739			12			1,017			124			18,756
New modifications		51			8,658			16			2,708			67			11,366
Principal payments and pay-offs		(41	)		(9,312	)		(3	)		(595	)		(44	)		(9,907	)
Balances charged-off		(2	)		(246	)		(4	)		(196	)		(6	)		(442	)
Transfers to OREO		(4	)		(173	)		(3	)		(245	)		(7	)		(418	)
Transfers to accrual status		2			130			(2	)		(130	)		—			—
Transfers to nonaccrual status		(3	)		(265	)		3			265			—			—
December 31, 2012		115		$	16,531			19		$	2,824			134		$	19,355

(1) Balances charged-off represent a partial charge off. As such, the number of loans was unaffected.

The following table summarizes our TDR’s as of December 31:

	2012						2011						2010						2009						2008
	Accruing Interest		Non- accrual		Total		Accruing Interest		Non- accrual		Total		Accruing Interest		Non- accrual		Total		Accruing Interest		Non- accrual		Total		Accruing Interest		Non- accrual		Total
Current	$	16,301	$	941	$	17,242	$	16,125	$	514	$	16,639	$	4,798	$	499	$	5,297	$	2,754	$	786	$	3,540	$	2,297	$	1,355	$	3,652
Past due 30-59 days		158		561		719		1,564		344		1,908		175		26		201		107		80		187		268		—		268
Past due 60-89 days		72		41		113		50		85		135		102		—		102		—		824		824		—		—		—
Past due 90 days or more		—		1,281		1,281		—		74		74		—		163		163		—		426		426		—		630		630
Total	$	16,531	$	2,824	$	19,355	$	17,739	$	1,017	$	18,756	$	5,075	$	688	$	5,763	$	2,861	$	2,116	$	4,977	$	2,565	$	1,985	$	4,550

Additional disclosures about TDR’s are included in “Note 6 – Loans and Allowance for Loan Losses” of the Notes to Consolidated Financial Statements.

20

Impaired Loans

The following is a summary of information pertaining to impaired loans as of and for the year ended December 31:

	2012						2011
	Outstanding Balance		Unpaid Principal Balance		Valuation Allowance		Outstanding Balance		Unpaid Principal Balance		Valuation Allowance
TDR’s
Commercial real estate	$	9,227	$	9,640	$	1,333	$	8,862	$	9,055	$	1,853
Commercial other		1,167		1,197		38		1,047		1,078		271
Agricultural real estate		91		91		32		—		—		—
Agricultural other		569		689		59		2,779		2,779		822
Residential real estate senior liens		8,224		8,670		1,429		5,882		6,377		922
Residential real estate junior liens		21		57		4		101		137		18
Consumer secured		56		56		—		85		85		—
Total TDR’s		19,355		20,400		2,895		18,756		19,511		3,886
Other impaired loans
Commercial real estate		1,817		2,304		320		4,136		6,657		28
Commercial other		2,245		2,376		359		52		116		—
Agricultural real estate		—		—		—		190		190		—
Agricultural other		63		63		—		415		535		—
Residential real estate senior liens		2,226		3,002		354		1,389		2,450		189
Residential real estate junior liens		51		61		9		94		123		17
Home equity lines of credit		182		482		—		198		498		—
Consumer secured		19		28		—		20		29		—
Total other impaired loans		6,603		8,316		1,042		6,494		10,598		234
Total impaired loans	$	25,958	$	28,716	$	3,937	$	25,250	$	30,109	$	4,120

Additional disclosure related to impaired loans is included in “Note 6 – Loans and Allowance for Loan Losses” of the Notes to Consolidated Financial Statements.

Nonperforming Assets

The following table summarizes our nonperforming assets as of December 31:

	2012			2011			2010			2009			2008
Nonaccrual loans	$	7,303		$	6,389		$	5,610		$	8,522		$	11,175
Accruing loans past due 90 days or more		428			760			486			768			1,251
Total nonperforming loans		7,731			7,149			6,096			9,290			12,426
OREO		2,008			1,867			2,039			1,141			2,770
Repossessed assets		10			9			28			16			153
Total nonperforming assets	$	9,749		$	9,025		$	8,163		$	10,447		$	15,349
Nonperforming loans as % of total loans		1.00	%		0.95	%		0.83	%		1.28	%		1.69	%
Nonperforming assets as a % of total loans		0.68	%		0.67	%		0.67	%		0.91	%		1.35	%

21

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. Upon transferring the loans to nonaccrual status, we perform an evaluation to determine the net realizable value of the underlying collateral. This evaluation is used to help determine if any charge offs are necessary. Loans may be placed back on accrual status after six months of continued performance.

Included in the nonaccrual loan balances above were credits classified as TDR’s as of December 31:

	2012		2011		2010		2009		2008
Commercial and agricultural	$	2,325	$	520	$	115	$	1,692	$	1,985
Residential mortgage		499		497		573		424		—
	$	2,824	$	1,017	$	688	$	2,116	$	1,985

Nonaccrual TDR’s increased in 2012 as a result of two large TDR’s that were granted during 2012. These relationships had a balance of $1,710 as of December 31, 2012.

The following table lists individually significant commercial and agricultural loan relationships in nonaccrual. To be classified as individually significant, the recorded investment in nonaccrual loans to each borrower must have exceeded $1,000 as of the end of each period.

	2012					2011					2010					2009
	Oustanding Balance			Specific Allocation		Oustanding Balance		Specific Allocation			Oustanding Balance			Specific Allocation		Oustanding Balance		Specific Allocation
Borrower 1	$	—	(A)	$	—	$	1,014	$	—	(C)	$	—		$	—	$	—	$	—
Borrower 2		—	(B)		—		1,900		—	(D)		2,679			345		—		—
Borrower 3		2,077			359		—		—			—			—		—		—
Borrower 4		—			—		—		—			—	(B)		—		1,800		—	(D)
Other not individually significant		5,226					3,475					2,931					6,722
Total	$	7,303				$	6,389				$	5,610				$	8,522

A - Transferred to accrual status.

B - Loan was partially charged-off with the remaining outstanding balance paid off by the customer.

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

D - No specific allocation established for this loan as it was charged down to reflect the current fair value of the underlying real estate.

There were no other individually significant credits included in nonaccrual loans as of December 31, 2012, 2011, 2010, 2009, or 2008.

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

We believe that the level of the ALLL is appropriate as of December 31, 2012 and we will continue to closely monitor overall credit quality and our policies and procedures related to the analysis of the ALLL to ensure that the ALLL remains appropriate.

22

NONINTEREST INCOME AND EXPENSES

Noninterest Income

The following table shows the changes in noninterest income between the years ended December 31:

							Change									Change
	2012			2011			$			%			2010			$			%
Service charges and fees
NSF and overdraft fees	$	2,367		$	2,500		$	(133	)		-5.3	%	$	2,809		$	(309	)		-11.0	%
ATM and debit card fees		1,874			1,736			138			7.9	%		1,492			244			16.4	%
Trust fees		1,061			979			82			8.4	%		896			83			9.3	%
Mortgage servicing fees		757			732			25			3.4	%		760			(28	)		-3.7	%
Service charges on deposit accounts		337			324			13			4.0	%		333			(9	)		-2.7	%
Net originated mortgage servicing rights loss		(89	)		(293	)		204			69.6	%		47			(340	)		N/M
All other		125			140			(15	)		-10.7	%		143			(3	)		-2.1	%
Total service charges and fees		6,432			6,118			314			5.1	%		6,480			(362	)		-5.6	%
Gain on sale of mortgage loans		1,576			538			1,038			N/M			610			(72	)		-11.8	%
Gain on sale of AFS securities		1,119			3			1,116			N/M			348			(345	)		N/M
Earnings on corporate owned life insurance policies		698			609			89			14.6	%		663			(54	)		-8.1	%
Other
Brokerage and advisory fees		574			545			29			5.3	%		573			(28	)		-4.9	%
Corporate Settlement Solutions joint venture		504			(182	)		686			N/M			11			(193	)		N/M
Gain on sale of OREO		220			62			158			N/M			12			50			N/M
Net loss on trading securities		(52	)		(78	)		26			33.3	%		(94	)		16			17.0	%
Net gain on borrowings measured at fair value		33			181			(148	)		-81.8	%		227			(46	)		-20.3	%
All other		426			422			4			0.9	%		470			(48	)		-10.2	%
Total other		1,705			950			755			79.5	%		1,199			(249	)		-20.8	%
Total noninterest income	$	11,530		$	8,218		$	3,312			40.3	%	$	9,300		$	(1,082	)		-11.6	%

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 fees 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. Despite increasing our per item NSF and overdraft fees in December 2012, we expect this downward trend to continue into the foreseeable future.

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

• In recent periods, we have invested considerable efforts to increase our market share in trust and brokerage and advisory services. These efforts have translated into increases in revenues and we expect this trend to continue in future periods.

• Historically low offering rates on residential real estate loans have 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. We anticipate that mortgage refinancing activity will decline in 2013.

• We are continually analyzing our AFS security portfolio for potential sale opportunities. 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

23

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. In the third quarter of 2012, we elected to sell some additional mortgage-backed securities as their current prepayment characteristics had resulted in less than acceptable yields. We do not anticipate any significant investment sales during 2013.

• 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. Future earnings are expected to approximate current levels.

• In 2011, Corporate Settlement Solutions invested significant resources to expand and enhance their services offered. While these efforts reduced earnings in 2011, they have led to the significant increase in earnings in 2012. We expect future earnings to approximate current levels.

• As market conditions have improved, we have been able to sell some of our OREO properties at gains. As property values and the facts and circumstances surrounding each property vary, this amount will fluctuate. We do not anticipate any assets currently included in OREO to generate significant gains or losses in future periods.

• Fluctuations in the gains and losses related to trading securities and borrowings measured at fair value are caused by interest rate variances. As we do not anticipate any significant changes to interest rates in the foreseeable future, we do not anticipate any large fluctuations in future periods.

• The fluctuation in all other income is spread throughout various categories, none of which are individually significant. We do not anticipate any significant fluctuations from current levels in 2013.

24

Noninterest Expenses

The following table shows the changes in noninterest expenses between the years ended December 31:

					Change								Change
	2012		2011		$			%			2010		$			%
Compensation and benefits
Employee salaries	$	15,374	$	14,377	$	997			6.9	%	$	13,697	$	680			5.0	%
Employee benefits		5,842		4,902		940			19.2	%		4,837		65			1.3	%
All other		11		13		(2	)		-15.4	%		18		(5	)		-27.8	%
Total compensation and benefits		21,227		19,292		1,935			10.0	%		18,552		740			4.0	%
Occupancy
Property taxes		501		470		31			6.6	%		505		(35	)		-6.9	%
Utilities		463		462		1			0.2	%		423		39			9.2	%
Outside services		605		587		18			3.1	%		524		63			12.0	%
Depreciation		621		605		16			2.6	%		584		21			3.6	%
Building repairs		244		262		(18	)		-6.9	%		243		19			7.8	%
All other		85		84		1			1.2	%		72		12			16.7	%
Total occupancy		2,519		2,470		49			2.0	%		2,351		119			5.1	%
Furniture and equipment
Depreciation		1,796		1,916		(120	)		-6.3	%		1,938		(22	)		-1.1	%
Computer / service contracts		1,995		1,898		97			5.1	%		1,779		119			6.7	%
ATM and debit card fees		690		629		61			9.7	%		595		34			5.7	%
All other		79		54		25			46.3	%		32		22			68.8	%
Total furniture and equipment		4,560		4,497		63			1.4	%		4,344		153			3.5	%
Net AFS impairment loss		282		—		282			N/M			—		—			N/M
Other
Marketing and community relations		1,965		1,174		791			67.4	%		1,093		81			7.4	%
Directors fees		885		842		43			5.1	%		887		(45	)		-5.1	%
FDIC insurance premiums		864		1,086		(222	)		-20.4	%		1,254		(168	)		-13.4	%
Audit fees		711		714		(3	)		-0.4	%		710		4			0.6	%
Education and travel		588		526		62			11.8	%		499		27			5.4	%
Consulting fees		482		386		96			24.9	%		167		219			131.1	%
Printing and supplies		424		405		19			4.7	%		420		(15	)		-3.6	%
Postage and freight		389		388		1			0.3	%		395		(7	)		-1.8	%
Other losses		300		54		246			N/M			72		(18	)		-25.0	%
Legal fees		268		302		(34	)		-11.3	%		382		(80	)		-20.9	%
Amortization of deposit premium		260		299		(39	)		-13.0	%		338		(39	)		-11.5	%
Foreclosed asset and collection		202		576		(374	)		-64.9	%		916		(340	)		-37.1	%
State taxes		187		57		130			N/M			51		6			11.8	%
All other		1,526		1,462		64			4.4	%		1,376		86			6.3	%
Total other		9,051		8,271		780			9.4	%		8,560		(289	)		-3.4	%
Total noninterest expenses	$	37,639	$	34,530	$	3,109			9.0	%	$	33,807	$	723			2.1	%

Significant changes in noninterest expenses are detailed below:

• The increase in employee salaries 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. Employee benefits increased in 2012 primarily as a result of increases in health care and retirement benefit related expenses. We expect employee salaries and benefits to increase with the growth of the Corporation.

• 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 an independent rating agency below investment grade. We will continue to monitor the investment portfolio throughout 2013 for other potential other-than-temporary impairments. For further discussion, see “Note 5 – Available-For-Sale Securities” of the Notes to Consolidated Financial Statements.

• We have been a consistently strong supporter of the various communities, schools, and charities in the markets we serve. In the 1996, we established a foundation that is generally funded from non-recurring revenue sources. The foundation provides centralized oversight for donations to organizations that

25

benefit our communities. Donation expenses related to the foundation were $850, $250, and $250 for the years ended December 31, 2012, 2011, and 2010, respectively and is included in marketing and community relations.

• FDIC insurance premiums have declined due to changes in the premium calculation. Premiums will increase in future periods as we continue to grow our balance sheet. There are no significant changes to the premium calculation expected in 2013.

• 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). Such expenses also increased due to the engagement of consultants to review our loan prepayment and deposit decay assumptions as well as to review various information technology projects. Consulting fees are expected to decline in 2013.

• Other losses increased significantly in 2012 primarily as a result of losses incurred related to fraudulent activities as well as losses related to the repurchase of a loan that was previously sold to a third party. We do not anticipate any significant other losses in 2013.

• As a result of decreases in foreclosure and repossession activity, we have seen significant declines in foreclosed asset and collection and legal expenses. These expenses have also declined as we have been able to recover expenses through our collection efforts. Foreclosed asset and collection expenses are expected to continue their decline in 2013.

• State taxes increased in 2012 as a result of changes to Michigan’s Corporate Income Tax structure. These expenses are expected to increase marginally in future periods.

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

26

ANALYSIS OF CHANGES IN FINANCIAL CONDITION

The following table shows the composition and changes in our balance sheet as of December 31:

							Change
	2012			2011			$			%
ASSETS
Cash and cash equivalents	$	24,920		$	28,590		$	(3,670	)		-12.84	%
Certificates of deposit held in other financial institutions		4,465			8,924			(4,459	)		-49.97	%
Trading securities		1,573			4,710			(3,137	)		-66.60	%
Available-for-sale securities		504,010			425,120			78,890			18.56	%
Mortgage loans available-for-sale		3,633			3,205			428			13.35	%
Loans		772,753			750,291			22,462			2.99	%
Allowance for loan losses		(11,936	)		(12,375	)		439			-3.55	%
Premises and equipment		25,787			24,626			1,161			4.71	%
Corporate owned life insurance		22,773			22,075			698			3.16	%
Accrued interest receivable		5,227			5,848			(621	)		-10.62	%
Equity securities without readily determinable fair values		18,118			17,189			929			5.40	%
Goodwill and other intangible assets		46,532			46,792			(260	)		-0.56	%
Other assets		12,784			12,930			(146	)		-1.13	%
TOTAL ASSETS	$	1,430,639		$	1,337,925		$	92,714			6.93	%
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities
Deposits	$	1,017,667		$	958,164		$	59,503			6.21	%
Borrowed funds		241,001			216,136			24,865			11.50	%
Accrued interest payable and other liabilities		7,482			8,842			(1,360	)		-15.38	%
Total liabilities		1,266,150			1,183,142			83,008			7.02	%
Shareholders’ equity		164,489			154,783			9,706			6.27	%
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	1,430,639		$	1,337,925		$	92,714			6.93	%

As shown above, we were able to continue to grow our balance sheet in 2012. The growth in deposits was supplemented by an increase in borrowed funds. As loan growth continues to be relatively soft, the additional funding provided by the growth in borrowings and deposits were deployed into available-for-sale investment securities. For 2013, we anticipate that deposit growth will continue to be strong and that loan demand will improve.

A discussion of changes in balance sheet amounts by major categories follows:

Certificates of deposit held in other financial institutions

During 2012, we reinvested maturities of certificates of deposit held in other financial institutions into AFS investment securities to increase net interest margins (as the yields on AFS investment securities exceeded the potential reinvestment rates for certificates of deposits held in other financial institutions during the year). This trend is likely to continue in 2013.

Trading securities

Trading securities are carried at fair value. Our overall intent is to maintain a trading portfolio to enhance the ongoing restructuring of assets and liabilities as part of our IRR management objectives (see” Note 4—Trading Securities” of the Notes to Consolidated Financial Statements). Due to the current interest rate environment, we have allowed this balance to decline.

27

AFS investment securities

The primary objective of our investing activities is to provide for safety of the principal invested. Secondary considerations include the need for earnings, liquidity, and our overall exposure to changes in interest rates.

The following is a schedule of the carrying value of investment securities AFS as of December 31:

	2012		2011		2010
Government sponsored enterprises	$	25,776	$	397	$	5,404
States and political subdivisions		182,743		174,938		169,717
Auction rate money market preferred		2,778		2,049		2,865
Preferred stocks		6,363		5,033		6,936
Mortgage-backed securities		155,345		143,602		102,215
Collateralized mortgage obligations		131,005		99,101		43,587
Total	$	504,010	$	425,120	$	330,724

Excluding those holdings in government sponsored enterprises and municipalities within the state of Michigan, there were no investments in securities of any one issuer that exceeded 10% of shareholders’ equity. We have a policy prohibiting investments in securities that we deem are unsuitable due to their inherent credit or market risks. Prohibited investments include stripped mortgage backed securities, zero coupon bonds, nongovernment agency asset backed securities, and structured notes. Our holdings in mortgage-backed securities and collateralized mortgage obligations include only government agencies and government sponsored agencies as we hold no investments in private label mortgage-backed securities or collateralized mortgage obligations.

The following is a schedule of maturities of AFS investment securities and their weighted average yield as of December 31, 2012. Weighted average yields have been computed on an FTE basis using a tax rate of 34%. Our auction rate money market preferred is a long term floating rate instrument for which the interest rate is set at periodic auctions. At each successful auction, we have the option to sell the security at par value. Additionally, the issuers of auction rate securities generally have the right to redeem or refinance the debt. Because of their lack of contractual maturities, auction rate money market preferred and preferred stocks are not reported by a specific maturity group. Mortgage-backed securities and collateralized mortgage obligations are not reported by a specific maturity group due to their variable monthly payments. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations.

	Maturing
	Within One Year				After One Year But Within Five Years				After Five Years But Within Ten Years				After Ten Years				Securities with Variable  Monthly Payments or Noncontractual Maturities
	Amount		Yield (%)		Amount		Yield (%)		Amount		Yield (%)		Amount		Yield (%)		Amount		Yield (%)
Government sponsored enterprises	$	—		—	$	73		7.91	$	25,703		1.47	$	—		—	$	—		—
States and political subdivisions		11,746		3.65		37,686		5.15		92,181		5.15		41,130		3.85		—		—
Mortgage-backed securities		—		—		—		—		36,626		2.05		118,719		2.15		—		—
Collateralized mortgage obligations		—		—		—		—		—		—		—		—		131,005		2.32
Auction rate money market preferred		—		—		—		—		—		—		—		—		2,778		6.29
Preferred stocks		—		—		—		—		—		—		—		—		6,363		5.76
Total	$	11,746		3.65	$	37,759		5.15	$	154,510		3.81	$	159,849		2.59	$	140,146		2.56

28

Loans

Loans are the largest component of earning assets. The proper management of credit and market risk inherent in the loan portfolio is critical to our financial well-being. To control these risks, we have adopted strict underwriting standards. These standards include specific criteria against lending outside our defined market areas, lending limits to a single borrower, and strict loan to collateral value limits. We also monitor and limit loan concentrations to specific industries. We have no foreign loans and there were no concentrations greater than 10% of total loans that are not disclosed as a separate category in the following table.

The following table presents the composition of the loan portfolio for the years ended December 31:

	2012		2011		2010		2009		2008
Commercial	$	371,505	$	365,714	$	348,852	$	340,274	$	324,806
Agricultural		83,606		74,645		71,446		64,845		58,003
Residential real estate		284,148		278,360		284,029		285,838		319,397
Consumer		33,494		31,572		30,977		32,359		33,179
	$	772,753	$	750,291	$	735,304	$	723,316	$	735,385

The following table presents the change in the loan categories for the years ended December 31:

	2012					2011						2010
	$ Change		% Change			$ Change			% Change			$ Change			% Change
Commercial	$	5,791		1.6	%	$	16,862			4.8	%	$	8,578			2.5	%
Agricultural		8,961		12.0	%		3,199			4.5	%		6,601			10.2	%
Residential real estate		5,788		2.1	%		(5,669	)		-2.0	%		(1,809	)		-0.6	%
Consumer		1,922		6.1	%		595			1.9	%		(1,382	)		-4.3	%
	$	22,462		3.0	%	$	14,987			2.0	%	$	11,988			1.7	%

We expect loans to increase moderately in 2013, with most of this growth coming in commercial loans.

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 (see “Note 1—Nature of Operations and Summary of Significant Accounting Policies” and “Note 20 – Fair Value” of the Notes to Consolidated Financial Statements).

Deposits

Deposits are our primary source of funding. The following table presents the composition of the deposit portfolio as of December 31:

	2012		2011		2010		2009		2008
Noninterest bearing deposits	$	143,735	$	119,072	$	104,902	$	96,875	$	97,546
NOW accounts		181,259		163,653		142,259		128,111		113,973
Savings deposits		228,338		193,902		177,817		157,020		182,523
Certificates of deposit		376,790		395,777		386,435		356,594		340,976
Brokered certificates of deposit		55,348		54,326		53,748		50,933		28,185
Internet certificates of deposit		32,197		31,434		12,178		13,119		12,427
Total	$	1,017,667	$	958,164	$	877,339	$	802,652	$	775,630

29

The following table presents the change in the deposit categories for the years ended December 31:

	2012						2011					2010
	$ Change			% Change			$ Change		% Change			$ Change			% Change
Noninterest bearing deposits	$	24,663			20.7	%	$	14,170		13.5	%	$	8,027			8.3	%
NOW accounts		17,606			10.8	%		21,394		15.0	%		14,148			11.0	%
Savings deposits		34,436			17.8	%		16,085		9.0	%		20,797			13.2	%
Certificates of deposit		(18,987	)		-4.8	%		9,342		2.4	%		29,841			8.4	%
Brokered certificates of deposit		1,022			1.9	%		578		1.1	%		2,815			5.5	%
Internet certificates of deposit		763			2.4	%		19,256		158.1	%		(941	)		-7.2	%
Total	$	59,503			6.2	%	$	80,825		9.2	%	$	74,687			9.3	%

While we anticipate that deposits will continue to increase in 2013, it is expected to be at a lower rate than 2012. Growth in 2013 is anticipated to continue to come in the form on non-contractual deposits. Certificates of deposits are expected to approximate current levels.

The following table shows the average balances and corresponding interest rates paid on deposit accounts as of December 31:

	2012					2011					2010
	Amount		Rate			Amount		Rate			Amount		Rate
Noninterest bearing demand deposits	$	125,443		N/A		$	113,726		N/A		$	102,812		N/A
Interest bearing demand deposits		170,851		0.12	%		152,530		0.12	%		137,109		0.11	%
Savings deposits		214,958		0.21	%		192,999		0.25	%		169,579		0.23	%
Time deposits		473,675		1.79	%		467,931		2.19	%		430,892		2.55	%
Total	$	984,927				$	927,186				$	840,392

The remaining maturity of time certificates and other time deposits of $100 or more as of December 31, 2012 was as follows:

Maturity
Within 3 months	$	31,319
Within 3 to 6 months		24,323
Within 6 to 12 months		52,684
Over 12 months		128,801
Total	$	237,127

Borrowed Funds

Borrowed funds include FHLB advances and securities sold under agreements to repurchase. The balance of borrowed funds fluctuates from period to period based on our funding needs including changes in loans, investments, and deposits. For additional disclosure related to borrowed funds see “Note 10 – Borrowed Funds” of Notes to Consolidated Financial Statements.

30

Contractual Obligations and Loan Commitments

We have various financial obligations, including contractual obligations and commitments, which may require future cash payments. The following schedule summarizes our non-cancelable obligations and future minimum payments as of December 31, 2012:

	Minimum Payments Due by Period
	Due in One Year or Less		After One Year But Within Three Years		After Three Years But Within Five Years		After Five Years		Total
Deposits
Deposits with no stated maturity	$	553,332	$	—	$	—	$	—	$	553,332
Certificates of deposit with stated maturities		205,754		148,427		91,755		18,399		464,335
Total deposits		759,086		148,427		91,755		18,399		1,017,667
Borrowed funds
Short term borrowings		72,717		—		—		—		72,717
Long term borrowings		5,000		63,284		50,000		50,000		168,284
Total borrowed funds		77,717		63,284		50,000		50,000		241,001
Total contractual obligations	$	836,803	$	211,711	$	141,755	$	68,399	$	1,258,668

We also have loan commitments that may impact liquidity. The following schedule summarizes our loan commitments and expiration dates by period as of December 31, 2012. Commitments to grant loans include loans to be sold to the secondary market. Since many of these commitments historically have expired without being drawn upon, the total amount of these commitments does not necessarily represent our future cash requirements.

	Expiration Dates by Period
	Due in One Year or Less		After One Year But Within Three Years		After Three Years But Within Five Years		After Five Years		Total
Unused commitments under lines of credit	$	69,385	$	34,744	$	7,934	$	3,170	$	115,233
Commitments to grant loans		40,507		—		—		—		40,507
Commercial and standby letters of credit		3,935		—		—		—		3,935
Total loan commitments	$	113,827	$	34,744	$	7,934	$	3,170	$	159,675

For additional disclosure related to Contractual Obligations and Loan Commitments, see “Note 13 – Off-Balance Sheet Activities” of the Notes to Consolidated Financial Statements.

Capital

Capital consists solely of common stock, retained earnings, and accumulated other comprehensive income. We are currently authorized to raise capital through dividend reinvestment, employee and director stock purchases, and shareholder stock purchases. Pursuant to these authorizations, we issued 124,530 shares of common stock generating $2,898 of capital during 2012, and 115,359 shares of common stock generating $2,192 of capital in 2011. We also offer the Directors Plan which allows participants to purchase stock units, in lieu of cash payments (see “Note 17—Benefit Plans” of the Notes to Consolidated Financial Statements). Pursuant to this plan, we raised $643 and $615 of capital in 2012 and 2011, respectively.

We have approved a publicly announced common stock repurchase plan. During 2012 and 2011, pursuant to this plan, we repurchased 83,586 shares of common stock at an average price of $23.69 and 120,441 shares of common stock at an average price of $18.30, respectively. As of December 31, 2012, we were authorized to repurchase up to an additional 85,410 shares of common stock.

31

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 average assets ratio, which consists of shareholders’ equity plus the ALLL less goodwill and acquisition intangibles, was 8.29% at December 31, 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 December 31:

	2012			2011			Required
Equity Capital		13.23	%		12.92	%		4.00	%
Secondary Capital		1.25	%		1.25	%		4.00	%
Total Capital		14.48	%		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.

The FRB and FDIC also prescribe minimum capital requirements for the Bank. At December 31, 2012, the Bank exceeded these minimum capital requirements. Proposed new capital standards, if enacted, will require us to meet higher capital standards. This increase in capital levels may have an adverse impact on our ability to grow and pay dividends. For further information regarding the Bank’s capital requirements, see “Note 16—Minimum Regulatory Capital Requirements” of the Notes to Consolidated Financial Statements.

Fair Value

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

For further information regarding fair value measurements see “Note 1—Nature of Operations and Summary of Significant Accounting Policies” and “Note 20—Fair Value” of the Notes to Consolidated Financial Statements.

Interest Rate Sensitivity

Interest rate sensitivity is determined by the amount of earning assets and interest bearing liabilities repricing within a specific time period, and their relative sensitivity to a change in interest rates. We strive to achieve reasonable stability in the net interest margin through periods of changing interest rates. One tool we use to measure interest rate sensitivity is gap analysis. As shown in the following table, the gap analysis depicts our position for specific time periods and the cumulative gap as a percentage of total assets.

Trading securities are included in the 0 to 3 month time frame due to their repricing characteristics. Fixed interest rate AFS securities are scheduled according to their contractual maturity. Fixed rate loans are included in the appropriate time frame based on their scheduled amortization. Variable rate loans, which totaled $162,635 as of December 31, 2012, are included in the time frame of their earliest repricing. Time deposit liabilities are scheduled based on their contractual maturity except for variable rate time deposits in the amount of $1,151 that are included in the 0 to 3 month time frame.

32

Savings and NOW accounts have no contractual maturity date and are believed by us to be predominantly noninterest rate sensitive. These accounts have been classified in the gap table according to their estimated withdrawal rates based upon our analysis of deposit decay over the past five years. We believe this decay experience is consistent with our expectation for the future. As of December 31, 2012, we had a positive cumulative gap within one year. A positive gap position results when more assets, within a specified time frame, have the potential to mature or reprice than liabilities.

The following table shows the time periods and the amount of assets and liabilities available for interest rate repricing as of December 31, 2012. The interest rate sensitivity information for investment securities is based on the expected prepayments and call dates versus stated maturities. For purposes of this analysis, nonaccrual loans and the allowance for loan losses are excluded.

	0 to 3 Months			4 to 12 Months			1 to 5 Years			Over 5 Years
Interest sensitive assets
Trading securities	$	1,573		$	—		$	—		$	—
AFS securities		37,663			86,789			211,184			168,374
Loans		194,062			101,725			380,469			89,194
Total	$	233,298		$	188,514		$	591,653		$	257,568
Interest sensitive liabilities
Borrowed funds	$	72,754		$	5,111		$	113,136		$	50,000
Time deposits		62,287			143,836			239,813			18,399
Savings		6,242			20,903			82,438			118,755
NOW		2,163			6,488			30,237			142,371
Total	$	143,446		$	176,338		$	465,624		$	329,525
Cumulative gap	$	89,852		$	102,028		$	228,057		$	156,100
Cumulative gap as a % of assets		6.28	%		7.13	%		15.94	%		10.91	%

The following table shows the maturity of commercial and agricultural loans outstanding at December 31, 2012. Also provided are the amounts due after one year, classified according to the sensitivity to changes in interest rates.

	1 Year or Less		1 to 5 Years		Over 5 Years		Total
Commercial and agricultural	$	99,889	$	288,297	$	66,925	$	455,111
Interest sensitivity
Loans maturing after one year that have:
Fixed interest rates			$	231,656	$	59,368
Variable interest rates				56,641		7,557
Total			$	288,297	$	66,925

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.

The primary sources of our liquidity are cash and cash equivalents, certificates of deposit held in other financial institutions, trading securities, and AFS securities. These categories totaled $534,968 or 37.4% of assets as of

33

December 31, 2012 as compared to $467,344 or 34.9% in 2011. Liquidity is important for financial institutions because of their need to meet loan funding commitments, depositor withdrawal requests, and various other commitments discussed in the accompanying Notes to Consolidated Financial Statements. Liquidity varies significantly daily, based on customer activity.

Our primary source of funds is deposit accounts. We also 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. As of December 31, 2012, we had available lines of credit of $108,646.

The following table summarizes our sources and uses of cash for the years ended December 31:

	2012			2011			$ Variance
Net cash provided by operating activities	$	19,464		$	18,860		$	604
Net cash used in investing activities		(101,874	)		(105,203	)		3,329
Net cash provided by financing activities		78,740			96,824			(18,084	)
(Decrease) increase in cash and cash equivalents		(3,670	)		10,481			(14,151	)
Cash and cash equivalents January 1		28,590			18,109			10,481
Cash and cash equivalents December 31	$	24,920		$	28,590		$	(3,670	)

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 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.

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 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

34

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 December 31, 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 to these levels, we feel that these extreme scenarios help us identify potential gaps and mismatches in the repricing characteristics of assets and liabilities. We regularly monitor our forecasted net interest income sensitivity to ensure that it remains within established limits.

The following table summarizes our interest rate sensitivity as of:

	December 31, 2012
Immediate basis point change asumption (short-term rates)		-100		0	100		200		300		400
Percent change in net income vs. constant rates		-1.61	%	—	0.49	%	-1.58	%	-1.74	%	-2.16	%
	December 31, 2011
Immediate basis point change asumption (short-term rates)		-100		0	100		200		300		400
Percent change in net income vs. constant rates		-1.50	%	—	1.34	%	0.84	%	-0.78	%	N/A

A 400 basis point increase was not applicable as of December 31, 2011 as we were not utilizing this scenario as part of our interest rate sensitivity analysis at that time. We believe our risk associated with changes in interest rates are acceptable.

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. Residential real estate and consumer loans 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 offering rates, the level of sales of used homes, and the overall availability of credit in the market place. Generally, a decrease in interest rates will result in an increase in cash flows from these assets. A significant portion of our securities are callable or have prepayment options. The call and prepayment options are more likely to be exercised in a period of decreasing interest rates. Savings and demand accounts may generally be withdrawn on request without prior notice. The timing of cash flows from these deposits is estimated based on historical experience. 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 December 31, 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. During the first quarter of 2012, we engaged the services of a third party to analyze our historical loan prepayment speeds and non-contractual deposit decay rates. These analyses were

35

prompted by the Office of Thrift Supervision’s discontinuation of publishing its various benchmarks for various loan prepayment speeds and deposit decay rates, which we had previously used for certain loan and deposit accounts (including as of December 31, 2011). As a result of implementing the results of these analyses, the estimated lives of our non-contractual deposit accounts significantly increased, which in turn significantly impacted the corresponding estimated cash flows for these accounts in the following table. We have reviewed the results of the analyses in detail and feel that it reasonably reflects the prepayment speeds and decay rates of our loan and deposit portfolios.

	December 31, 2012
	2013			2014			2015			2016			2017			Thereafter			Total			Fair Value
Rate sensitive assets
Other interest bearing assets	$	6,411		$	100		$	240		$	—		$	—		$	—		$	6,751		$	6,761
Average interest rates		0.86	%		0.35	%		1.25	%		—			—			—			0.86	%
Trading securities	$	1,051		$	522		$	—		$	—		$	—		$	—		$	1,573		$	1,573
Average interest rates		2.68	%		2.54	%		—			—			—			—			2.63	%
AFS securities	$	124,452		$	83,606		$	49,419		$	42,655		$	35,504		$	168,374		$	504,010		$	504,010
Average interest rates		2.42	%		2.30	%		2.53	%		2.82	%		2.89	%		2.48	%		2.50	%
Fixed interest rate loans (1)	$	138,840		$	96,013		$	91,353		$	85,095		$	109,057		$	89,760		$	610,118		$	622,329
Average interest rates		5.74	%		5.62	%		5.57	%		5.21	%		4.60	%		4.63	%		5.26	%
Variable interest rate loans (1)	$	64,482		$	28,076		$	24,669		$	12,650		$	22,061		$	10,697		$	162,635		$	162,635
Average interest rates		4.90	%		3.77	%		3.96	%		3.89	%		3.36	%		3.90	%		4.21	%
Rate sensitive liabilities
Borrowed funds	$	77,865		$	10,814		$	42,322		$	20,000		$	40,000		$	50,000		$	241,001		$	248,822
Average interest rates		0.46	%		0.65	%		1.14	%		2.67	%		2.15	%		3.03	%		1.59	%
Savings and NOW accounts	$	35,796		$	32,794		$	29,476		$	26,520		$	23,885		$	261,126		$	409,597		$	409,597
Average interest rates		0.13	%		0.13	%		0.12	%		0.12	%		0.12	%		0.11	%		0.12	%
Fixed interest rate time deposits	$	204,972		$	76,373		$	71,685		$	51,232		$	40,523		$	18,399		$	463,184		$	471,479
Average interest rates		1.13	%		1.69	%		2.10	%		2.14	%		1.72	%		1.67	%		1.55	%
Variable interest rate time deposits	$	782		$	369		$	—		$	—		$	—		$	—		$	1,151		$	1,151
Average interest rates		0.46	%		0.45	%		—			—			—			—			0.46	%
	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	%
AFS 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		$	227,780
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.

36

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

Item 7A. 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 8. Financial Statements and Supplementary Data

The following consolidated financial statements accompanied by the report of our independent registered public accounting firm are set forth beginning on page 39 of this report:

Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheets

Consolidated Statements of Changes in Shareholders’ Equity

Consolidated Statements of Income

Consolidated Statements of Comprehensive Income

Consolidated Statements of Cash Flows

Notes to Consolidated Financial Statements

Supplementary data regarding quarterly results of operations are set forth under the table headed “Summary of Selected Financial Data” under Item 6 of this report.

37

Report of Independent Registered Public Accounting Firm

Shareholders and Board of Directors

Isabella Bank Corporation

Mount Pleasant, Michigan

We have audited the accompanying consolidated balance sheets of Isabella Bank Corporation as of December 31, 2012 and 2011, and the related consolidated statements of changes in shareholders’ equity, income, comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2012. We also have audited Isabella Bank Corporation’s internal control over financial reporting as of December 31, 2012, based on criteria established in the Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Isabella Bank Corporation’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on these consolidated financial statements and an opinion on the effectiveness of Isabella Bank Corporation’s internal control over financial reporting, based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material misstatement exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. We believe that our audits provide a reasonable basis for our opinion.

A corporation’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles. A corporation’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the corporation; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the corporation are being made only in accordance with authorizations of management and directors of the corporation; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the corporation’s assets that could have a material effect on the consolidated financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Isabella Bank Corporation as of December 31, 2012 and 2011, and the consolidated results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2012 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion Isabella Bank Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2012, based on criteria established in the Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission.

/s/Rehmann Robson LLC

Saginaw, Michigan

March 11, 2013

38

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)

	December 31
	2012		2011
ASSETS
Cash and cash equivalents
Cash and demand deposits due from banks	$	22,634	$	24,514
Interest bearing balances due from banks		2,286		4,076
Total cash and cash equivalents		24,920		28,590
Certificates of deposit held in other financial institutions		4,465		8,924
Trading securities		1,573		4,710
AFS securities (amortized cost of $490,420 in 2012 and $414,614 in 2011)		504,010		425,120
Mortgage loans available-for-sale		3,633		3,205
Loans
Commercial		371,505		365,714
Agricultural		83,606		74,645
Residential real estate		284,148		278,360
Consumer		33,494		31,572
Total loans		772,753		750,291
Less allowance for loan losses		11,936		12,375
Net loans		760,817		737,916
Premises and equipment		25,787		24,626
Corporate owned life insurance		22,773		22,075
Accrued interest receivable		5,227		5,848
Equity securities without readily determinable fair values		18,118		17,189
Goodwill and other intangible assets		46,532		46,792
Other assets		12,784		12,930
TOTAL ASSETS	$	1,430,639	$	1,337,925
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits
Noninterest bearing	$	143,735	$	119,072
NOW accounts		181,259		163,653
Certificates of deposit under $100 and other savings		455,546		440,123
Certificates of deposit over $100		237,127		235,316
Total deposits		1,017,667		958,164
Borrowed funds ($0 in 2012 and $5,242 in 2011 at fair value)		241,001		216,136
Accrued interest payable and other liabilities		7,482		8,842
Total liabilities		1,266,150		1,183,142
Shareholders’ equity
Common stock — no par value 15,000,000 shares authorized; issued and outstanding 7,671,846 shares (including 5,130 shares held in the Rabbi Trust) in 2012 and 7,589,226 shares (including 16,585 shares held in the Rabbi Trust) in 2011		136,580		134,734
Shares to be issued for deferred compensation obligations		3,734		4,524
Retained earnings		19,168		13,036
Accumulated other comprehensive income		5,007		2,489
Total shareholders’ equity		164,489		154,783
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	1,430,639	$	1,337,925

The accompanying notes are an integral part of these consolidated financial statements.

39

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
Balances, January 1, 2010		7,535,193		$	133,443		$	4,507		$	4,972		$	(2,119	)	$	140,803
Comprehensive income		—			—			—			9,045			410			9,455
Issuance of common stock		124,953			2,683			—			—			—			2,683
Common stock issued for deferred compensation obligations		28,898			537			(475	)		—			—			62
Share based payment awards under equity compensation plan		—			—			650			—			—			650
Common stock purchased for deferred compensation obligations		—			(514	)		—									(514	)
Common stock repurchased pursuant to publicly announced repurchase plan		(138,970	)		(2,557	)					—			—			(2,557	)
Cash dividends ($0.72 per share)		—			—			—			(5,421	)		—			(5,421	)
Balances, December 31, 2010		7,550,074			133,592			4,682			8,596			(1,709	)		145,161
Comprehensive income		—			—			—			10,210			4,198			14,408
Issuance of common stock		120,336			3,075			—			—			—			3,075
Common stock issued for deferred compensation obligations		39,257			697			(773	)		—			—			(76	)
Share based payment awards under equity compensation plan		—			—			615			—			—			615
Common stock purchased for deferred compensation obligations		—			(426	)		—			—			—			(426	)
Common stock repurchased pursuant to publicly announced repurchase plan		(120,441	)		(2,204	)					—			—			(2,204	)
Cash dividends ($0.76 per share)		—			—			—			(5,770	)		—			(5,770	)
Balances, December 31, 2011		7,589,226			134,734			4,524			13,036			2,489			154,783
Comprehensive income		—			—			—			12,206			2,518			14,724
Issuance of common stock		124,530			2,898			—			—			—			2,898
Common stock issued for deferred compensation obligations		41,676			814			(814	)		—			—			—
Common stock transferred from the Rabbi Trust to satisfy deferred compensation obligations		—			619			(619	)		—			—			—
Share based payment awards under equity compensation plan		—			—			643			—			—			643
Common stock purchased for deferred compensation obligations		—			(505	)		—			—			—			(505	)
Common stock repurchased pursuant to publicly announced repurchase plan		(83,586	)		(1,980	)		—			—			—			(1,980	)
Cash dividends ($0.80 per share)		—			—			—			(6,074	)		—			(6,074	)
Balances, December 31, 2012		7,671,846		$	136,580		$	3,734		$	19,168		$	5,007		$	164,489

The accompanying notes are an integral part of these consolidated financial statements.

40

CONSOLIDATED STATEMENTS OF INCOME

(Dollars in thousands except per share data)

	Year Ended December 31
	2012			2011		2010
Interest income
Loans, including fees	$	43,396		$	45,463	$	46,794
AFS securities
Taxable		7,555			6,941		5,271
Nontaxable		4,870			4,806		4,367
Trading securities		94			189		306
Federal funds sold and other		486			506		479
Total interest income		56,401			57,905		57,217
Interest expense
Deposits		9,131			10,935		11,530
Borrowings		4,292			5,268		5,674
Total interest expense		13,423			16,203		17,204
Net interest income		42,978			41,702		40,013
Provision for loan losses		2,300			3,826		4,857
Net interest income after provision for loan losses		40,678			37,876		35,156
Noninterest income
Service charges and fees		6,432			6,118		6,480
Gain on sale of mortgage loans		1,576			538		610
Gain on sale of available-for-sale investment securities		1,119			3		348
Earnings on corporate owned life insurance policies		698			609		663
Other		1,705			950		1,199
Total noninterest income		11,530			8,218		9,300
Noninterest expenses
Compensation and benefits		21,227			19,292		18,552
Occupancy		2,519			2,470		2,351
Furniture and equipment		4,560			4,497		4,344
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			—		—
Other		9,051			8,271		8,560
Total noninterest expenses		37,639			34,530		33,807
Income before federal income tax expense		14,569			11,564		10,649
Federal income tax expense		2,363			1,354		1,604
NET INCOME	$	12,206		$	10,210	$	9,045
Earnings per share
Basic	$	1.61		$	1.35	$	1.20
Diluted	$	1.56		$	1.31	$	1.17
Cash dividends per basic share	$	0.80		$	0.76	$	0.72

The accompanying notes are an integral part of these consolidated financial statements.

41

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Dollars in thousands)

	Year Ended December 31
	2012			2011			2010
Net income	$	12,206		$	10,210		$	9,045
Unrealized holding gains on available-for-sale securities:
Unrealized gains arising during the year		3,921			9,220			1,156
Reclassification adjustment for net realized gains included in net income		(1,119	)		(3	)		(348	)
Reclassification adjustment for impairment loss included in net income		282			—			—
Net unrealized gains		3,084			9,217			808
Tax effect (1)		(348	)		(3,719	)		(351	)
Unrealized gains, net of tax		2,736			5,498			457
Increase in unrecognized pension costs		(329	)		(1,971	)		(72	)
Tax effect		111			671			25
Net unrealized loss on defined benefit pension plan		(218	)		(1,300	)		(47	)
Other comprehensive income, net of tax		2,518			4,198			410
Comprehensive income	$	14,724		$	14,408		$	9,455

(1) See “Note 12 – Federal Income Taxes” for tax effect reconciliation.

The accompanying notes are an integral part of these consolidated financial statements.

42

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

	Year Ended December 31
	2012			2011			2010
OPERATING ACTIVITIES
Net income	$	12,206		$	10,210		$	9,045
Reconciliation of net income to net cash provided by operations:
Provision for loan losses		2,300			3,826			4,857
Impairment of foreclosed assets		166			82			180
Depreciation		2,417			2,521			2,522
Amortization and impairment of originated mortgage servicing rights		787			714			543
Amortization of acquisition intangibles		260			299			338
Net amortization of available-for-sale securities		2,277			1,689			1,153
Available-for-sale security impairment loss		282			—			—
Gain on sale of available-for-sale securities		(1,119	)		(3	)		(348	)
Net unrealized losses on trading securities		52			78			94
Net gain on sale of mortgage loans		(1,576	)		(538	)		(610	)
Net unrealized gains on borrowings measured at fair value		(33	)		(181	)		(227	)
Increase in cash value of corporate owned life insurance		(698	)		(609	)		(642	)
Realized gain on redemption of corporate owned life insurance		—			—			(21	)
Share-based payment awards under equity compensation plan		643			615			650
Deferred income tax expense		616			389			179
Origination of loans held for sale		(99,353	)		(57,584	)		(72,106	)
Proceeds from loan sales		100,501			56,099			73,815
Net changes in operating assets and liabilities which provided (used) cash:
Trading securities		3,085			1,049			7,632
Accrued interest receivable		621			(392	)		376
Other assets		(2,610	)		147			(1,914	)
Accrued interest payable and other liabilities		(1,360	)		449			1,005
Net cash provided by operating activities		19,464			18,860			26,521
INVESTING ACTIVITIES
Net change in certificates of deposit held in other financial institutions		4,459			6,884			(10,428	)
Activity in available-for-sale securities
Sales		40,677			8,877			18,303
Maturities and calls		89,112			69,275			66,970
Purchases		(207,035	)		(165,017	)		(156,928	)
Loan principal originations, net		(27,103	)		(20,743	)		(21,319	)
Proceeds from sales of foreclosed assets		1,594			2,041			2,778
Purchases of premises and equipment		(3,578	)		(2,520	)		(3,232	)
Purchases of corporate owned life insurance		—			(4,000	)		(175	)
Net cash used in investing activities		(101,874	)		(105,203	)		(103,877	)
FINANCING ACTIVITIES
Acceptances and withdrawals of deposits, net		59,503			80,825		$	74,687
Increase in other borrowed funds		24,898			21,400			2,043
Cash dividends paid on common stock		(6,074	)		(5,770	)		(5,421	)
Proceeds from issuance of common stock		2,279			2,302			2,208
Common stock repurchased		(1,361	)		(1,507	)		(2,020	)
Common stock purchased for deferred compensation obligations		(505	)		(426	)		(514	)
Net cash provided by financing activities		78,740			96,824			70,983
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS		(3,670	)		10,481			(6,373	)
Cash and cash equivalents at beginning of year		28,590			18,109			24,482
CASH AND CASH EQUIVALENTS AT END OF YEAR	$	24,920		$	28,590		$	18,109
SUPPLEMENTAL CASH FLOWS INFORMATION:
Interest paid	$	13,639		$	16,239		$	17,344
Federal income taxes paid		2,357			878			1,261
SUPPLEMENTAL NONCASH INVESTING AND FINANCING INFORMATION:
Transfers of loans to foreclosed assets	$	1,902		$	1,932		$	3,868
Common stock issued for deferred compensation obligations		619			773			475
Common stock repurchased from the Rabbi Trust		(619	)		(697	)		(537	)

See notes to interim condensed consolidated financial statements.

43

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands except per share amounts)

NOTE 1 – NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION AND CONSOLIDATION: The consolidated financial statements include the accounts of Isabella Bank Corporation, a financial services holding company, and its wholly owned subsidiaries, Isabella Bank and Financial Group Information Services. All intercompany balances and accounts have been eliminated in consolidation.

NATURE OF OPERATIONS: Isabella Bank Corporation is a financial services holding company offering a wide array of financial products and services in several mid-Michigan counties. Our banking subsidiary, Isabella Bank, offers banking services through 26 locations, 24 hour banking services locally and nationally through shared automatic teller machines, 24 hour online banking, and direct deposits to businesses, institutions, and individuals. Lending services offered include commercial loans, agricultural loans, residential real estate loans, and consumer loans. Deposit services include interest and noninterest bearing checking accounts, savings accounts, money market accounts, and certificates of deposit. Other related financial products include trust and investment services, safe deposit box rentals, and credit life insurance. Active competition, principally from other commercial banks, savings banks and credit unions, exists in all of our principal markets. Our results of operations can be significantly affected by changes in interest rates or changes in the local economic environment.

Financial Group Information Services provides information technology services to Isabella Bank Corporation and our subsidiaries.

USE OF ESTIMATES: In preparing consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, we are required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated balance sheet and reported amounts of revenues and expenses during the reporting year. Actual results could differ from those estimates.

Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the ALLL, the fair value of certain AFS investment securities, the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans, valuation of goodwill and other intangible assets, and determinations of assumptions in accounting for the defined benefit pension plan.

FAIR VALUE MEASUREMENTS: Fair value refers to the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants in the market in which the reporting entity transacts such sales or transfers based on the assumptions market participants would use when pricing an asset or liability. Assumptions are developed based on prioritizing information within a fair value hierarchy that gives the highest priority to quoted prices in active markets and the lowest priority to unobservable data, such as the reporting entity’s own data. We may choose to measure eligible items at fair value at specified election dates. Unrealized gains and losses on items for which the fair value measurement option has been elected are reported in earnings at each subsequent reporting date. The fair value option (i) may be applied instrument by instrument, with certain exceptions, allowing us to record identical financial assets and liabilities at fair value or by another measurement basis permitted under generally accepted accounting principles, (ii) is irrevocable (unless a new election date occurs) and (iii) is applied only to entire instruments and not to portions of instruments.

For assets and liabilities recorded at fair value, it is our policy to maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements for those financial instruments for which there is an active market. In cases where the market for a financial asset or liability is not active, we include appropriate risk adjustments that market participants would make for nonperformance and

44

liquidity risks when developing fair value measurements. Fair value measurements for assets and liabilities for which limited or no observable market data exists are accordingly based primarily upon estimates, are often calculated based on the economic and competitive environment, the characteristics of the asset or liability and other factors. Therefore, the results cannot be determined with precision and may not be realized in an actual sale or immediate settlement of the asset or liability. Additionally, there may be inherent weaknesses in any calculation technique, and changes in the underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect the results of current or future values.

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

Fair Value Hierarchy

Under fair value measurement and disclosure authoritative guidance, we group assets and liabilities measured at fair value into three levels, based on the markets in which the assets and liabilities are traded, and the reliability of the assumptions used to determine fair value, based on the prioritization of inputs in the valuation techniques. These levels are:

Level 1:	Valuation is based upon quoted prices for identical instruments traded in active markets.
Level 2:	Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model based valuation techniques for which all significant assumptions are observable in the market.
Level 3:	Valuation is generated from model based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability.

The asset’s or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques maximize the use of observable inputs and minimize the use of unobservable inputs. Transfers between measurement levels are recognized at the end of reporting periods.

For further discussion of fair value considerations, refer to “Note 20 – Fair Value.”

SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK: Most of our activities conducted are with customers located within the central Michigan area. A significant amount of our outstanding loans are secured by commercial and residential real estate. Other than these types of loans, there is no significant concentration to any other industry or any one customer.

CASH AND CASH EQUIVALENTS: For purposes of the consolidated statements of cash flows, cash and cash equivalents include cash and balances due from banks, federal funds sold, and other deposit accounts. Generally, federal funds sold are for a one day period. We maintain deposit accounts in various financial institutions which generally exceed federally insured limits or are not insured. We do not believe we are exposed to any significant interest, credit or other financial risk as a result of these deposits.

CERTIFICATES OF DEPOSIT HELD IN OTHER FINANCIAL INSTITUTIONS: Certificates of deposits held in other financial institutions consist of interest bearing certificates of deposit that mature within 3 years and are carried at cost.

45

TRADING SECURITIES: We engage in trading activities of our own accounts. Securities that are held principally for resale in the near term are recorded in the trading assets account at fair value with changes in fair value recorded in noninterest income. Interest income is included in net interest income.

AFS SECURITIES: Purchases of investment securities are generally classified as AFS. However, we may elect to classify securities as either held to maturity or trading. Securities classified as AFS are recorded at fair value, with unrealized gains and losses, net of the effect of deferred income taxes, excluded from earnings and reported in other comprehensive income. Included in AFS securities are auction rate money market preferreds and preferred stocks. These investments are considered equity securities for federal income tax purposes, and as such, no estimated federal income tax impact is expected or recorded. Auction rate money market preferred securities and preferred stocks are recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Realized gains and losses on the sale of AFS securities are determined using the specific identification method.

AFS securities are reviewed quarterly for possible OTTI. In determining whether an OTTI exists for debt securities, we must assert that: (a) we do not have the intent to sell the security; and (b) it is more likely than not we will not have to sell the security before recovery of its cost basis. If these conditions are not met, we must recognize an OTTI charge through earnings for the difference between the debt security’s amortized cost basis and its fair value, and such amount is included in noninterest income. For debt securities that do not meet the above criteria, and we do not expect to recover the security’s amortized cost basis, the security is considered other-than-temporarily impaired. For these debt securities, we separate the total impairment into the credit risk loss component and the amount of the loss related to market and other risk factors. In order to determine the amount of the credit loss for a debt security, we calculate the recovery value by performing a discounted cash flow analysis based on the current cash flows and future cash flows we expect to recover. The amount of the total OTTI related to the credit risk is recognized in earnings and is included in noninterest income. The amount of the total OTTI related to other risk factors is recognized as a component of other comprehensive income. For debt securities that have recognized an OTTI through earnings, if through subsequent evaluation there is a significant increase in the cash flow expected, the difference between the amortized cost basis and the cash flows expected to be collected is accreted as interest income.

AFS equity securities are reviewed for OTTI at each reporting date. This evaluation considers a number of factors including, but not limited to, the length of time and extent to which the fair value has been less than cost, the financial condition and near term prospects of the issuer, and our ability and intent to hold the securities until fair value recovers. If it is determined that we do not have the ability and intent to hold the securities until recovery or that there are conditions that indicate that a security may not recover in value then the difference between the fair value and the cost of the security is recognized in earnings and is included in noninterest income.

LOANS: Loans that we have the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at their outstanding principal balance adjusted for any charge-offs, the ALLL, and any deferred fees or costs on originated loans. 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 agricultural, commercial and mortgage loans is discontinued at the time the loan is 90 days or more past due unless the credit is well secured and in the process of collection. Consumer loans are typically charged off no later than 180 days past due. Past due status is based on contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful.

46

For loans that are placed on nonaccrual status or charged-off, all interest accrued in the current calendar year, but not collected, is reversed against interest income while interest accrued in prior calendar years, but not collected is charged against the ALLL. The interest on these loans is accounted for on the cash-basis, until qualifying for return to accrual status. Loans are returned to accrual status when all principal and interest amounts contractually due are brought current and future payments are reasonably assured. For impaired loans not classified as nonaccrual, interest income continues to be accrued over the term of the loan based on the principal amount outstanding.

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

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

The ALLL consists of specific, general, and unallocated components. The specific component relates to loans that are deemed to be impaired. For such loans that are also analyzed for specific allowance allocations, an allowance is established when the discounted cash flows or collateral value or observable market price of the impaired loan is lower than the carrying value of that loan. The general component covers non classified loans and is based on historical loss experience. An unallocated component is maintained to cover uncertainties that we believe affect our estimate of probable losses based on qualitative factors. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.

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

1. There has been a charge-off of its principal balance;

2. The loan has been classified as a TDR; or

3. The loan is in nonaccrual status.

Impairment is measured on a loan by loan basis for commercial and agricultural loans by 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.

LOANS HELD FOR SALE: Mortgage loans held for sale in the secondary market are carried at the lower of cost or fair value as determined by aggregating outstanding commitments from investors or current investor yield requirements. Net unrealized losses, if any, would be recognized as a component of other noninterest expenses.

Mortgage loans held for sale are sold with the mortgage servicing rights retained by us. The carrying value of mortgage loans sold is reduced by the cost allocated to the associated mortgage servicing rights. Gains or losses on sales of mortgage loans are recognized based on the difference between the selling price and the carrying value of the related mortgage loans sold.

TRANSFERS OF FINANCIAL ASSETS: Transfers of financial assets, including mortgage loans and participation loans are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is determined to be surrendered when 1) the assets have been legally isolated from us, 2) the transferee obtains the right (free of conditions that constrain it from taking advantage of the right) to pledge or

47

exchange the transferred assets, and 3) we do not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity. Other than servicing, we have no substantive continuing involvement related to these loans.

SERVICING: Servicing assets are recognized as separate assets when rights are acquired through purchase or through sale of financial assets. We have no purchased servicing rights. For sales of mortgage loans, a portion of the cost of originating the loan is allocated to the servicing right based on relative fair value. Fair value is based on market prices for comparable mortgage servicing contracts, when available, or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as the cost to service, the discount rate, the custodial earnings rate, an inflation rate, ancillary income, prepayment speeds and default rates and losses.

Servicing assets are evaluated for impairment based upon the fair value of the rights as compared to amortized cost. Impairment is determined by stratifying rights into tranches based on predominant risk characteristics, such as interest rate, loan type, and investor type. Impairment is recognized through a valuation allowance for an individual tranche, to the extent that fair value is less than the capitalized amount for the tranche. If we later determine that all or a portion of the impairment no longer exists for a particular tranche, a reduction of the valuation allowance may be recorded as an increase to income. Capitalized servicing rights are reported in other assets and are amortized into noninterest income in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets. The unpaid principal balance of mortgages serviced for others was $303,351 and $304,626 with capitalized servicing rights of $2,285 and $2,374 at December 31, 2012 and 2011, respectively.

Servicing fee income is recorded for fees earned for servicing loans for others. The fees are based on a contractual percentage of the outstanding principal; or a fixed amount per loan and are recorded as income when earned. We recorded servicing fee revenue of $757, $732, and $760 related to residential mortgage loans serviced for others during 2012, 2011, and 2010, respectively and is included in other noninterest income.

LOANS ACQUIRED THROUGH TRANSFER: Authoritative accounting guidance related to acquired loans requires that a valuation allowance for loans acquired in a transfer, including in a business combination, reflect only losses incurred after acquisition, and should not be recorded at acquisition. This standard applies to any loan acquired in a transfer that shows evidence of credit quality deterioration since it was originated.

FORECLOSED ASSETS: Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at the lower of our carrying amount or fair value less estimated selling costs at the date of transfer, establishing a new cost basis. Any write-downs based on the asset’s fair value at the date of acquisition are charged to the ALLL. After foreclosure, property held for sale is carried at the lower of the new cost basis or fair value less costs to sell. Impairment losses on property to be held and used are measured at the amount by which the carrying amount of property exceeds its fair value. Costs relating to holding these assets are expensed as incurred. We periodically perform valuations and any subsequent write-downs are recorded as a charge to operations, if necessary, to reduce the carrying value of a property to the lower of our carrying amount or fair value less costs to sell. Foreclosed assets of $2,018 and $1,876 as of December 31, 2012 and 2011, respectively, are included in other assets.

PREMISES AND EQUIPMENT: Land is carried at cost. Buildings and equipment are carried at cost, less accumulated depreciation which is computed principally by the straight-line method based upon the estimated useful lives of the related assets, which range from 3 to 40 years. Major improvements are capitalized and appropriately amortized based upon the useful lives of the related assets or the expected terms of the leases, if shorter, using the straight-line method. Maintenance, repairs and minor alterations are charged to current operations as expenditures occur. We annually review these assets to determine whether carrying values have been impaired.

48

FDIC INSURANCE PREMIUM: Included in other assets were prepaid FDIC assessments of $1,804 and $2,588 as of December 31, 2012 and 2011, respectively.

EQUITY SECURITIES WITHOUT READILY DETERMINABLE FAIR VALUES: Included in equity securities without readily determinable fair values are FHLB Stock and FRB Stock as well as our ownership interests in Corporate Settlement Solutions and Valley Financial Corporation. The investment in Corporate Settlement Solutions, a title insurance company, was made in the 1st quarter 2007. The Corporation is not the managing entity of Corporate Settlement Solutions, LLC, and accounts for its investment in that entity under the equity method of accounting. Valley Financial Corporation is the parent company of 1st State Bank in Saginaw, Michigan, which is a de novo bank that opened in 2005. The Corporation made investments in Valley Financial Corporation in 2004 and in 2007.

Equity securities without readily determinable fair values consist of the following as of December 31:

	2012		2011
Federal Home Loan Bank Stock	$	7,850	$	7,380
Investment in Corporate Settlement Solutions		7,040		6,611
Federal Reserve Bank Stock		1,879		1,879
Investment in Valley Financial Corporation		1,000		1,000
Other		349		319
Total	$	18,118	$	17,189

EQUITY COMPENSATION PLAN: At December 31, 2012, the Directors Plan had 170,566 shares eligible to be issued to participants, for which the Rabbi Trust held 5,130 shares. We had 218,023 shares to be issued in 2011, with 16,585 shares held in the Rabbi Trust. Compensation costs relating to share based payment transactions are recognized as the services are rendered, with the cost measured based on the fair value of the equity or liability instruments issued (see “Note 17 – Benefit Plans”). We have no other equity-based compensation plans.

CORPORATE OWNED LIFE INSURANCE: We have purchased life insurance policies on key members of management. In the event of death of one of these individuals, we would receive a specified cash payment equal to the face value of the policy. Such policies are recorded at their cash surrender value, or the amount that can be realized on the balance sheet dates. Increases in cash surrender value in excess of single premiums paid are reported as other noninterest income.

As of December 31, 2012 and 2011, the present value of the post retirement benefits payable by us to the covered employees was estimated to be $2,657 and $2,633, respectively, and is included in accrued interest payable and other liabilities . The periodic policy maintenance costs were $24, $60, and $68 for 2012, 2011, and 2010, respectively and is included in other noninterest expenses.

ACQUISITION INTANGIBLES AND GOODWILL: We previously acquired branch facilities and related deposits in business combinations accounted for as a purchase. The acquisitions included amounts related to the valuation of customer deposit relationships (core deposit intangibles). Core deposit intangibles arising from acquisitions are included in goodwill and other intangible assets are being amortized over their estimated lives and evaluated for potential impairment on at least an annual basis. Goodwill represents the excess of purchase price over identifiable assets, is not amortized but is evaluated for impairment on at least an annual basis. Acquisition intangibles and goodwill are typically qualitatively evaluated to determine if it is more likely than not that the carrying balance is impaired. If it is determined that the carrying balance is more likely than not to be impaired, we perform a cash flow valuation to determine the extent of the potential impairment. This valuation method requires a significant degree of our judgment. In the event the projected undiscounted net operating cash flows for these intangible assets are less than the carrying value, the asset is recorded at fair value as determined by the valuation model.

49

OFF BALANCE SHEET CREDIT RELATED FINANCIAL INSTRUMENTS: In the ordinary course of business, we have entered into commitments to extend credit, including commitments under credit card arrangements, home equity lines of credit, commercial letters of credit, and standby letters of credit. Such financial instruments are recorded only when funded.

FEDERAL INCOME TAXES: Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method. Under this method, the net deferred tax assets or liability is determined based on the tax effects of the temporary differences between the book and tax bases on the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws. Valuation allowances are established, where necessary, to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable or refundable for the year plus or minus the change during the year in deferred tax assets and liabilities.

We analyze our filing positions in the jurisdictions where it is required to file income tax returns, as well as all open tax years in these jurisdictions. We have also elected to retain our existing accounting policy with respect to the treatment of interest and penalties attributable to income taxes, and continue to reflect any charges for such, to the extent they arise, as a component of our noninterest expenses.

MARKETING COSTS: Marketing costs are expensed as incurred (see “Note 11 – Other Noninterest Expenses”).

RECLASSIFICATIONS: Certain amounts reported in the 2011 and 2010 consolidated financial statements have been reclassified to conform with the 2012 presentation.

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 year. 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 we may issue relate solely to outstanding shares in the Directors Plan, see “Note 17 – Benefit Plans.”

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

	2012		2011		2010
Average number of common shares outstanding for basic calculation		7,604,303		7,572,841		7,541,676
Average potential effect of shares in the Directors Plan (1)		195,063		194,634		187,744
Average number of common shares outstanding used to calculate diluted earnings per common share		7,799,366		7,767,475		7,729,420
Net income	$	12,206	$	10,210	$	9,045
Earnings per share
Basic	$	1.61	$	1.35	$	1.20
Diluted	$	1.56	$	1.31	$	1.17

(1) Exclusive of shares held in the Rabbi Trust

50

NOTE 3 – ACCOUNTING STANDARDS UPDATES

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 shareholders’ 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 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.

ASU No. 2012-02: “Intangibles—Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment”

In August 2012, ASU No. 2012-02 amended ASC Topic 350, “Goodwill and Other” to simplify the testing of intangible assets with indefinite lives. This update will allow for a qualitative assessment of intangible assets

51

with indefinite lives to determine whether or not it is necessary to perform the impairment test described in ASC Topic 350. While the new authoritative guidance was effective for fiscal years beginning after September 15, 2012, we elected to early adopt the guidance as of December 31, 2012. This standard did not have any impact on our consolidated financial statements.

Pending Accounting Standards Updates

ASU No. 2012-06: “Business Combinations (Topic 805): Subsequent Accounting for an Indemnification Asset Recognized at the Acquisition Date as a Result of a Government-Assisted Acquisition of a Financial Institution”

In October 2012, ASU No. 2012-06 amended ASC Topic 805, “Business Combinations” to clarify the applicable guidance for subsequently measuring an indemnification asset recognized as part of a government assisted acquisition of a financial institution. The new authoritative guidance is effective for fiscal years beginning after December 15, 2012 and at this time is not expected to have any impact on our consolidated financial statements.

NOTE 4 – TRADING SECURITIES

Trading securities, at fair value, consist of the following investments at December 31:

	2012		2011
States and political subdivisions	$	1,573	$	4,710

Included in net trading losses of $52 during 2012, were $18 of net trading losses on securities that relate to our trading portfolio as of December 31, 2012. Included in net trading gains of $78 during 2011, were $60 of net trading gains on securities that relate to our trading portfolio as of December 31, 2011.

NOTE 5 – AFS SECURITIES

The amortized cost and fair value of AFS securities, with gross unrealized gains and losses, are as follows as of December 31:

	2012
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Government sponsored enterprises	$	25,668	$	108	$	—	$	25,776
States and political subdivisions		174,118		9,190		565		182,743
Auction rate money market preferred		3,200		—		422		2,778
Preferred stocks		6,800		—		437		6,363
Mortgage-backed securities		152,256		3,199		110		155,345
Collateralized mortgage obligations		128,378		2,627		—		131,005
Total	$	490,420	$	15,124	$	1,534	$	504,010
	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

52

The amortized cost and fair value of AFS securities by contractual maturity at December 31, 2012 are as follows:

	Maturing
	Due in One Year or Less		After One Year  But Within Five Years		After Five Years  But Within Ten Years		After Ten Years		Securities With Variable Monthly Payments or Noncontractual Maturities		Total
Government sponsored enterprises	$	—	$	72	$	25,596	$	—	$	—	$	25,668
States and political subdivisions		11,670		36,157		86,062		40,229		—		174,118
Auction rate money market preferred		—		—		—		—		3,200		3,200
Preferred stocks		—		—		—		—		6,800		6,800
Mortgage-backed securities		—		—		—		—		152,256		152,256
Collateralized mortgage obligations		—		—		—		—		128,378		128,378
Total amortized cost	$	11,670	$	36,229	$	111,658	$	40,229	$	290,634	$	490,420
Fair value	$	11,746	$	37,759	$	117,884	$	41,130	$	295,491	$	504,010

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 preferreds and preferred stocks have noncontractual maturities 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 the sale of AFS securities is as follows during the years ended December 31:

	2012		2011		2010
Proceeds from sales AFS of securities	$	40,677	$	8,877	$	18,303
Gross realized gains	$	1,119	$	3	$	351
Gross realized losses		—		—		(3	)
Net realized gains	$	1,119	$	3	$	348
Applicable income tax expense	$	380	$	1	$	118

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 December 31 aggregated by investment category and length of time that individual securities have been in continuous loss position, follows:

	2012
	Less Than Twelve Months				Over Twelve Months
	Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Total Unrealized Losses
States and political subdivisions	$	80	$	5,019	$	485	$	2,352	$	565
Auction rate money market preferred		—		—		422		2,778		422
Preferred stocks		—		—		437		3,363		437
Mortgage-backed securities		110		25,499		—		—		110
Total	$	190	$	30,518	$	1,344	$	8,493	$	1,534
Number of securities in an unrealized loss position:				15				6		21

53

	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 December 31, 2012 and 2011, we conducted an analysis to determine whether any AFS securities currently in an unrealized loss position, should be considered OTTI. Such analyses considered, among other factors, the following criteria:

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

• Is the investment credit rating below investment grade?

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

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

• Has the duration of the investment been extended?

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 earnings 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 + 5.64%
	Credit Yield Analysis Method
Credit discount rate	LIBOR + 4.00%
Average observed discounts based on closed transactions	17.06%

To test for additional impairment of this security as of December 31, 2012, we obtained another investment valuation (from the same independent firm engaged to perform the initial valuation as of March 31, 2012) as of December 31, 2012. Based on the results of this valuation, no additional OTTI was indicated.

54

A rollforward of credit related impairment recognized in earnings on AFS securities was as follows:

January 1, 2012	$	—
Additions to credit losses for which no previous OTTI was recognized		282
December 31, 2012	$	282

There were no credit losses recognized in earnings on AFS 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 our testing that it is unlikely that we will 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 December 31, 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 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 and agricultural loans are secured primarily by real estate, business assets, and personal guarantees; a portion of loans are unsecured.

Commercial and agricultural loans include loans for commercial real estate, commercial operating loans, farmland and agricultural production, and states and political subdivisions. Repayment of these loans is often dependent upon the successful operation and management of a business; 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 80% or less. Depending upon the type of loan, past credit history, and current operating results, we may require borrowers 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 FHLMC. 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 these loans to FHLMC.

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.

55

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 Year Ended December 31, 2012
	Commercial			Agricultural			Residential Real Estate			Consumer			Unallocated			Total
January 1, 2012	$	6,284		$	1,003		$	2,980		$	633		$	1,475		$	12,375
Loans charged off		(1,672	)		—			(1,142	)		(542	)		—			(3,356	)
Recoveries		240			—			122			255			—			617
Provision for loan losses		2,010			(596	)		1,667			320			(1,101	)		2,300
December 31, 2012	$	6,862		$	407		$	3,627		$	666		$	374		$	11,936
	Allowance for Loan Losses and Recorded Investment in Loans As of December 31, 2012
	Commercial			Agricultural			Residential Real Estate			Consumer			Unallocated			Total
ALLL
Individually evaluated for impairment	$	2,050		$	91		$	1,796		$	—		$	—		$	3,937
Collectively evaluated for impairment		4,812			316			1,831			666			374			7,999
Total	$	6,862		$	407		$	3,627		$	666		$	374		$	11,936
Loans
Individually evaluated for impairment	$	14,456		$	723		$	10,704		$	75					$	25,958
Collectively evaluated for impairment		357,049			82,883			273,444			33,419						746,795
Total	$	371,505		$	83,606		$	284,148		$	33,494					$	772,753

56

	Allowance for Loan Losses Year Ended December 31, 2011
	Commercial			Agricultural			Residential Real Estate			Consumer			Unallocated			Total
January 1, 2011	$	6,048		$	1,033		$	3,198		$	605		$	1,489		$	12,373
Loans charged off		(1,863	)		(121	)		(2,240	)		(552	)		—			(4,776	)
Recoveries		460			1			177			314			—			952
Provision for loan losses		1,639			90			1,845			266			(14	)		3,826
December 31, 2011	$	6,284		$	1,003		$	2,980		$	633		$	1,475		$	12,375
	Allowance for Loan Losses and Recorded Investment in Loans As of December 31, 2011
	Commercial			Agricultural			Residential Real Estate			Consumer			Unallocated			Total
ALLL
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 December 31:

	2012
	Commercial						Agricultural
	Real Estate		Other		Total		Real Estate		Other		Total
Rating
2 - High quality	$	25,209	$	15,536	$	40,745	$	2,955	$	2,313	$	5,268
3 - High satisfactory		83,805		28,974		112,779		16,972		11,886		28,858
4 - Low satisfactory		127,423		45,143		172,566		27,291		15,437		42,728
5 - Special mention		16,046		1,692		17,738		1,008		3,191		4,199
6 - Substandard		20,029		2,224		22,253		1,167		1,217		2,384
7 - Vulnerable		1,512		2,294		3,806		—		—		—
8 - Doubtful		1,596		22		1,618		—		169		169
Total	$	275,620	$	95,885	$	371,505	$	49,393	$	34,213	$	83,606
	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

57

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.

58

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

5. SPECIAL MENTION– Criticized

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

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

• Impaired working capital position.

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

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

• Shrinking equity cushion.

• Diminishing primary source of repayment and questionable secondary source.

• Management abilities are questionable.

• Weak industry conditions.

• Litigation pending against the borrower.

• Collateral or guaranty offers limited protection.

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

6. SUBSTANDARD – Classified

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

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

• Deteriorating liquidity.

• Serious management problems or internal fraud.

• Original repayment terms liberalized.

• Likelihood of bankruptcy.

• Inability to access other funding sources.

• Reliance on secondary source of repayment.

• Litigation filed against borrower.

• Collateral provides little or no value.

• Requires excessive attention of the loan officer.

• Borrower is uncooperative with loan officer.

7. VULNERABLE – Classified

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

59

• 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.

60

Our primary credit quality indicators for residential real estate and consumer loans is the individual loan’s past due aging. The following tables summarize our past due and current loans as of December 31:

	2012
	Accruing Interest and Past Due:						Nonaccrual		Total Past  Due and Nonaccrual		Current		Total
	30-59 Days		60-89 Days		90 Days or More
Commercial
Commercial real estate	$	1,304	$	161	$	63	$	2,544	$	4,072	$	271,548	$	275,620
Commercial other		606		—		40		2,294		2,940		92,945		95,885
Total commercial		1,910		161		103		4,838		7,012		364,493		371,505
Agricultural
Agricultural real estate		—		—		—		—		—		49,393		49,393
Agricultural other		90		—		—		169		259		33,954		34,213
Total agricultural		90		—		—		169		259		83,347		83,606
Residential real estate
Senior liens		2,000		346		320		2,064		4,730		223,532		228,262
Junior liens		232		—		—		50		282		16,207		16,489
Home equity lines of credit		237		—		—		182		419		38,978		39,397
Total residential real estate		2,469		346		320		2,296		5,431		278,717		284,148
Consumer
Secured		127		33		4		—		164		28,118		28,282
Unsecured		31		3		1		—		35		5,177		5,212
Total consumer		158		36		5		—		199		33,295		33,494
Total	$	4,627	$	543	$	428	$	7,303	$	12,901	$	759,852	$	772,753
	2011
	Accruing Interest and Past Due:						Nonaccrual		Total Past  Due and Nonaccrual		Current		Total
	30-59 Days		60-89 Days		90 Days or More
Commercial
Commercial real estate	$	1,721	$	—	$	364	$	4,176	$	6,261	$	251,834	$	258,095
Commercial other		388		38		3		25		454		107,165		107,619
Total commercial		2,109		38		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		2,668		336		124		1,292		4,420		213,181		217,601
Junior liens		203		32		40		94		369		20,877		21,246
Home equity lines of credit		185		—		125		198		508		39,005		39,513
Total residential real estate		3,056		368		289		1,584		5,297		273,063		278,360
Consumer
Secured		127		31		5		—		163		26,011		26,174
Unsecured		20		3		—		—		23		5,375		5,398
Total consumer		147		34		5		—		186		31,386		31,572
Total	$	5,312	$	442	$	760	$	6,389	$	12,903	$	737,388	$	750,291

61

Impaired Loans

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

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

2. The loan has been classified as a TDR; or

3. The loan is in nonaccrual status.

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

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 year ended December 31:

	2012
	Outstanding Balance		Unpaid Principal Balance		Valuation Allowance		Average Outstanding Balance		Interest Income Recognized
Impaired loans with a valuation allowance
Commercial real estate	$	7,295	$	7,536	$	1,653	$	6,155	$	237
Commercial other		2,140		2,140		397		1,437		93
Agricultural real estate		91		91		32		413		—
Agricultural other		420		420		59		1,555		54
Residential real estate senior liens		10,450		11,654		1,783		8,860		405
Residential real estate junior liens		72		118		13		134		6
Total impaired loans with a valuation allowance		20,468		21,959		3,937		18,554		795
Impaired loans without a valuation allowance
Commercial real estate		3,749		4,408				5,867		321
Commercial other		1,272		1,433				819		87
Agricultural real estate		—		—				183		—
Agricultural other		212		332				201		4
Residential real estate senior liens		—		18				1		1
Home equity lines of credit		182		482				190		16
Consumer secured		75		84				90		6
Total impaired loans without a valuation allowance		5,490		6,757				7,351		435
Impaired loans
Commercial		14,456		15,517		2,050		14,278		738
Agricultural		723		843		91		2,352		58
Residential real estate		10,704		12,272		1,796		9,185		428
Consumer		75		84		—		90		6
Total impaired loans	$	25,958	$	28,716	$	3,937	$	25,905	$	1,230

62

	2011
	Outstanding Balance		Unpaid Principal Balance		Valuation Allowance		Average Outstanding Balance		Interest Income Recognized
Impaired loans with a valuation allowance
Commercial real estate	$	5,014	$	5,142	$	1,881	$	4,012	$	247
Commercial other		734		734		271		376		25
Agricultural real estate		—		—		—		9		—
Agricultural other		2,689		2,689		822		2,443		138
Residential mortgage senior liens		7,269		8,825		1,111		5,781		331
Residential mortgage junior liens		195		260		35		184		11
Total impaired loans with a valuation allowance		15,901		17,650		4,120		12,805		752
Impaired loans without a valuation allowance
Commercial real estate		7,984		10,570				4,863		375
Commercial other		365		460				267		10
Agricultural real estate		190		190				180		—
Agricultural other		505		625				253		18
Residential mortgage senior liens		2		2				202		—
Home equity lines of credit		198		498				99		12
Consumer secured		105		114				77		4
Total impaired loans without a valuation allowance		9,349		12,459				5,941		419
Impaired loans
Commercial		14,097		16,906		2,152		9,518		657
Agricultural		3,384		3,504		822		2,885		156
Residential mortgage		7,664		9,585		1,146		6,266		354
Consumer		105		114		—		77		4
Total impaired loans	$	25,250	$	30,109	$	4,120	$	18,746	$	1,171

As of December 31, 2012 and 2011, we had committed to advance $9 and $243, respectively, in connection with impaired loans, which include TDR’s.

Troubled Debt Restructurings

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

Typical concessions granted include, but are not limited to:

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

2. Extending the amortization period beyond typical lending guidelines for 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. The borrower would likely default on any of their debt if the concession was not granted.

63

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

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

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

The following is a summary of information pertaining to TDR’s granted in the years ended December 31:

	2012						2011
	Number of Loans		Pre- Modification Recorded Investment		Post- Modification Recorded Investment		Number of Loans		Pre- Modification Recorded Investment		Post- Modification Recorded Investment
Commercial
Commercial real estate		1	$	912	$	792		1	$	408	$	408
Commercial other		28		6,437		6,437		42		12,575		12,132
Total commercial		29		7,349		7,229		43		12,983		12,540
Agricultural other		7		652		652		8		1,321		1,321
Residential real estate
Senior liens		29		3,463		3,463		36		3,915		3,865
Junior liens		1		22		22		—		—		—
Total residential real estate		30		3,485		3,485		36		3,915		3,865
Consumer
Secured		1		—		—		7		69		69
Unsecured		—		—		—		2		20		20
Total consumer		1		—		—		9		89		89
Total		67	$	11,486	$	11,366		96	$	18,308	$	17,815

The following tables summarize concessions we granted to borrowers in financial difficulty during 2012:

	Below Market Interest Rate				Extension of Amortization Period				Below Market Interest Rate and Extension of Amortization Period
	Number of Loans		Pre- Modification Recorded Investment		Number of Loans		Pre- Modification Recorded Investment		Number of Loans		Pre- Modification Recorded Investment
Commercial
Commercial real estate		—	$	—		—	$	—		1	$	912
Commercial other		25		4,924		1		1,368		2		145
Total commercial		25		4,924		1		1,368		3		1,057
Agricultural other		6		561		1		91		—		—
Residential real estate
Senior liens		17		1,779		3		521		9		1,163
Junior liens		—		—		—		—		1		22
Total residential real estate		17		1,779		3		521		10		1,185
Consumer secured		1		—		—		—		—		—
Total		49	$	7,264		5	$	1,980		13	$	2,242

64

The following tables summarize concessions we granted to borrowers in financial difficulty during 2011:

	Below Market Interest Rate				Extension of Amortization Period				Below Market Interest Rate and Extension of Amortization Period
	Number of Loans		Pre- Modification Recorded Investment		Number of Loans		Pre- Modification Recorded Investment		Number of Loans		Pre- Modification Recorded Investment
Commercial
Commercial real estate		1	$	408		—	$	—		—	$	—
Commercial other		38		9,932		—		—		4		2,643
Total commercial		39		10,340		—		—		4		2,643
Agricultural other		8		1,321		—		—		—		—
Residential real estate Senior liens		19		2,161		—		—		17		1,754
Consumer
Secured		6		65		—		—		1		4
Unsecured		—		—		—		—		2		20
Total consumer		6		65		—		—		3		24
Total		72	$	13,887		—	$	—		24	$	4,421

We did not restructure any loans through the forbearance of principal or accrued interest during 2012 and 2011.

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 during 2012, which were modified within 12 months prior to the default date:

	Number of Loans		Pre- Default Recorded Investment		Charge-Off Recorded Upon Default		Post- Default Recorded Investment
Commercial other		5	$	342	$	143	$	199
Residential real estate senior liens		1		47		43		4
Consumer secured		1		8		8		—
Total		7	$	397	$	194	$	203

65

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

The following is a summary of TDR loan balances as of December 31:

	2012		2011
Troubled debt restructurings	$	19,355	$	18,756

NOTE 7 – PREMISES AND EQUIPMENT

A summary of premises and equipment at December 31 follows:

	2012		2011
Land	$	5,435	$	5,174
Buildings and improvements		22,705		22,397
Furniture and equipment		29,755		26,926
Total		57,895		54,497
Less: accumulated depreciation		32,108		29,871
Premises and equipment, net	$	25,787	$	24,626

Depreciation expense amounted to $2,417, $2,521 and $2,522 in 2012, 2011, and 2010, respectively.

NOTE 8 – GOODWILL AND OTHER INTANGIBLE ASSETS

The carrying amount of goodwill was $45,618 at December 31, 2012 and 2011.

Identifiable intangible assets at year end were as follows:

	2012
	Gross Intangible Assets		Accumulated Amortization		Net Intangible Assets
Core deposit premium resulting from acquisitions	$	5,373	$	4,459	$	914
	2011
	Gross Intangible Assets		Accumulated Amortization		Net Intangible Assets
Core deposit premium resulting from acquisitions	$	5,373	$	4,199	$	1,174

Amortization expense associated with identifiable intangible assets was $260, $299, and $338 in 2012, 2011, and 2010, respectively.

Estimated amortization expense associated with identifiable intangibles for each of the next five years succeeding December 31, 2012, and thereafter is as follows:

Year	Amount
2013	$	221
2014		183
2015		145
2016		106
2017		74
Thereafter		185
	$	914

66

NOTE 9 – DEPOSITS

Scheduled maturities of time deposits for the next five years, and thereafter, are as follows:

Year	Amount
2013	$	205,754
2014		76,742
2015		71,685
2016		51,232
2017		40,523
Thereafter		18,399
	$	464,335

Interest expense on time deposits greater than $100 was $3,854 in 2012, $4,302 in 2011, and $4,427 in 2010.

NOTE 10 – BORROWED FUNDS

Borrowed funds consist of the following obligations at December 31:

	2012					2011
	Amount		Rate			Amount		Rate
FHLB advances	$	152,000		2.05	%	$	142,242		3.16	%
Securities sold under agreements to repurchase without stated maturity dates		66,147		0.15	%		57,198		0.25	%
Securities sold under agreements to repurchase with stated maturity dates		16,284		3.57	%		16,696		3.51	%
Federal funds purchased		6,570		0.50	%		—		—
Total	$	241,001		1.59	%	$	216,136		2.42	%

The FHLB borrowings are collateralized by U.S. government and federal agency securities and a blanket lien on all qualified 1-to-4 family mortgage loans. Advances are also secured by FHLB stock that we own. As of December 31, 2012, we had total unused lines of credit of $108,646.

The maturity and weighted average interest rates of FHLB advances are as follows as of December 31:

	2012					2011
	Amount		Rate			Amount		Rate
Fixed rate advances due 2012	$	—		—		$	17,000		2.97	%
One year putable fixed rate advances due 2012		—		—			15,000		4.10	%
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		10,000		0.48	%		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	$	152,000		2.05	%	$	142,242		3.16	%

67

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 had a fair value of $143,322 and $99,869 at December 31, 2012 and 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 maturity and weighted average interest rates of securities sold under agreements to repurchase with stated maturity dates are as follows at December 31:

	2012					2011
	Amount		Rate			Amount		Rate
Repurchase agreements due 2012	$	—		—		$	428		2.08	%
Repurchase agreements due 2013		5,000		4.51	%		5,000		4.51	%
Repurchase agreements due 2014		10,872		3.15	%		10,869		3.12	%
Repurchase agreements due 2015		412		3.25	%		399		3.25	%
Total	$	16,284		3.57	%	$	16,696		3.51	%

Securities sold under repurchase agreements without stated maturity dates, federal funds purchased, and FRB discount window advances generally mature within one to four days from the transaction date. The following table provides a summary of short term borrowings for the years ended December 31:

	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	$	66,147	$	57,466		0.20	%	$	57,198	$	45,397		0.25	%
Federal funds purchased		17,900		3,386		0.47	%		18,300		3,467		0.51	%

We had pledged certificates of deposit held in other financial institutions, trading securities, AFS securities, and 1-4 family mortgage loans in the following amounts at December 31:

	2012		2011
Pledged to secure borrowed funds	$	308,628	$	292,092
Pledged to secure repurchase agreements		143,322		99,869
Pledged for public deposits and for other purposes necessary or required by law		22,955		26,761
Total	$	474,905	$	418,722

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

68

NOTE 11 – OTHER NONINTEREST EXPENSES

A summary of expenses included in other noninterest expenses is as follows for the years ended December 31:

	2012		2011		2010
Marketing and community relations	$	1,965	$	1,174	$	1,093
Directors fees		885		842		887
FDIC insurance premiums		864		1,086		1,254
Audit fees		711		714		710
Education and travel		588		526		499
Consulting fees		482		386		167
Printing and supplies		424		405		420
Postage and freight		389		388		395
Other losses		300		54		72
Legal fees		268		302		382
Amortization of deposit premium		260		299		338
Foreclosed asset and collection		202		576		916
State taxes		187		57		51
All other		1,526		1,462		1,376
Total other	$	9,051	$	8,271	$	8,560

NOTE 12 – FEDERAL INCOME TAXES

Components of the consolidated provision for federal income taxes are as follows for the year ended December 31:

	2012		2011		2010
Currently payable	$	1,747	$	965	$	1,425
Deferred expense		616		389		179
Income tax expense	$	2,363	$	1,354	$	1,604

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 taxes is as follows for the years ended December 31:

	2012			2011			2010
Income taxes at 34% statutory rate	$	4,953		$	3,932		$	3,621
Effect of nontaxable income
Interest income on tax exempt municipal bonds		(1,675	)		(1,687	)		(1,565	)
Earnings on corporate owned life insurance		(238	)		(207	)		(225	)
Other		(147	)		(65	)		(132	)
Total effect of nontaxable income		(2,060	)		(1,959	)		(1,922	)
Effect of tax credits		(667	)		(793	)		(263	)
Effect of nondeductible expenses		137			174			168
Income tax expense	$	2,363		$	1,354		$	1,604

Included in OCI are unrealized gains (losses) on 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.

69

A summary of the components of unrealized holding gains on AFS securities included in OCI follows for the years ended December 31:

	2012								2011									2010
	Auction Rate Money Market Preferred and Preferred Stocks		All Other AFS Securities			Total			Auction Rate Money Market Preferred and Preferred Stocks			All Other AFS Securities			Total			Auction Rate Money Market Preferred and Preferred Stocks			All Other AFS Securities			Total
Unrealized gains arising during the year	$	2,059	$	1,862		$	3,921		$	(1,719	)	$	10,939		$	9,220		$	(226	)	$	1,382		$	1,156
Reclassification adjustment for net realized gains included in net income		—		(1,119	)		(1,119	)		—			(3	)		(3	)		—			(348	)		(348	)
Reclassification adjustment for impairment loss included in net income		—		282			282			—			—			—			—			—			—
Net unrealized gains		2,059		1,025			3,084			(1,719	)		10,936			9,217			(226	)		1,034			808
Tax effect		—		(348	)		(348	)		—			(3,719	)		(3,719	)		—			(351	)		(351	)
Unrealized gains, net of tax	$	2,059	$	677		$	2,736		$	(1,719	)	$	7,217		$	5,498		$	(226	)	$	683		$	457

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for federal income tax purposes. Significant components of our deferred tax assets and liabilities, included in other assets in the accompanying consolidated balance sheets, are as follows as of December 31:

	2012		2011
Deferred tax assets
Allowance for loan losses	$	3,133	$	3,278
Deferred directors’ fees		2,100		2,384
Employee benefit plans		189		158
Core deposit premium and acquisition expenses		892		800
Net unrealized losses on trading securities		351		364
Net unrecognized actuarial loss on pension plan		1,891		1,780
Life insurance death benefit payable		804		804
Alternative minimum tax		729		729
Other		195		260
Total deferred tax assets		10,284		10,557
Deferred tax liabilities
Prepaid pension cost		1,021		851
Premises and equipment		724		992
Accretion on securities		37		34
Core deposit premium and acquisition expenses		1,203		1,102
Net unrealized gains on available-for-sale securities		4,912		4,564
Other		1,163		937
Total deferred tax liabilities		9,060		8,480
Net deferred tax assets	$	1,224	$	2,077

70

We are subject to U.S. federal income tax; however, we are no longer subject to examination by taxing authorities for years before 2009. There are no material uncertain tax positions requiring recognition in our consolidated financial statements. We do not expect the total amount of unrecognized tax benefits to significantly increase in the next twelve months.

We recognize interest and/or penalties related to income tax matters in income tax expense. We do not have any amounts accrued for interest and penalties at December 31, 2012 and 2011 and we not aware of any claims for such amounts by federal income tax authorities.

NOTE 13 – OFF-BALANCE-SHEET ACTIVITIES

Credit-Related Financial Instruments

We are party to credit related financial instruments with off-balance-sheet risk. These financial instruments are entered into in the normal course of business to meet the financing needs of our customers. These financial instruments, which include commitments to extend credit and standby letters of credit, involve, to varying degrees, elements of credit and IRR 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.

	December 31
	2012		2011
Unfunded commitments under lines of credit	$	115,233	$	102,822
Commercial and standby letters of credit		3,935		4,461
Commitments to grant loans		40,507		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 we issued to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support private borrowing arrangements, including commercial paper, bond financing, and similar transactions. These commitments to extend credit and letters of credit 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 we deem necessary upon the extension of credit, is based on our credit evaluation of the borrower. While we consider standby letters of credit to be guarantees, the amount of the liability related to such guarantees on the commitment date is not significant and a liability related to such guarantees is not recorded on the consolidated balance sheets.

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 we deem necessary, is based on our 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 in deciding to make these commitments as we do for extending loans to customers. No significant losses are anticipated as a result of these commitments.

71

NOTE 14 – ON-BALANCE SHEET ACTIVITIES

Derivative Loan Commitments

Mortgage loan commitments are referred to as derivative loan commitments if the loan that will result from exercise of the commitment will be held for sale upon funding. We enter into commitments to fund residential mortgage loans at specific times in the future, with the intention that these loans will subsequently be sold in the secondary market. A mortgage loan commitment binds us to lend funds to a potential borrower at a specified interest rate within a specified period of time, generally up to 60 days after inception of the rate lock.

Outstanding derivative loan commitments expose us to the risk that the price of the loans arising from the exercise of the loan commitment might decline from the inception of the rate lock to funding of the loan due to increases in mortgage interest rates. If interest rates increase, the value of these loan commitments decreases. Conversely, if interest rates decrease, the value of these loan commitments increase. The notional amount of undesignated interest rate lock commitments was $1,912 and $875 at December 31, 2012 and 2011, respectively.

Forward Loan Sale Commitments

To protect against the price risk inherent in derivative loan commitments, we utilize both “mandatory delivery” and “best efforts” forward loan sale commitments to mitigate the risk of potential decreases in the values of loan that would result from the exercise of the derivative loan commitments.

With a “mandatory delivery” contract, we commit to deliver a certain principal amount of mortgage loans to an investor at a specified price on or before a specified date. If we fail to deliver the amount of mortgages necessary to fulfill the commitment by the specified date, we are obligated to pay a “pair-off” fee, based on then current market prices, to the investor to compensate the investor for the shortfall.

With a “best efforts” contract, we commit to deliver an individual mortgage loan of a specified principal amount and quality to an investor if the loan to the underlying borrower closes. Generally, the price the investor will pay the seller for an individual loan is specified prior to the loan being funded (e.g. on the same day the lender commits to lend funds to a potential borrower).

We expect that these forward loan sale commitments will experience changes in fair value opposite to the change in fair value of derivative loan commitments. The notional amount of undesignated forward loan sale commitments was $5,545 and $4,080 at December 31, 2012 and 2011, respectively.

The fair values of the rate lock loan commitments related to the origination of mortgage loans that will be held for sale and the forward loan sale commitments are deemed insignificant by management and, accordingly, are not recorded in our consolidated financial statements.

NOTE 15 – COMMITMENTS AND OTHER MATTERS

Banking regulations require us to maintain cash reserve balances in currency or as deposits with the FRB. At December 31, 2012 and 2011, the reserve balances amounted to $885 and $821, respectively.

Banking regulations limit the transfer of assets in the form of dividends, loans, or advances from the Bank to the Corporation. At December 31, 2012, substantially all of the Bank’s assets were restricted from transfer to the Corporation in the form of loans or advances. Consequently, Bank dividends are the principal source of funds for the Corporation. Payment of dividends without regulatory approval is limited to the current year’s retained net income plus retained net income for the preceding two years, less any required transfers to common stock. At January 1, 2013, the amount available to the Corporation for dividends from the Bank, without regulatory approval, was approximately $17,000.

72

NOTE 16 – MINIMUM REGULATORY CAPITAL REQUIREMENTS

The Corporation (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by the FRB and the FDIC. Failure to meet minimum capital requirements can initiate mandatory and possibly additional discretionary actions by the FRB and the FDIC that if undertaken, could have a material effect on our financial statements. Under regulatory capital adequacy guidelines and the regulatory framework for prompt corrective action, we must meet specific capital guidelines that include quantitative measures of assets, liabilities, capital, and certain off-balance-sheet items, as calculated under regulatory accounting standards. Our capital amounts and classifications are also subject to qualitative judgments by the FRB and the FDIC about components, risk weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding companies.

Quantitative measures established by regulation to ensure capital adequacy require us to maintain minimum amounts and ratios (set forth in the following table) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined) and Tier 1 capital to average assets (as defined). We believe, as of December 31, 2012 and 2011, that we met all capital adequacy requirements.

As of December 31, 2012, the most recent notifications from the FRB and the FDIC categorized us as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, an institution must maintain total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the following tables. There are no conditions or events since the notifications that we believe has changed our categories. Our actual capital amounts and ratios are also presented in the table.

	Actual					Minimum Capital Requirement					Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
December 31, 2012
Total capital to risk weighted assets
Isabella Bank	$	112,498		13.40	%	$	67,150		8.00	%	$	83,937		10.00	%
Consolidated		123,388		14.48			68,161		8.00			N/A		N/A
Tier 1 capital to risk weighted assets
Isabella Bank		101,988		12.15			33,575		4.00			50,362		6.00
Consolidated		112,722		13.23			34,080		4.00			N/A		N/A
Tier 1 capital to average assets
Isabella Bank		101,988		7.57			53,916		4.00			67,395		5.00
Consolidated		112,722		8.29			54,411		4.00			N/A		N/A

	Actual					Minimum Capital Requirement					Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
December 31, 2011
Total capital to risk weighted assets
Isabella Bank	$	104,542		13.06	%	$	64,028		8.00	%	$	80,035		10.00	%
Consolidated		115,172		14.17			65,009		8.00			N/A		N/A
Tier 1 capital to risk weighted assets
Isabella Bank		94,508		11.81			32,014		4.00			48,021		6.00
Consolidated		104,987		12.92			32,505		4.00			N/A		N/A
Tier 1 capital to average assets
Isabella Bank		94,508		7.44			50,808		4.00			63,510		5.00
Consolidated		104,987		8.18			51,317		4.00			N/A		N/A

73

NOTE 17 – BENEFIT PLANS

401(k) Plan

We have a 401(k) plan in which substantially all employees are eligible to participate. Employees may contribute up to 50% of their compensation subject to certain limits based on federal tax laws. We made a 3.0% safe harbor contribution for all eligible employees and matching contributions equal to 50% of the first 4.0% of an employee’s compensation contributed to the Plan during the year. Employees are 100% vested in the safe harbor contributions and are 0% vested through their first two years of employment and are 100% vested after 6 years of service for matching contributions. For 2012, 2011 and 2010, expenses attributable to the Plan were $662, $652, and $625, respectively.

Defined Benefit Pension Plan

We have a non-contributory defined benefit pension plan which was curtailed in 2007. Due to the curtailment, future salary increases will not be considered and the benefits are based on years of service and the employees’ five highest consecutive years of compensation out of the last ten years of service rendered through March 1, 2007.

Changes in the projected benefit obligation and plan assets during each year, the funded status of the plan, and the net amount recognized on our consolidated balance sheets using an actuarial measurement date of December 31, are summarized as follows during the years ended December 31:

	2012			2011
Change in benefit obligation
Benefit obligation, January 1	$	11,334		$	9,660
Interest cost		470			507
Actuarial loss		888			1,750
Benefits paid, including plan expenses		(483	)		(583	)
Benefit obligation, December 31		12,209			11,334
Change in plan assets
Fair value of plan assets, January 1		8,603			8,900
Investment return		778			148
Contributions		752			138
Benefits paid, including plan expenses		(483	)		(583	)
Fair value of plan assets, December 31		9,650			8,603
Deficiency in funded status at December 31, included on the consolidated balance sheets in accrued interest payable and other liabilities	$	(2,559	)	$	(2,731	)

	2012			2011
Change in accrued pension benefit costs
Accrued benefit cost at January 1	$	(2,731	)	$	(760	)
Contributions		752			138
Net periodic cost for the year		(251	)		(138	)
Net change in unrecognized actuarial loss and prior service cost		(329	)		(1,971	)
Accrued pension benefit cost at December 31	$	(2,559	)	$	(2,731	)

74

Amounts recognized as a component of other comprehensive income consist of the following amounts during the years ended December 31:

	2012			2011			2010
Change in unrecognized pension cost	$	(329	)	$	(1,971	)	$	(72	)
Tax effect		111			671			25
Net	$	(218	)	$	(1,300	)	$	(47	)

The accumulated benefit obligation was $12,209 and $11,334 at December 31, 2012 and 2011, respectively.

We have recorded the funded status of the Plan in our consolidated balance sheets. We adjust the underfunded status in a liability account to reflect the current funded status of the plan. Any gains or losses that arise during the period but are not recognized as components of net periodic benefit cost will be recognized as a component of other comprehensive income (loss). The components of net periodic benefit cost are as follows for the years ended December 31:

	2012			2011			2010
Interest cost on projected benefit obligation	$	470		$	507		$	531
Expected return on plan assets		(511	)		(522	)		(491	)
Amortization of unrecognized actuarial net loss		292			153			153
Total	$	251		$	138		$	193

Accumulated other comprehensive income at December 31, 2012 includes net unrecognized pension costs before income taxes of $5,562, of which $208 is expected to be amortized into benefit cost during 2013.

The actuarial assumptions used in determining the projected benefit obligation are as follows for the year ended December 31:

	2012			2011			2010
Discount rate		3.75	%		4.22	%		5.36	%
Expected long-term rate of return		6.00	%		6.00	%		6.00	%

The actuarial weighted average assumptions used in determining the net periodic pension costs are as follows for the year ended December 31:

	2012			2011			2010
Discount rate		4.22	%		5.36	%		6.10	%
Expected long-term return on plan assets		6.00	%		6.00	%		6.00	%

As a result of the curtailment of the Plan, there is no rate of compensation increase considered in the above assumptions.

The expected long term rate of return is an estimate of anticipated future long term rates of return on plan assets as measured on a market value basis. Factors considered in arriving at this assumption include:

• Historical long term rates of return for broad asset classes.

• Actual past rates of return achieved by the plan.

• The general mix of assets held by the plan.

• The stated investment policy for the plan.

The selected rate of return is net of anticipated investment related expenses.

75

Plan Assets

Our overall investment strategy is to moderately grow the portfolio by investing 50% of the portfolio in equity securities and 50% in fixed income securities. This strategy is designed to generate a long term rate of return of 6.0%. Equity securities primarily consist of the S&P 500 Index with a smaller allocation to the Small Cap and International Index. Fixed income securities are invested in the Bond Market Index. The Plan has appropriate assets invested in short term investments to meet near-term benefit payments.

The asset mix and the sector weighting of the investments are determined by our pension committee, which is comprised of members of our management. To manage the Plan, we retain a third party investment advisor to conduct consultations. We review the performance of the advisor no less than annually.

The fair values of our pension plan assets by asset category were as follows as of December 31:

	2012				2011
Description	Total		(Level 2)		Total		(Level 2)
Asset Category
Short-term investments	$	80	$	80	$	16	$	16
Common collective trusts
Fixed income		4,832		4,832		4,357		4,357
Equity investments		4,738		4,738		4,230		4,230
	$	9,650	$	9,650	$	8,603	$	8,603

The following is a description of the valuation methodologies used for assets measured at fair value. There have been no changes in the methodologies used at December 31, 2012 and 2011:

• Short-term investments: Shares of a money market portfolio, which is valued using amortized cost, which approximates fair value.

• Common collective trusts: These investments are public investment securities valued using the NAV provided by a third party investment advisor. The NAV is quoted on a private market that is not active; however, the unit price is based on underlying investments which are traded on an active market.

We anticipate contributions of $215 to the plan in 2013.

Estimated future benefit payments are as follows for the next ten years:

Year	Amount
2013	$	432
2014		526
2015		567
2016		567
2017		593
Years 2018 - 2022		3,281

The components of projected net periodic benefit cost are as follows for the year ending December 31:

	2013
Interest cost on projected benefit obligation	$	450
Expected return on plan assets		(572	)
Amortization of unrecognized actuarial net loss		330
Net periodic benefit cost	$	208

76

Equity Compensation Plan

Pursuant to the terms of the Directors Plan, our directors are required to defer at least 25% of their earned board fees into the Directors Plan. The fees are converted on a quarterly basis into shares of our common stock based on the fair value of a share of common stock as of the relevant valuation date. Stock credited to a participant’s account is eligible for stock and cash dividends as declared. Upon retirement from the board or the occurrence of certain other events, the participant is eligible to receive a lump-sum, in-kind, distribution of all of the stock that is then in his or her account, and any unconverted cash will be converted to and rounded up to whole shares of stock and distributed, as well. The Directors Plan does not allow for cash settlement, and therefore, such share-based payment awards qualify for classification as equity. All authorized but unissued shares of common stock are eligible for issuance under the Directors Plan. We may also purchase shares of common stock on the open market to meet our obligations under the Directors Plan.

We maintain the Rabbi Trust to fund the Directors Plan. The Rabbi Trust is an irrevocable grantor trust to which we may contribute assets for the limited purpose of funding a nonqualified deferred compensation plan. Although we may not reach the assets of the Rabbi Trust for any purpose other than meeting our obligations under the Directors Plan, the assets of the Rabbi Trust remain subject to the claims of our creditors and are included in the consolidated financial statements. We may contribute cash or common stock to the Rabbi Trust from time to time for the sole purpose of funding the Directors Plan. The Rabbi Trust will use any cash that we contributed to purchase shares of our common stock on the open market through our brokerage services department.

The components of shares eligible to be issued under the Directors Plan were as follows as of December 31:

	2012				2011
	Eligible Shares		Market Value		Eligible Shares		Market Value
Unissued		165,436	$	3,598		201,438	$	4,774
Shares held in Rabbi Trust		5,130		112		16,585		393
Total		170,566	$	3,710		218,023	$	5,167

Other Employee Benefit Plans

We maintain two nonqualified supplementary employee retirement plans to provide supplemental retirement benefits to specified participants. Expenses related to these programs for 2012, 2011, and 2010 were $382, $444, and $363, respectively, and are being recognized over the participants’ expected years of service.

We maintain a non-leveraged ESOP which was frozen to new participants on December 31, 2006. Contributions to the plan are discretionary and are approved by the Board of Directors and recorded as compensation expense. During 2012, the Board of Directors approved a contribution of $75 to the ESOP. Prior to 2012, the most recent contribution was $50 in 2009. We made no contributions in 2011 or 2010. Compensation cost related to the plan for 2012, 2011, and 2010 was $102, $20, and $0, respectively. Total allocated shares outstanding related to the ESOP at December 31, 2012, 2011, and 2010 were 246,404, 246,404, and 246,419, respectively. Such shares are included in the computation of dividends and earnings per share in each of the respective years.

We maintain a self-funded medical plan under which we are responsible for the first $75 per year of claims made by a covered family. Expenses are accrued based on estimates of the aggregate liability for claims incurred and our experience. Expenses were $2,534 in 2012, $2,045 in 2011 and $2,101 in 2010.

NOTE 18 – ACCUMULATED OTHER COMPREHENSIVE INCOME

Accumulated other comprehensive income includes net income as well as unrealized gains and losses, net of tax, on AFS investment securities owned and changes in the funded status of our defined benefit pension plan, which

77

are excluded from net income. Unrealized AFS securities gains and losses and changes in the funded status of the pension plan, net of tax, are excluded from net income, and are reflected as a direct charge or credit to shareholders’ equity. Comprehensive income (loss) and the related components are disclosed in the consolidated statements of comprehensive.

The following is a summary of the components comprising the balance of accumulated other comprehensive income (loss) reported on the consolidated balance sheets as of December 31 (presented net of tax):

	2012			2011
Unrealized gains on available-for-sale investment securities	$	8,678		$	5,942
Unrecognized pension costs		(3,671	)		(3,453	)
Accumulated other comprehensive income	$	5,007		$	2,489

NOTE 19 – RELATED PARTY TRANSACTIONS

In the ordinary course of business, we grant loans to principal officers and directors and their affiliates (including their families and companies in which they have 10% or more ownership). Annual activity during the years ended December 31 consisted of the following:

	2012			2011
Balance, January 1	$	3,728		$	4,347
New loans		8,435			1,800
Repayments		(5,565	)		(2,419	)
Balance, December 31	$	6,598		$	3,728

Total deposits of these principal officers and directors and their affiliates amounted to $6,871 and $7,664 at December 31, 2012 and 2011, respectively. In addition, the ESOP held deposits with the Bank aggregating $517 and $275, respectively, at December 31, 2012 and 2011.

From time to time, we make charitable donations to the Isabella Bank Foundation (the “Foundation”), which is an affiliated nonprofit entity formed for the purpose of distributing charitable donations to recipient organizations generally located in the communities we service. Donations are expensed when committed to the Foundation as they are non-refundable. The assets and transactions of the Foundation are not included in our consolidated financial statements.

The following table displays ending balances of, and our contributions to, the Foundation as of, and for the years ended, December 31:

	2012		2011		2010
Ending assets	$	1,766	$	1,150	$	1,108
Contributions	$	850	$	250	$	250

NOTE 20 – 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.

78

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 December 31, 2010. As the markets for these securities normalized and established regular trading patterns, we measured preferred stocks utilizing Level 1 inputs and the auction rate money market preferred security utilizing Level 2 inputs as of December 31, 2011 and continued to measure at these levels as of December 31, 2012.

The table below represents the activity in auction rate money market preferred and preferred stock AFS securities measured with Level 3 inputs on a recurring basis for the year ended December 31, 2011:

	Auction Rate Money Market Preferred			Preferred Stocks
Level 3 inputs—January 1, 2011	$	2,865		$	6,936
Calls		—			(1,000	)
Transfer to Level 1 inputs		—			(5,033	)
Transfer to Level 2 inputs		(2,049	)		—
Net unrealized losses on AFS securities		(816	)		(903	)
Level 3 inputs—December 31, 2011	$	—		$	—

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 subject to nonrecurring fair value adjustments as Level 2.

Loans: For variable rate loans with no significant change in credit risk, fair values are based on carrying values. Fair values for fixed rate loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. The resulting amounts are adjusted to estimate the effect of changes in the credit quality of borrowers since the loans were originated. Upon reviewing our assumptions related to the estimation of the fair value of loans, we transferred loans with an estimated fair value of $751,009 as of December 31, 2012 from nonrecurring Level 2 assets to nonrecurring Level 3 assets. As such, we classify loans as level 3 assets.

We do not record loans at fair value on a recurring basis. However, from time to time, loans are classified as impaired and a specific allowance for loan 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.

79

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. Due to the inherent level of estimation in the valuation process, we record impaired loans as nonrecurring Level 3.

The table below lists the quantitative information about impaired loans measured utilizing Level 3 fair value measurements as of December 31, 2012:

Valuation Techniques	Fair Value	Unobservable Input	Range
		Duration of cash flows	14 - 120 Months
Discounted cash flow	$10,522	Reduction in interest rate from original loan terms	5.00% - 6.25%
		Discount applied to collateral appraisal:
		Real Estate	20% - 30%
		Equipment	50%
Discounted appraisal value	$11,499	Livestock	50%
		Cash crop inventory	50%
		Other inventory	75%
		Accounts receivable	75%

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. Acquisition intangibles and goodwill are typically qualitatively evaluated to determine if it is more likely than not that the carrying balance is impaired. If it is determined that the carrying balance of acquisition intangibles or goodwill is more likely than not to be impaired, we perform a cash flow valuation to determine the extent of the potential impairment. If the testing resulted in impairment, we would classify goodwill and other acquisition intangibles subjected to nonrecurring fair value adjustments as Level 3. During 2012 and 2011 there were no impairments recorded on goodwill and other acquisition intangibles.

Equity securities without readily determinable fair values: Included in equity securities without readily determinable fair values are FHLB Stock and FRB Stock as well as our ownership interests in Corporate Settlement Solutions and Valley Financial Corporation. The investment in Corporate Settlement Solutions, a title insurance company, was made in the 1st quarter 2007. The Corporation is not the managing entity of Corporate Settlement Solutions, LLC, and accounts for its investment in that entity under the equity method of accounting. Valley Financial Corporation is the parent company of 1st State Bank in Saginaw, Michigan, which is a de novo bank that opened in 2005. The Corporation made investments in Valley Financial Corporation in 2004 and in 2007.

80

The lack of an active market, or other independent sources to validate fair value estimates coupled with the impact of future capital calls and transfer restrictions, is an inherent limitation in the valuation process. As the fair values of these investments are not readily determinable, they are not disclosed under a specific fair value hierarchy; however, they are reviewed quarterly for impairment. If we were to record an impairment adjustment related to these securities, it would be classified as a nonrecurring Level 3 fair value adjustment. During 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. Upon reviewing our assumptions related to the estimation of the fair value of loans, we transferred foreclosed assets with an estimated fair value of $2,018 as of December 31, 2012 from nonrecurring Level 2 assets to nonrecurring Level 3 assets. Due to the inherent level of estimation in the valuation process, we record foreclosed assets as nonrecurring Level 3.

The table below lists the quantitative information related to foreclosed assets measured utilizing Level 3 fair value measurements as of December 31, 2012:

Valuation Technique	Fair Value	Unobservable Input	Range
		Discount applied to collateral appraisal:
		Real Estate	20% -30%
Discounted appraisal value	$2,018
		Equipment	50%

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.

81

The activity in borrowings which we have elected to carry at fair value was as follows for the years ended December 31:

	2012			2011
Borrowings carried at fair value—beginning of year	$	5,242		$	10,423
Paydowns and maturities		(5,209	)		(5,000	)
Net unrealized change in fair value		(33	)		(181	)
Borrowings carried at fair value—December 31	$	—		$	5,242
Unpaid principal balance—December 31	$	—		$	5,000

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 December 31:

	2012
	Carrying Value			Estimated Fair Value			(Level 1)		(Level 2)		(Level 3)
ASSETS
Cash and demand deposits due from banks	$	24,920		$	24,920		$	24,920	$	—	$	—
Certicates of deposit held in other financial institutions		4,465			4,475			—		4,475		—
Mortgage loans available-for-sale		3,633			3,680			—		3,680		—
Total loans		772,753			784,964			—		—		784,964
Less allowance for loan losses		(11,936	)		(11,936	)		—		—		(11,936	)
Net loans		760,817			773,028			—		—		773,028
Accrued interest receivable		5,227			5,227			5,227		—		—
Equity securities without readily determinable fair values (1)		18,118			18,118			—		—		—
Originated mortgage servicing rights		2,285			2,285			—		2,285		—
LIABILITIES
Deposits without stated maturities		553,332			553,332			553,332		—		—
Deposits with stated maturities		464,335			472,630			—		472,630		—
Borrowed funds		241,001			248,822			—		248,822		—
Accrued interest payable		751			751			751		—		—

82

	2011
	Carrying Value			Estimated Fair Value			(Level 1)		(Level 2)			(Level 3)
ASSETS
Cash and demand deposits due from banks	$	28,590		$	28,590		$	28,590	$	—		$	—
Certicates of deposit held in other financial institutions		8,924			8,977			—		8,977			—
Mortgage loans available-for-sale		3,205			3,252			—		3,252			—
Total loans		750,291			769,177			—		743,927			25,250
Less allowance for loan losses		(12,375	)		(12,375	)		—		(8,255	)		(4,120	)
Net loans		737,916			756,802			—		735,672			21,130
Accrued interest receivable		5,848			5,848			5,848		—			—
Equity securities without readily determinable fair values (1)		17,189			17,189			—		—			—
Originated mortgage servicing rights		2,374			2,374			—		2,374			—
LIABILITIES
Deposits without stated maturities		476,627			476,627			476,627		—			—
Deposits with stated maturities		481,537			499,644			—		499,644			—
Borrowed funds		210,894			222,538			—		222,538			—
Accrued interest payable		967			967			967		—			—

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

83

Financial Instruments Recorded at Fair Value

The table below presents the recorded amount of assets and liabilities measured at fair value on December 31:

	2012											2011
Description	Total		(Level 1)			(Level 2)			(Level 3)			Total		(Level 1)			(Level 2)			(Level 3)
Recurring items
Trading securities
States and political subdivisions	$	1,573	$	—		$	1,573		$	—		$	4,710				$	4,710		$	—
Available-for-sale investment securities
Government-sponsored enterprises		25,776		—			25,776			—			397					397			—
States and political subdivisions		182,743		—			182,743			—			174,938					174,938			—
Auction rate money market preferred		2,778		—			2,778			—			2,049					2,049			—
Preferred stock		6,363		6,363			—			—			5,033		5,033			—			—
Mortgage-backed		155,345		—			155,345			—			143,602					143,602			—
Collateralized mortgage obligations		131,005		—			131,005			—			99,101					99,101			—
Total available-for-sale investment securities		504,010		6,363			497,647			—			425,120		5,033			420,087			—
Borrowed funds		—		—			—			—			5,242		—			5,242			—
Nonrecurring items
Impaired loans		22,021		—			—			22,021			21,130		—			—			21,130
Originated mortgage servicing rights		2,285		—			2,285			—			2,374		—			2,374			—
Foreclosed assets		2,018		—			—			2,018			1,876		—			1,876			—
	$	531,907	$	6,363		$	501,505		$	24,039		$	460,452	$	5,033		$	434,289		$	21,130
Percent of assets and liabilities measured at fair value				1.20	%		94.28	%		4.52	%				1.09	%		94.32	%		4.59	%

84

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 years ended December 31:

	2012									2011
Description	Trading Losses			Other Gains and (Losses)			Total			Trading Losses			Other Gains and (Losses)			Total
Recurring items
Trading securities	$	(52	)	$	—		$	(52	)	$	(78	)	$	—		$	(78	)
Borrowed funds		—			33			33			—			181			181
Nonrecurring items
Foreclosed assets		—			(166	)		(166	)		—			(82	)		(82	)
Originated mortgage servicing rights		—			(58	)		(58	)		—			(243	)		(243	)
Total	$	(52	)	$	(191	)	$	(243	)	$	(78	)	$	(144	)	$	(222	)

NOTE 21 – PARENT COMPANY ONLY FINANCIAL INFORMATION

Condensed Balance Sheets	December 31
	2012		2011
ASSETS
Cash on deposit at subsidiary Bank	$	332	$	1,474
Securities available for sale		3,939		3,567
Investments in subsidiaries		115,781		106,463
Premises and equipment		2,041		1,916
Other assets		52,398		52,060
TOTAL ASSETS	$	174,491	$	165,480
LIABILITIES AND SHAREHOLDERS’ EQUITY
Other liabilities	$	10,002	$	10,697
Shareholders’ equity		164,489		154,783
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	174,491	$	165,480

Condensed Statements of Income	Year Ended December 31
	2012		2011		2010
Income
Dividends from subsidiaries	$	6,125	$	6,500	$	6,250
Interest income		174		128		72
Management fee and other		2,037		1,201		1,340
Total income		8,336		7,829		7,662
Expenses
Compensation and benefits		2,424		2,267		2,286
Occupancy and equipment		370		370		356
Audit fees		351		378		476
Other		945		1,089		932
Total expenses		4,090		4,104		4,050
Income before income tax benefit and equity in undistributed earnings of subsidiaries		4,246		3,725		3,612
Federal income tax benefit		673		958		896
		4,919		4,683		4,508
Undistributed earnings of subsidiaries		7,287		5,527		4,537
Net income	$	12,206	$	10,210	$	9,045

85

Condensed Statements of Cash Flows	Year Ended December 31
	2012			2011			2010
OPERATING ACTIVITIES
Net income	$	12,206		$	10,210		$	9,045
Adjustments to reconcile net income to cash provided by operations
Undistributed earnings of subsidiaries		(7,287	)		(5,527	)		(4,537	)
Undistributed earnings of equity securities without readily determinable fair values		(459	)		160			(7	)
Share-based payment awards		643			615			650
Depreciation		114			123			147
Net amortization of investment securities		4			7			5
Deferred income tax expense (benefit)		425			(48	)		(172	)
Changes in operating assets and liabilities which (used) provided cash
Other assets		(513	)		7			305
Accrued interest and other liabilities		(98	)		757			1,883
NET CASH PROVIDED BY OPERATING ACTIVITIES		5,035			6,304			7,319
INVESTING ACTIVITIES
Activity in available-for-sale securities
Maturities, calls, and sales		370			585			110
Purchases		—			(3,000	)		—
(Purchases) sales of equipment and premises		(239	)		(87	)		247
Advances to subsidiaries		(50	)		—			(250	)
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES		81			(2,502	)		107
FINANCING ACTIVITIES
Net (decrease) increase in other borrowed funds		(597	)		2,772			(1,550	)
Cash dividends paid on common stock		(6,074	)		(5,770	)		(5,421	)
Proceeds from the issuance of common stock		2,279			2,302			2,208
Common stock repurchased		(1,361	)		(1,507	)		(2,020	)
Common stock purchased for deferred compensation obligations		(505	)		(426	)		(514	)
NET CASH USED IN FINANCING ACTIVITIES		(6,258	)		(2,629	)		(7,297	)
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS		(1,142	)		1,173			129
Cash and cash equivalents at beginning of year		1,474			301			172
CASH AND CASH EQUIVALENTS AT END OF YEAR	$	332		$	1,474		$	301

NOTE 22 – OPERATING SEGMENTS

Our reportable segments are based on legal entities that account for at least 10 percent of net operating results. Retail banking operations for 2012, 2011, and 2010 represent approximately 90% or greater of our total assets and operating results. As such, no additional segment information is presented.

86

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures

None

Item 9A. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We carried out an evaluation, under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15(d)-15(e) under the Exchange Act as of December 31, 2012, pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of December 31, 2012, are effective in timely alerting them to material information relating to us required to be included in our periodic filings under the Exchange Act.

Changes in Internal Control

We also conducted an evaluation of internal control over financial reporting to determine whether any changes occurred during the quarter ended December 31, 2012, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Based on this evaluation, we have concluded that there have been no such changes during the quarter ended December 31, 2012.

Management’s Report on Internal Control Over Financial Reporting

We are responsible for the preparation and integrity of our published consolidated financial statements. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and, accordingly, include amounts based on judgments and estimates. We also prepared the other information included in the annual report and are responsible for the accuracy and consistency with the consolidated financial statements.

We are responsible for establishing and maintaining a system of internal control over financial reporting, which is intended to provide reasonable assurance to our management and Board of Directors regarding the reliability of our consolidated financial statements. The system includes but is not limited to:

• A documented organizational structure and division of responsibility;

• Established policies and procedures, including a code of conduct to foster a strong ethical climate which is communicated throughout our Corporation;

• Internal auditors that monitor the operation of the internal control system and report findings and recommendations to management and the Audit Committee;

• Procedures for taking action in response to an internal audit finding or recommendation;

• Regular reviews of our consolidated financial statements by qualified individuals; and

• The careful selection, training and development of our people.

There are inherent limitations in the effectiveness of any system of internal control, including the possibility of human error and the circumvention or overriding of controls. Also, the effectiveness of an internal control system may change over time. We have implemented a system of internal control that was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles.

We have assessed our internal control system in relation to criteria for effective internal control over financial reporting described in “Internal Control-Integrated Framework” issued by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission.

87

Based upon these criteria, we believe that, as of December 31, 2012, our system of internal control over financial reporting was effective.

Our independent registered public accounting firm, Rehmann Robson LLC (Rehmann) has audited our 2012 consolidated financial statements. Rehmann was given unrestricted access to all financial records and related data, including minutes of all meetings of stockholders, the Board of Directors and committees of the Board. Rehmann has issued an unqualified audit opinion on our 2012 consolidated financial statements as a result of the integrated audit which also includes Rehmann attestation report on the effectiveness of our internal control.

Isabella Bank Corporation

By:

//s// Richard J. Barz

Richard J. Barz

Chief Executive Officer

(Principal Executive Officer)

March 4, 2013

//s// Dennis P. Angner

Dennis P. Angner

President and Chief Financial Officer

(Principal Financial Officer, Principal Accounting Officer)

March 4, 2013

Item 9 B. Other Information

None

88

Part III

Item 10. Directors, Executive Officers and Corporate Governance

For information concerning our directors and certain executive officers, see “Election of Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance” in our Proxy Statement for the Annual Meeting of Shareholders to be held May 7, 2013 (“Proxy Statement”) which is incorporated herein by reference.

For Information concerning our Audit Committee financial experts, see “Committees of the Board of Directors and Meeting Attendance” in the Proxy Statement which is incorporated herein by reference.

We have adopted a Code of Business Conduct and Ethics that applies to our Chief Executive Officer and Chief Financial Officer. We shall provide to any person without charge upon request, a copy of our Code of Business Conduct and Ethics. Written requests should be sent to: Secretary, Isabella Bank Corporation, 401 North Main Street, Mount Pleasant, Michigan 48858.

Item 11. Executive Compensation

For information concerning executive compensation, see “Executive Officers,” “Compensation Committee Report,” “Compensation Committee Interlocks and Insider Participation,” “Compensation Discussion and Analysis,” and “Remuneration of Directors” in the Proxy Statement which is incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters

For information concerning the security ownership of certain owners and management, see “Security Ownership of Certain Beneficial Owners and Management” in the Proxy Statement which is incorporated herein by reference.

Equity Compensation Plan Information

The following table provides information as of December 31, 2012, with respect to compensation plans under which our common shares are authorized for issuance to directors, officers or employees in exchange for consideration in the form of goods or services.

Plan Category	Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants, and Rights (A)		Weighted Average Exercise Price of Outstanding Options, Warrants, and Rights (B)			Number of  Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (A)) (C)
Equity compensation plans approved by
Shareholders: None		—		—			—
Equity compensation plans not approved by shareholders (1) (2):
Deferred director compensation plan		165,436		(1	)(2)		(1	)(2)
Total		165,436

(1) Pursuant to the terms of the Directors Plan, our directors are required to defer at least 25% of their earned board fees into the Directors Plan. Deferred fees are converted on a quarterly basis into stock units of our common stock. The fees are converted on a quarterly basis into shares of our common stock based on the fair value of a share of common stock as of the relevant valuation date. Stock credited to a participant’s account is eligible for stock and cash dividends as declared. Upon retirement from the board or the

89

occurrence of certain other events, the participant is eligible to receive a lump-sum, in-kind, distribution of all of the stock that is then in his or her account, and any unconverted cash will be converted to and rounded up to whole shares of stock and distributed, as well. The Directors Plan does not allow for cash settlement, and therefore, such share based payment awards qualify for classification as equity. All authorized but unissued shares of common stock are eligible for issuance under the Directors Plan. As of December 31, 2012, the Directors Plan had 170,566 shares eligible to be distributed under the Directors Plan.

(2) The Rabbi Trust holds 5,130 shares for the benefit of participants pursuant to the Directors Plan. Accordingly, such shares are not included in the number of securities issuable in column (A) or the weighted average price calculation in column (B), nor are potential future contributions included in column (C).

Item 13. Certain Relationships and Related Transactions, and Director Independence

For information, see “Indebtedness of and Transactions with Management” and “Election of Directors” in the Proxy Statement, which is incorporated herein by reference.

Item 14. Principal Accountant Fees and Services

For information concerning the principal accountant fees and services see “Fees for Professional Services Provided by Rehmann Robson LLC” and “Pre-approval Policies and Procedures” in the Proxy Statement which is incorporated herein by reference.

90

Part IV

Item 15. Exhibits and Financial Statement Schedules

(a) 1.     Financial Statements:

The following consolidated financial statements and independent auditors’ report thereon of Isabella Bank Corporation are incorporated by reference in Item 8:

Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheets

Consolidated Statements of Changes in Shareholders’ Equity

Consolidated Statements of Income

Consolidated Statements of Comprehensive Income

Consolidated Statements of Cash Flows

Notes to Consolidated Financial Statements

2. Financial Statement Schedules:

All schedules are omitted because they are neither applicable nor required, or because the required information is included in the consolidated financial statements or related notes.

3. See the exhibits listed below under Item 15(b):

(b) The following exhibits required by Item 601 of Regulation S-K are filed as part of this report:

3(a)	Amended Articles of Incorporation (1)
3(b)	Amendment to the Articles of Incorporation (2)
3(c)	Amendment to the Articles of Incorporation (3)
3(d)	Amendment to the Articles of Incorporation (4)
3(e)	Amendment to the Articles of Incorporation (8)
3(f)	Amended Bylaws (6)
3(g)	Amendment to Bylaws (7)
3(h)	Amendment to Bylaws (10)
3(i)	Amendment to Bylaws (11)
10(a)	Isabella Bank Corporation and Related Companies Deferred Compensation Plan for Directors (9)*
10(b)	Isabella Bank Corporation Plan Death Benefit (9)*
10(c)	Isabella Bank Corporation Retirement Bonus Plan (9)*
14	Code of Business Conduct and Ethics (5)
21	Subsidiaries of the Registrant
23	Consent of Rehmann Robson LLC, Independent Registered Public Accounting Firm
31(a)	Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002 by the Chief Executive Officer
31(b)	Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002 by the Chief Financial Officer
32	Section 1350 Certification of Chief Executive Officer and Chief Financial Officer

91

101.INS	XBRL Interactive Data File**
101.SCH	XBRL Interactive Data File**
101.CAL	XBRL Interactive Data File**
101.LAB	XBRL Interactive Data File**
101.PRE	XBRL Interactive Data File**
101.DEF	XBRL Interactive Data File**

** As provided by Rule 406T in Regulation S-T, this information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Exchange Act

(1) Previously filed as an Exhibit to the Isabella Bank Corporation Form 10-K, filed March 12, 1991, and incorporated herein by reference.

(2) Previously filed as an Exhibit to the Isabella Bank Corporation Form 10-K, filed March 26, 1994, and incorporated herein by reference.

(3) Previously filed as an Exhibit to Isabella Bank Corporation Form 10-K, filed March 22, 2000, and incorporated herein by reference.

(4) Previously filed as an Exhibit to Isabella Bank Corporation Form 10-K, filed March 27, 2001, and incorporated herein by reference.

(5) Previously filed as an Exhibit to Isabella Bank Corporation Form 8-K, filed April 25, 2006, and incorporated herein by reference.

(6) Previously filed as an Exhibit to Isabella Bank Corporation Form 10-K, filed March 16, 2005, and incorporated herein by reference.

(7) Previously filed as an Exhibit to Isabella Bank Corporation Form 8-K, filed November 22, 2006, and incorporated herein by reference.

(8) Previously filed as an Exhibit to Isabella Bank Corporation Form 8-K, filed May 16, 2008, and incorporated herein by reference.

(9) Previously filed as an Exhibit to Isabella Bank Corporation Form 8-K, filed December 19, 2008, and incorporated herein by reference.

(10) Previously filed as an Exhibit to Isabella Bank Corporation Form 8-K, filed August 28, 2009, and incorporated herein by reference.

(11) Previously filed as an Exhibit to Isabella Bank Corporation Form 8-K, filed December 23, 2009, and incorporated herein by reference.

* Management Contract or Compensatory Plan or Arrangement.

92

Signatures

Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act, the registrant has duly caused this annual report to be signed on its behalf by the undersigned, thereunto duly authorized.

ISABELLA BANK CORPORATION

(Registrant)

by:	/s/ Richard J. Barz	Date:	March 4, 2013
	Richard J. Barz
	Chief Executive Officer
	(Principal Executive Officer)

Pursuant to the requirements of the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signatures	Capacity	Date
/s/ Dennis P. Angner Dennis P. Angner	Chief Financial Officer (Principal Financial Officer, Principal Accounting Officer) and Director	March 4, 2013
/s/ Jeffrey J. Barnes Jeffrey Barnes	Director	March 4, 2013
/s/ Richard J. Barz Richard J. Barz	Chief Executive Officer and Director	March 4, 2013
/s/ Sandra L. Caul Sandra L. Caul	Director	March 6, 2013
/s/ G. Charles Hubscher G. Charles Hubscher	Director	March 6, 2013
/s/ Thomas Kleinhardt Thomas Kleinhardt	Director	March 6, 2013
/s/ Joseph LaFramboise Joseph LaFramboise	Director	March 4, 2013
/s/ Wilson Lauer Wilson Lauer	Director	March 6, 2013
/s/ David J. Maness David J. Maness	Director	March 4, 2013
/s/ W. Joseph Manifold W. Joseph Manifold	Director	March 4, 2013
/s/ W. Michael McGuire W. Michael McGuire	Director	March 4, 2013
/s/ Sarah Opperman Sarah Opperman	Director	March 6, 2013

93

Isabella Bank Corporation

FORM 10-K

Index to Exhibits

Exhibit Number	Exhibit	Form 10-K Page Number
21	Subsidiaries of the Registrant	95
23	Consent of Rehmann Robson LLC Independent Registered Public Accounting Firm	96
31 (a)	Certification pursuant to Rule 13a – 14(a) of the Chief Executive Officer	97
31 (b)	Certification pursuant to Rule 13a – 14(a) of the Chief Financial Officer	98
32	Section 1350 Certification of Chief Executive Officer and Chief Financial Officer	99

94

EX-21

Exhibit 21

SUBSIDIARIES OF THE REGISTRANT:

Isabella Bank

Wholly owned

Financial Group Information Services

Wholly owned

95

EX-23

Exhibit 23

Consent of Independent Registered Public Accounting Firm

We hereby consent to the incorporation by reference in the registration statements (Form S-3 No. 333-169711) pertaining to the Dividend Reinvestment Plan and (Form S-8 Nos. 333-151353 and 333-181799) pertaining to the Employee Stock Purchase Plan of our integrated audit report dated March 11, 2013, relating to the consolidated financial statements and the effectiveness of internal control over financial reporting of Isabella Bank Corporation, included in this Annual Report on Form 10-K for the year ended December 31, 2012.

/s/Rehmann Robson LLC

Saginaw, Michigan

March 11, 2013

96

EX-31.A

Exhibit 31 (a)

I, Richard J. Barz, certify that:

1. I have reviewed this annual report on Form 10-K of Isabella Bank Corporation (the “Registrant”).

2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report.

3. Based on my knowledge, the consolidated financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report.

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 our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles;

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 (the registrant’s fourth fiscal quarter in the case of an annual report) 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 (or persons performing the equivalent function):

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: March 4, 2013	/s/ Richard J. Barz
	Chief Executive Officer
	(Principal Executive Officer)

97

EX-31.B

Exhibit 31 (b)

I, Dennis P. Angner, certify that:

1. I have reviewed this annual report on Form 10-K of Isabella Bank Corporation (the “Registrant”).

2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report.

3. Based on my knowledge, the consolidated financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report.

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 our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles;

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 (the registrant’s fourth fiscal quarter in the case of an annual report) 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 (or persons performing the equivalent function):

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: March 4, 2013	/s/ Dennis P. Angner
	President and Chief Financial Officer
	(Principal Financial Officer, Principal Accounting Officer)

98

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 Annual Report of Isabella Bank Corporation (the “Corporation”) on Form 10- K for the year ended December 31, 2012 as filed with the Securities and Exchange Commission (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, consolidated financial condition and results of operations of the Corporation.

/s/ Richard J. Barz

Chief Executive Officer

(Principal Executive Officer)

March 4, 2013

/s/ Dennis P. Angner

President and Chief Financial Officer

(Principal Financial Officer, Principal Accounting Officer)

March 4, 2013

99

XML

Deposits (Tables)

12 Months Ended

Dec. 31, 2012

Deposits and Minimum Regulatory Capital Requirements [Abstract]

Scheduled maturities of time deposits

Year	Amount
2013	$	205,754
2014		76,742
2015		71,685
2016		51,232
2017		40,523
Thereafter		18,399
	$	464,335

XML

Fair Value (Details 3) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011
Activity in borrowings which the Corporation has elected to carry at fair value
Borrowings carried at fair value - beginning of year	$ 5,242	$ 10,423
Paydowns and maturities	(5,209)	(5,000)
Net unrealized change in fair value	(33)	(181)
Borrowings carried at fair value - December 31		5,242
Unpaid principal balance - December 31		$ 5,000

XML

Trading Securities (Details Textual) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011
Trading Securities (Textual) [Abstract]
Net realized trading losses	$ 52
Net realized trading gain		78
Net unrealized trading losses	18
Net unrealized trading gains		$ 60

XML

Fair Value (Tables)

12 Months Ended

Dec. 31, 2012

Fair Value [Abstract]

Activity in auction rate money market preferred and preferred stock AFS securities measured with Level 3 inputs on a recurring basis

	Auction Rate Money Market Preferred			Preferred Stocks
Level 3 inputs—January 1, 2011	$	2,865		$	6,936
Calls		—			(1,000	)
Transfer to Level 1 inputs		—			(5,033	)
Transfer to Level 2 inputs		(2,049	)		—
Net unrealized losses on AFS securities		(816	)		(903	)
Level 3 inputs—December 31, 2011	$	—		$	—

Quantitative information about impaired loans measured utilizing Level 3 fair value measurement

Valuation Techniques	Fair Value	Unobservable Input	Range
		Duration of cash flows	14 - 120 Months
Discounted cash flow	$10,522	Reduction in interest rate from original loan terms	5.00% - 6.25%
		Discount applied to collateral appraisal:
		Real Estate	20% - 30%
		Equipment	50%
Discounted appraisal value	$11,499	Livestock	50%
		Cash crop inventory	50%
		Other inventory	75%
		Accounts receivable	75%

Quantitative information related to foreclosed assets measured utilizing Level 3 fair value measurements

Valuation Technique	Fair Value	Unobservable Input	Range
		Discount applied to collateral appraisal:
		Real Estate	20% -30%
Discounted appraisal value	$2,018
		Equipment	50%

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

	2012
	Carrying Value			Estimated Fair Value			(Level 1)		(Level 2)		(Level 3)
ASSETS
Cash and demand deposits due from banks	$	24,920		$	24,920		$	24,920	$	—	$	—
Certicates of deposit held in other financial institutions		4,465			4,475			—		4,475		—
Mortgage loans available-for-sale		3,633			3,680			—		3,680		—
Total loans		772,753			784,964			—		—		784,964
Less allowance for loan losses		(11,936	)		(11,936	)		—		—		(11,936	)
Net loans		760,817			773,028			—		—		773,028
Accrued interest receivable		5,227			5,227			5,227		—		—
Equity securities without readily determinable fair values (1)		18,118			18,118			—		—		—
Originated mortgage servicing rights		2,285			2,285			—		2,285		—
LIABILITIES
Deposits without stated maturities		553,332			553,332			553,332		—		—
Deposits with stated maturities		464,335			472,630			—		472,630		—
Borrowed funds		241,001			248,822			—		248,822		—
Accrued interest payable		751			751			751		—		—

	2011
	Carrying Value			Estimated Fair Value			(Level 1)		(Level 2)			(Level 3)
ASSETS
Cash and demand deposits due from banks	$	28,590		$	28,590		$	28,590	$	—		$	—
Certicates of deposit held in other financial institutions		8,924			8,977			—		8,977			—
Mortgage loans available-for-sale		3,205			3,252			—		3,252			—
Total loans		750,291			769,177			—		743,927			25,250
Less allowance for loan losses		(12,375	)		(12,375	)		—		(8,255	)		(4,120	)
Net loans		737,916			756,802			—		735,672			21,130
Accrued interest receivable		5,848			5,848			5,848		—			—
Equity securities without readily determinable fair values (1)		17,189			17,189			—		—			—
Originated mortgage servicing rights		2,374			2,374			—		2,374			—
LIABILITIES
Deposits without stated maturities		476,627			476,627			476,627		—			—
Deposits with stated maturities		481,537			499,644			—		499,644			—
Borrowed funds		210,894			222,538			—		222,538			—
Accrued interest payable		967			967			967		—			—

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

Assets and liabilities measured at fair value

	2012											2011
Description	Total		(Level 1)			(Level 2)			(Level 3)			Total		(Level 1)			(Level 2)			(Level 3)
Recurring items
Trading securities
States and political subdivisions	$	1,573	$	—		$	1,573		$	—		$	4,710				$	4,710		$	—
Available-for-sale investment securities
Government-sponsored enterprises		25,776		—			25,776			—			397					397			—
States and political subdivisions		182,743		—			182,743			—			174,938					174,938			—
Auction rate money market preferred		2,778		—			2,778			—			2,049					2,049			—
Preferred stock		6,363		6,363			—			—			5,033		5,033			—			—
Mortgage-backed		155,345		—			155,345			—			143,602					143,602			—
Collateralized mortgage obligations		131,005		—			131,005			—			99,101					99,101			—
Total available-for-sale investment securities		504,010		6,363			497,647			—			425,120		5,033			420,087			—
Borrowed funds		—		—			—			—			5,242		—			5,242			—
Nonrecurring items
Impaired loans		22,021		—			—			22,021			21,130		—			—			21,130
Originated mortgage servicing rights		2,285		—			2,285			—			2,374		—			2,374			—
Foreclosed assets		2,018		—			—			2,018			1,876		—			1,876			—
	$	531,907	$	6,363		$	501,505		$	24,039		$	460,452	$	5,033		$	434,289		$	21,130
Percent of assets and liabilities measured at fair value				1.20	%		94.28	%		4.52	%				1.09	%		94.32	%		4.59	%

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

	2012									2011
Description	Trading Losses			Other Gains and (Losses)			Total			Trading Losses			Other Gains and (Losses)			Total
Recurring items
Trading securities	$	(52	)	$	—		$	(52	)	$	(78	)	$	—		$	(78	)
Borrowed funds		—			33			33			—			181			181
Nonrecurring items
Foreclosed assets		—			(166	)		(166	)		—			(82	)		(82	)
Originated mortgage servicing rights		—			(58	)		(58	)		—			(243	)		(243	)
Total	$	(52	)	$	(191	)	$	(243	)	$	(78	)	$	(144	)	$	(222	)

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

	2012			2011
Borrowings carried at fair value—beginning of year	$	5,242		$	10,423
Paydowns and maturities		(5,209	)		(5,000	)
Net unrealized change in fair value		(33	)		(181	)
Borrowings carried at fair value—December 31	$	—		$	5,242
Unpaid principal balance—December 31	$	—		$	5,000

XML

Loans and Allowance for Loan Losses (Details Textual) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2012 NumberofLoan	Dec. 31, 2011 NumberofLoan
Loans and Allowance for Loan Losses (Textual) [Abstract]
Amortized periods	6 Years
Loans and Allowance for Loan Losses (Additional Textual) [Abstract]
Maximum amount of loans	$ 12,500
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%
Maximum amount without corporation approval	400
Consumer loans sold to secondary market	0
Migration analysis of loan portfolio period	4 years
Loans delinquent period	120 days
Advance in connection with impaired loans	9	243
Number of loans restructured through the forbearance of principal or accrued interest	0	0
Installment period	12 months
Loans defaulted		$ 0
Maximum [Member]
Loans and Allowance for Loan Losses (Textual) [Abstract]
Amortized periods	30 Years
Repayment delinquent period	30 days
Loans delinquent and overdraft period	60 days
Minimum [Member]
Loans and Allowance for Loan Losses (Textual) [Abstract]
Amortized periods	15 Years
Repayment delinquent period	10 days
Loans delinquent and overdraft period	30 days
Residential Real Estate [Member]
Loans and Allowance for Loan Losses (Textual) [Abstract]
Maximum percentage of loan	95.00%
Residential Real Estate [Member] | Maximum [Member]
Loans and Allowance for Loan Losses (Textual) [Abstract]
Amortized periods	15 Years
Commercial and agricultural real estate [Member]
Loans and Allowance for Loan Losses (Textual) [Abstract]
Maximum percentage of loan	80.00%

XML

AFS Securities (Details) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2012	Dec. 31, 2011
Amortized cost and fair value of available-for-sale securities
Amortized Cost	$ 490,420	$ 414,614
Gross Unrealized Gains	15,124	13,522
Gross Unrealized Losses	1,534	3,016
Fair Value, Total	504,010	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 Losses	422	1,151
Fair Value, Total	2,778	2,049
Collateralized mortgage obligations [Member]
Amortized cost and fair value of available-for-sale securities
Amortized Cost	128,378	96,545
Gross Unrealized Gains	2,627	2,556
Fair Value, Total	131,005	99,101
Government sponsored enterprises [Member]
Amortized cost and fair value of available-for-sale securities
Amortized Cost	25,668	395
Gross Unrealized Gains	108	2
Fair Value, Total	25,776	397
States and political subdivisions [Member]
Amortized cost and fair value of available-for-sale securities
Amortized Cost	174,118	166,832
Gross Unrealized Gains	9,190	8,157
Gross Unrealized Losses	565	51
Fair Value, Total	182,743	174,938
Preferred stocks [Member]
Amortized cost and fair value of available-for-sale securities
Amortized Cost	6,800	6,800
Gross Unrealized Losses	437	1,767
Fair Value, Total	6,363	5,033
Mortgage-backed securities [Member]
Amortized cost and fair value of available-for-sale securities
Amortized Cost	152,256	140,842
Gross Unrealized Gains	3,199	2,807
Gross Unrealized Losses	110	47
Fair Value, Total	$ 155,345	$ 143,602

XML

Borrowed Funds (Details) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2012	Dec. 31, 2011
Summary of borrowed funds
FHLB advances	$ 152,000	$ 142,242
Federal Home Loan Bank advances, Rate	2.05%	3.16%
Securities sold under agreements to repurchase, Amount	16,284	16,696
Securities sold under agreements to repurchase, Rate	3.57%	3.51%
Borrowed funds	241,001	216,136
Total, Rate	1.59%	2.42%
Without stated maturity dates [Member]
Summary of borrowed funds
Securities sold under agreements to repurchase, Amount	66,147	57,198
Securities sold under agreements to repurchase, Rate	0.15%	0.25%
With stated maturity dates [Member]
Summary of borrowed funds
Securities sold under agreements to repurchase, Amount	16,284	16,696
Securities sold under agreements to repurchase, Rate	3.57%	3.51%
Federal funds purchased [Member]
Summary of borrowed funds
Federal funds purchased	$ 6,570
Total, Rate	0.50%

XML

Benefit Plans (Details Textual) (USD $) In Thousands, except Share data, unless otherwise specified	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010	Dec. 31, 2009
Benefit Plans (Textual) [Abstract]
Employees contribution	50.00%
Safe harbor contribution	3.00%
Corporation matching contribution	50.00%
Compensation of the first contributed of an employee	4.00%
Employees vested in the safe harbor	100.00%
Vested through first two years of employment	0.00%
Vested years of employment	2 years
Vested after six years of service	100.00%
Years of service	6 years
Plan expenses	$ 662	$ 652	$ 625
Accumulated benefit obligation	12,209	11,334	9,660
Accumulated other comprehensive income includes net unrecognized pension cost before income taxes	5,562
Accumulated other comprehensive income expected to be amortized into benefit cost	208
Rate of compensation increase	0.00%
Investment in equity securities	50.00%
Investment in fixed income securities	50.00%
Long term rate of return	6.00%	6.00%	6.00%
Corporation anticipates contributions	215
Defer earned board fees into the Directors Plan	25.00%
Contribution approved by Board of Directors to the ESOP (Discretionary)	75	0	0	50
Compensation cost related to plan	102	20	0
Allocated shares outstanding related to the ESOP	246,404	246,404	246,419
Corporation self-funded medical plan	75
Medical expenses	2,534	2,045	2,101
Other Post Employment Benefits [Member]
Benefit Plans (Additional Textual) [Abstract]
Number of nonqualified supplementary employee retirement plans	2
Expenses related to nonqualified supplementary employee retirement plans	$ 382	$ 444	$ 363

XML

Accumulated Other Comprehensive Income (Tables)

12 Months Ended

Dec. 31, 2012

Accumulated Other Comprehensive Income [Abstract]

Summary of the components of accumulated other comprehensive income

	2012			2011
Unrealized gains on available-for-sale investment securities	$	8,678		$	5,942
Unrecognized pension costs		(3,671	)		(3,453	)
Accumulated other comprehensive income	$	5,007		$	2,489

XML

Computation of Earnings Per Share (Tables)

12 Months Ended

Dec. 31, 2012

Computation of Earnings Per Share [Abstract]

Computation of earnings per share

	2012		2011		2010
Average number of common shares outstanding for basic calculation		7,604,303		7,572,841		7,541,676
Average potential effect of shares in the Directors Plan (1)		195,063		194,634		187,744
Average number of common shares outstanding used to calculate diluted earnings per common share		7,799,366		7,767,475		7,729,420
Net income	$	12,206	$	10,210	$	9,045
Earnings per share
Basic	$	1.61	$	1.35	$	1.20
Diluted	$	1.56	$	1.31	$	1.17

(1) Exclusive of shares held in the Rabbi Trust

XML

Borrowed Funds (Details 1) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2012	Dec. 31, 2011
Schedule of maturity and weighted average interest rates of FHLB advances
Fixed rate advances due 2012, Amount		$ 17,000
Fixed rate advances due 2012, Rate		2.97%
One year putable fixed rate advances due 2012, Amount		15,000
One year putable fixed rate advances due 2012, Rate		4.10%
Fixed rate advance due 2013, Amount		5,242
Fixed rate advances due 2013, Rate		4.14%
One year putable fixed rate advances due 2013, Amount		5,000
One year putable fixed rate advances due 2013, Rate		3.15%
Fixed rate advances due 2014, Amount	10,000	25,000
Fixed rate advances due 2014, Rate	0.48%	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	$ 152,000	$ 142,242
Total, Rate	2.05%	3.16%

XML

Parent Company Only Financial Information (Details 1) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010
Income
Interest income	$ 42,978	$ 41,702	$ 40,013
Expenses
Occupancy and equipment	2,519	2,470	2,351
Audit fees	268	302	382
Other	9,051	8,271	8,560
Income before income tax benefit and equity in undistributed earnings of subsidiaries	14,569	11,564	10,649
Federal income tax benefit	2,363	1,354	1,604
Net income	12,206	10,210	9,045
Parent Company [Member]
Income
Dividends from subsidiaries	6,125	6,500	6,250
Interest income	174	128	72
Management fee and other	2,037	1,201	1,340
Total income	8,336	7,829	7,662
Expenses
Compensation and benefits	2,424	2,267	2,286
Occupancy and equipment	370	370	356
Audit fees	351	378	476
Other	945	1,089	932
Total expenses	4,090	4,104	4,050
Income before income tax benefit and equity in undistributed earnings of subsidiaries	4,246	3,725	3,612
Federal income tax benefit	673	958	896
Income Loss after Taxes	4,919	4,683	4,508
Undistributed earnings of subsidiaries	7,287	5,527	4,537
Net income	$ 12,206	$ 10,210	$ 9,045

XML

Goodwill and Other Intangible Assets (Details) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2012	Dec. 31, 2011
Summary of identifiable intangible assets
Net Intangible Assets	$ 914
Core deposit premium resulting from acquisitions [Member]
Summary of identifiable intangible assets
Gross Intangible Assets	5,373	5,373
Accumulated Amortization	4,459	4,199
Net Intangible Assets	$ 914	$ 1,174

XML

Federal Income Taxes (Details Textual) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011
Federal Income Taxes (Textual) [Abstract]
Federal statutory tax rate	34.00%
Accrued interest and penalties	$ 0	$ 0
Deferred federal income taxes	$ 0

XML

AFS Securities (Details 2) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010
Summary of the activity related to sale of available-for-sale securities
Proceeds from sales AFS of securities	$ 40,677	$ 8,877	$ 18,303
Gross realized gains	1,119	3	351
Gross realized losses			(3)
Net realized gains	1,119	3	348
Applicable income tax expense	$ 380	$ 1	$ 118

XML

Fair Value (Details) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2011
Auction rate money market preferred [Member]
Available-for-sale investment securities measured with Level 3 inputs on a recurring basis
Level 3 inputs - January 1, 2011	$ 2,865
Transfer to Level 1 and 2 inputs	(2,049)
Net unrealized losses on AFS securities	(816)
Level 3 inputs - December 31, 2011
Preferred stocks [Member]
Available-for-sale investment securities measured with Level 3 inputs on a recurring basis
Level 3 inputs - January 1, 2011	6,936
Calls	(1,000)
Transfer to Level 1 and 2 inputs	(5,033)
Net unrealized losses on AFS securities	(903)
Level 3 inputs - December 31, 2011

XML

Deposits (Details) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2012
Scheduled maturities of time deposits
2013	$ 205,754
2014	76,742
2015	71,685
2016	51,232
2017	40,523
Thereafter	18,399
Time Deposits, Total	$ 464,335

XML

Federal Income Taxes (Details 1) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010
Summary of federal income tax expense
Income taxes at 34% statutory rate	$ 4,953	$ 3,932	$ 3,621
Effect of nontaxable income
Interest income on tax exempt municipal bonds	(1,675)	(1,687)	(1,565)
Earnings on corporate owned life insurance	(238)	(207)	(225)
Other	(147)	(65)	(132)
Total effect of nontaxable income	(2,060)	(1,959)	(1,922)
Effect of tax credits	(667)	(793)	(263)
Effect of nondeductible expenses	137	174	168
Income tax expense	$ 2,363	$ 1,354	$ 1,604

XML

Borrowed Funds (Details 3) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011
Securities sold under agreements to repurchase without stated maturity dates [Member]
Summary of short term borrowings
Maximum Month-End Balance	$ 66,147	$ 57,198
YTD Average Balance	57,466	45,397
Weighted Average Interest Rate During the Period	0.20%	0.25%
Federal funds purchased [Member]
Summary of short term borrowings
Maximum Month-End Balance	17,900	18,300
YTD Average Balance	$ 3,386	$ 3,467
Weighted Average Interest Rate During the Period	0.47%	0.51%

XML

Federal Income Taxes (Details 2) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2012		Dec. 31, 2011		Dec. 31, 2010
Summary of other comprehensive income (loss)
Unrealized gains arising during the year	$ 3,921		$ 9,220		$ 1,156
Reclassification adjustment for net realized gains included in net income	(1,119)		(3)		(348)
Reclassification adjustment for impairment loss included in net income	282
Net unrealized gains	3,084		9,217		808
Tax effect	(348)	[1]	(3,719)	[1]	(351)	[1]
Unrealized gains, net of tax	2,736		5,498		457
Auction Rate Money Market Preferred and Preferred Stocks [Member]
Summary of other comprehensive income (loss)
Unrealized gains arising during the year	2,059		(1,719)		(226)
Net unrealized gains	2,059		(1,719)		(226)
Unrealized gains, net of tax	2,059		(1,719)		(226)
All Other Available-for-Sale Securities [Member]
Summary of other comprehensive income (loss)
Unrealized gains arising during the year	1,862		10,939		1,382
Reclassification adjustment for net realized gains included in net income	(1,119)		(3)		(348)
Reclassification adjustment for impairment loss included in net income	282
Net unrealized gains	1,025		10,936		1,034
Tax effect	(348)		(3,719)		(351)
Unrealized gains, net of tax	$ 677		$ 7,217		$ 683

[1] See "Note 12 - Federal Income Taxes" for tax effect reconciliation.

XML

Deposits (Details Textual) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010
Deposits (Textual) [Abstract]
Interest expense on time deposits greater than $100	$ 3,854	$ 4,302	$ 4,427

XML

Premises and Equipment (Details) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2012	Dec. 31, 2011
Summary of premises and equipment
Total	$ 57,895	$ 54,497
Less: accumulated depreciation	32,108	29,871
Premises and equipment, net	25,787	24,626
Land [Member]
Summary of premises and equipment
Total	5,435	5,174
Buildings and improvements [Member]
Summary of premises and equipment
Total	22,705	22,397
Furniture and equipment [Member]
Summary of premises and equipment
Total	$ 29,755	$ 26,926

XML

Benefit Plans

12 Months Ended

Dec. 31, 2012

Benefit Plans [Abstract]

BENEFIT PLANS

NOTE 17 – BENEFIT PLANS

401(k) Plan

We have a 401(k) plan in which substantially all employees are eligible to participate. Employees may contribute up to 50% of their compensation subject to certain limits based on federal tax laws. We made a 3.0% safe harbor contribution for all eligible employees and matching contributions equal to 50% of the first 4.0% of an employee’s compensation contributed to the Plan during the year. Employees are 100% vested in the safe harbor contributions and are 0% vested through their first two years of employment and are 100% vested after 6 years of service for matching contributions. For 2012, 2011 and 2010, expenses attributable to the Plan were $662, $652, and $625, respectively.

Defined Benefit Pension Plan

We have a non-contributory defined benefit pension plan which was curtailed in 2007. Due to the curtailment, future salary increases will not be considered and the benefits are based on years of service and the employees’ five highest consecutive years of compensation out of the last ten years of service rendered through March 1, 2007.

Changes in the projected benefit obligation and plan assets during each year, the funded status of the plan, and the net amount recognized on our consolidated balance sheets using an actuarial measurement date of December 31, are summarized as follows during the years ended December 31:

	2012			2011
Change in benefit obligation
Benefit obligation, January 1	$	11,334		$	9,660
Interest cost		470			507
Actuarial loss		888			1,750
Benefits paid, including plan expenses		(483	)		(583	)
Benefit obligation, December 31		12,209			11,334
Change in plan assets
Fair value of plan assets, January 1		8,603			8,900
Investment return		778			148
Contributions		752			138
Benefits paid, including plan expenses		(483	)		(583	)
Fair value of plan assets, December 31		9,650			8,603
Deficiency in funded status at December 31, included on the consolidated balance sheets in accrued interest payable and other liabilities	$	(2,559	)	$	(2,731	)

	2012			2011
Change in accrued pension benefit costs
Accrued benefit cost at January 1	$	(2,731	)	$	(760	)
Contributions		752			138
Net periodic cost for the year		(251	)		(138	)
Net change in unrecognized actuarial loss and prior service cost		(329	)		(1,971	)
Accrued pension benefit cost at December 31	$	(2,559	)	$	(2,731	)

Amounts recognized as a component of other comprehensive income consist of the following amounts during the years ended December 31:

	2012			2011			2010
Change in unrecognized pension cost	$	(329	)	$	(1,971	)	$	(72	)
Tax effect		111			671			25
Net	$	(218	)	$	(1,300	)	$	(47	)

The accumulated benefit obligation was $12,209 and $11,334 at December 31, 2012 and 2011, respectively.

We have recorded the funded status of the Plan in our consolidated balance sheets. We adjust the underfunded status in a liability account to reflect the current funded status of the plan. Any gains or losses that arise during the period but are not recognized as components of net periodic benefit cost will be recognized as a component of other comprehensive income (loss). The components of net periodic benefit cost are as follows for the years ended December 31:

	2012			2011			2010
Interest cost on projected benefit obligation	$	470		$	507		$	531
Expected return on plan assets		(511	)		(522	)		(491	)
Amortization of unrecognized actuarial net loss		292			153			153
Total	$	251		$	138		$	193

Accumulated other comprehensive income at December 31, 2012 includes net unrecognized pension costs before income taxes of $5,562, of which $208 is expected to be amortized into benefit cost during 2013.

The actuarial assumptions used in determining the projected benefit obligation are as follows for the year ended December 31:

	2012			2011			2010
Discount rate		3.75	%		4.22	%		5.36	%
Expected long-term rate of return		6.00	%		6.00	%		6.00	%

The actuarial weighted average assumptions used in determining the net periodic pension costs are as follows for the year ended December 31:

	2012			2011			2010
Discount rate		4.22	%		5.36	%		6.10	%
Expected long-term return on plan assets		6.00	%		6.00	%		6.00	%

As a result of the curtailment of the Plan, there is no rate of compensation increase considered in the above assumptions.

The expected long term rate of return is an estimate of anticipated future long term rates of return on plan assets as measured on a market value basis. Factors considered in arriving at this assumption include:

• Historical long term rates of return for broad asset classes.

• Actual past rates of return achieved by the plan.

• The general mix of assets held by the plan.

• The stated investment policy for the plan.

The selected rate of return is net of anticipated investment related expenses.

Plan Assets

Our overall investment strategy is to moderately grow the portfolio by investing 50% of the portfolio in equity securities and 50% in fixed income securities. This strategy is designed to generate a long term rate of return of 6.0%. Equity securities primarily consist of the S&P 500 Index with a smaller allocation to the Small Cap and International Index. Fixed income securities are invested in the Bond Market Index. The Plan has appropriate assets invested in short term investments to meet near-term benefit payments.

The asset mix and the sector weighting of the investments are determined by our pension committee, which is comprised of members of our management. To manage the Plan, we retain a third party investment advisor to conduct consultations. We review the performance of the advisor no less than annually.

The fair values of our pension plan assets by asset category were as follows as of December 31:

	2012				2011
Description	Total		(Level 2)		Total		(Level 2)
Asset Category
Short-term investments	$	80	$	80	$	16	$	16
Common collective trusts
Fixed income		4,832		4,832		4,357		4,357
Equity investments		4,738		4,738		4,230		4,230
	$	9,650	$	9,650	$	8,603	$	8,603

The following is a description of the valuation methodologies used for assets measured at fair value. There have been no changes in the methodologies used at December 31, 2012 and 2011:

• Short-term investments: Shares of a money market portfolio, which is valued using amortized cost, which approximates fair value.

• Common collective trusts: These investments are public investment securities valued using the NAV provided by a third party investment advisor. The NAV is quoted on a private market that is not active; however, the unit price is based on underlying investments which are traded on an active market.

We anticipate contributions of $215 to the plan in 2013.

Estimated future benefit payments are as follows for the next ten years:

Year	Amount
2013	$	432
2014		526
2015		567
2016		567
2017		593
Years 2018 - 2022		3,281

The components of projected net periodic benefit cost are as follows for the year ending December 31:

	2013
Interest cost on projected benefit obligation	$	450
Expected return on plan assets		(572	)
Amortization of unrecognized actuarial net loss		330
Net periodic benefit cost	$	208

Equity Compensation Plan

Pursuant to the terms of the Directors Plan, our directors are required to defer at least 25% of their earned board fees into the Directors Plan. The fees are converted on a quarterly basis into shares of our common stock based on the fair value of a share of common stock as of the relevant valuation date. Stock credited to a participant’s account is eligible for stock and cash dividends as declared. Upon retirement from the board or the occurrence of certain other events, the participant is eligible to receive a lump-sum, in-kind, distribution of all of the stock that is then in his or her account, and any unconverted cash will be converted to and rounded up to whole shares of stock and distributed, as well. The Directors Plan does not allow for cash settlement, and therefore, such share-based payment awards qualify for classification as equity. All authorized but unissued shares of common stock are eligible for issuance under the Directors Plan. We may also purchase shares of common stock on the open market to meet our obligations under the Directors Plan.

We maintain the Rabbi Trust to fund the Directors Plan. The Rabbi Trust is an irrevocable grantor trust to which we may contribute assets for the limited purpose of funding a nonqualified deferred compensation plan. Although we may not reach the assets of the Rabbi Trust for any purpose other than meeting our obligations under the Directors Plan, the assets of the Rabbi Trust remain subject to the claims of our creditors and are included in the consolidated financial statements. We may contribute cash or common stock to the Rabbi Trust from time to time for the sole purpose of funding the Directors Plan. The Rabbi Trust will use any cash that we contributed to purchase shares of our common stock on the open market through our brokerage services department.

The components of shares eligible to be issued under the Directors Plan were as follows as of December 31:

	2012				2011
	Eligible Shares		Market Value		Eligible Shares		Market Value
Unissued		165,436	$	3,598		201,438	$	4,774
Shares held in Rabbi Trust		5,130		112		16,585		393
Total		170,566	$	3,710		218,023	$	5,167

Other Employee Benefit Plans

We maintain two nonqualified supplementary employee retirement plans to provide supplemental retirement benefits to specified participants. Expenses related to these programs for 2012, 2011, and 2010 were $382, $444, and $363, respectively, and are being recognized over the participants’ expected years of service.

We maintain a non-leveraged ESOP which was frozen to new participants on December 31, 2006. Contributions to the plan are discretionary and are approved by the Board of Directors and recorded as compensation expense. During 2012, the Board of Directors approved a contribution of $75 to the ESOP. Prior to 2012, the most recent contribution was $50 in 2009. We made no contributions in 2011 or 2010. Compensation cost related to the plan for 2012, 2011, and 2010 was $102, $20, and $0, respectively. Total allocated shares outstanding related to the ESOP at December 31, 2012, 2011, and 2010 were 246,404, 246,404, and 246,419, respectively. Such shares are included in the computation of dividends and earnings per share in each of the respective years.

We maintain a self-funded medical plan under which we are responsible for the first $75 per year of claims made by a covered family. Expenses are accrued based on estimates of the aggregate liability for claims incurred and our experience. Expenses were $2,534 in 2012, $2,045 in 2011 and $2,101 in 2010.

XML

Nature of Operations and Summary of Significant Accounting Policies (Details) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2012	Dec. 31, 2011
Schedule of equity securities without fair values
Federal Home Loan Bank Stock	$ 7,850	$ 7,380
Federal Reserve Bank Stock	1,879	1,879
Other	349	319
Total	18,118	17,189
Investment in Corporate Settlement Solutions [Member]
Schedule of equity securities without fair values
Equity method investments	7,040	6,611
Investment in Valley Financial Corporation [Member]
Schedule of equity securities without fair values
Equity method investments	$ 1,000	$ 1,000

XML

Federal Income Taxes (Tables)

12 Months Ended

Dec. 31, 2012

Federal Income Taxes [Abstract]

Components of the consolidated provision for federal income taxes

	2012		2011		2010
Currently payable	$	1,747	$	965	$	1,425
Deferred expense		616		389		179
Income tax expense	$	2,363	$	1,354	$	1,604

Summary of federal income tax expense

	2012			2011			2010
Income taxes at 34% statutory rate	$	4,953		$	3,932		$	3,621
Effect of nontaxable income
Interest income on tax exempt municipal bonds		(1,675	)		(1,687	)		(1,565	)
Earnings on corporate owned life insurance		(238	)		(207	)		(225	)
Other		(147	)		(65	)		(132	)
Total effect of nontaxable income		(2,060	)		(1,959	)		(1,922	)
Effect of tax credits		(667	)		(793	)		(263	)
Effect of nondeductible expenses		137			174			168
Income tax expense	$	2,363		$	1,354		$	1,604

Summary of components of unrealized holding gains on AFS securities

	2012								2011									2010
	Auction Rate Money Market Preferred and Preferred Stocks		All Other AFS Securities			Total			Auction Rate Money Market Preferred and Preferred Stocks			All Other AFS Securities			Total			Auction Rate Money Market Preferred and Preferred Stocks			All Other AFS Securities			Total
Unrealized gains arising during the year	$	2,059	$	1,862		$	3,921		$	(1,719	)	$	10,939		$	9,220		$	(226	)	$	1,382		$	1,156
Reclassification adjustment for net realized gains included in net income		—		(1,119	)		(1,119	)		—			(3	)		(3	)		—			(348	)		(348	)
Reclassification adjustment for impairment loss included in net income		—		282			282			—			—			—			—			—			—
Net unrealized gains		2,059		1,025			3,084			(1,719	)		10,936			9,217			(226	)		1,034			808
Tax effect		—		(348	)		(348	)		—			(3,719	)		(3,719	)		—			(351	)		(351	)
Unrealized gains, net of tax	$	2,059	$	677		$	2,736		$	(1,719	)	$	7,217		$	5,498		$	(226	)	$	683		$	457

Summary of deferred tax assets and liabilities

	2012		2011
Deferred tax assets
Allowance for loan losses	$	3,133	$	3,278
Deferred directors’ fees		2,100		2,384
Employee benefit plans		189		158
Core deposit premium and acquisition expenses		892		800
Net unrealized losses on trading securities		351		364
Net unrecognized actuarial loss on pension plan		1,891		1,780
Life insurance death benefit payable		804		804
Alternative minimum tax		729		729
Other		195		260
Total deferred tax assets		10,284		10,557
Deferred tax liabilities
Prepaid pension cost		1,021		851
Premises and equipment		724		992
Accretion on securities		37		34
Core deposit premium and acquisition expenses		1,203		1,102
Net unrealized gains on available-for-sale securities		4,912		4,564
Other		1,163		937
Total deferred tax liabilities		9,060		8,480
Net deferred tax assets	$	1,224	$	2,077

XML

Goodwill and Other Intangible Assets (Details Textual) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010
Goodwill and Other Intangible Assets (Textual) [Abstract]
Carrying amount of goodwill	$ 45,618	$ 45,618
Amortization expense of identifiable intangible assets	$ 260	$ 299	$ 338

XML

Benefit Plans (Details 2) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010
Components of net periodic benefit cost
Interest cost on projected benefit obligation	$ 450	$ 470	$ 507	$ 531
Expected return on plan assets	(572)	(511)	(522)	(491)
Amortization of unrecognized actuarial net loss	330	292	153	153
Total	$ 208	$ 251	$ 138	$ 193

XML

Premises and Equipment (Tables)

12 Months Ended

Dec. 31, 2012

Premises and Equipment [Abstract]

Summary of premises and equipment

	2012		2011
Land	$	5,435	$	5,174
Buildings and improvements		22,705		22,397
Furniture and equipment		29,755		26,926
Total		57,895		54,497
Less: accumulated depreciation		32,108		29,871
Premises and equipment, net	$	25,787	$	24,626

XML

Computation of Earnings Per Share (Details) (USD $) In Thousands, except Share data, unless otherwise specified	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010
Computation of earnings per share
Average number of common shares outstanding for basic calculation	7,604,303	7,572,841	7,541,676
Average potential effect of shares in the Directors Plan (1)	195,063	194,634	187,744
Average number of common shares outstanding used to calculate diluted earnings per common share	7,799,366	7,767,475	7,729,420
Net income	$ 12,206	$ 10,210	$ 9,045
Earnings per share
Basic	$ 1.61	$ 1.35	$ 1.20
Diluted	$ 1.56	$ 1.31	$ 1.17

XML

Loans and Allowance for Loan Losses (Details 5) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2012 NumberofLoan	Dec. 31, 2011 NumberofLoan
Information pertaining to TDR's
Number of Loans	67	96
Pre- Modification Recorded Investment	$ 11,486	$ 18,308
Post- Modification Recorded Investment	11,366	17,815
Below Market Interest Rate [Member]
Information pertaining to TDR's
Number of Loans	49	72
Pre- Modification Recorded Investment	7,264	13,887
Extension of Amortization Period [Member]
Information pertaining to TDR's
Number of Loans	5
Pre- Modification Recorded Investment	1,980
Below Market Interest Rate and Extension of Amortization Period [Member]
Information pertaining to TDR's
Number of Loans	13	24
Pre- Modification Recorded Investment	2,242	4,421
Commercial real estate [Member]
Information pertaining to TDR's
Number of Loans	1	1
Pre- Modification Recorded Investment	912	408
Post- Modification Recorded Investment	792	408
Commercial real estate [Member] | Below Market Interest Rate [Member]
Information pertaining to TDR's
Number of Loans		1
Pre- Modification Recorded Investment		408
Commercial real estate [Member] | Extension of Amortization Period [Member]
Information pertaining to TDR's
Number of Loans
Pre- Modification Recorded Investment
Commercial real estate [Member] | Below Market Interest Rate and Extension of Amortization Period [Member]
Information pertaining to TDR's
Number of Loans	1
Pre- Modification Recorded Investment	912
Commercial other [Member]
Information pertaining to TDR's
Number of Loans	28	42
Pre- Modification Recorded Investment	6,437	12,575
Post- Modification Recorded Investment	6,437	12,132
Commercial other [Member] | Below Market Interest Rate [Member]
Information pertaining to TDR's
Number of Loans	25	38
Pre- Modification Recorded Investment	4,924	9,932
Commercial other [Member] | Extension of Amortization Period [Member]
Information pertaining to TDR's
Number of Loans	1
Pre- Modification Recorded Investment	1,368
Commercial other [Member] | Below Market Interest Rate and Extension of Amortization Period [Member]
Information pertaining to TDR's
Number of Loans	2	4
Pre- Modification Recorded Investment	145	2,643
Total commercial [Member]
Information pertaining to TDR's
Number of Loans	29	43
Pre- Modification Recorded Investment	7,349	12,983
Post- Modification Recorded Investment	7,229	12,540
Total commercial [Member] | Below Market Interest Rate [Member]
Information pertaining to TDR's
Number of Loans	25	39
Pre- Modification Recorded Investment	4,924	10,340
Total commercial [Member] | Extension of Amortization Period [Member]
Information pertaining to TDR's
Number of Loans	1
Pre- Modification Recorded Investment	1,368
Total commercial [Member] | Below Market Interest Rate and Extension of Amortization Period [Member]
Information pertaining to TDR's
Number of Loans	3	4
Pre- Modification Recorded Investment	1,057	2,643
Agricultural other [Member]
Information pertaining to TDR's
Number of Loans	7	8
Pre- Modification Recorded Investment	652	1,321
Post- Modification Recorded Investment	652	1,321
Agricultural other [Member] | Below Market Interest Rate [Member]
Information pertaining to TDR's
Number of Loans	6	8
Pre- Modification Recorded Investment	561	1,321
Agricultural other [Member] | Extension of Amortization Period [Member]
Information pertaining to TDR's
Number of Loans	1
Pre- Modification Recorded Investment	91
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	29	36
Pre- Modification Recorded Investment	3,463	3,915
Post- Modification Recorded Investment	3,463	3,865
Residential real estate senior liens [Member] | Below Market Interest Rate [Member]
Information pertaining to TDR's
Number of Loans	17	19
Pre- Modification Recorded Investment	1,779	2,161
Residential real estate senior liens [Member] | Extension of Amortization Period [Member]
Information pertaining to TDR's
Number of Loans	3
Pre- Modification Recorded Investment	521
Residential real estate senior liens [Member] | Below Market Interest Rate and Extension of Amortization Period [Member]
Information pertaining to TDR's
Number of Loans	9	17
Pre- Modification Recorded Investment	1,163	1,754
Residential real estate junior liens [Member]
Information pertaining to TDR's
Number of Loans	1
Pre- Modification Recorded Investment	22
Post- Modification Recorded Investment	22
Residential real estate junior liens [Member] | Below Market Interest Rate and Extension of Amortization Period [Member]
Information pertaining to TDR's
Number of Loans	1
Pre- Modification Recorded Investment	22
Total residential real estate [Member]
Information pertaining to TDR's
Number of Loans	30	36
Pre- Modification Recorded Investment	3,485	3,915
Post- Modification Recorded Investment	3,485	3,865
Total residential real estate [Member] | Below Market Interest Rate [Member]
Information pertaining to TDR's
Number of Loans	17
Pre- Modification Recorded Investment	1,779
Total residential real estate [Member] | Extension of Amortization Period [Member]
Information pertaining to TDR's
Number of Loans	3
Pre- Modification Recorded Investment	521
Total residential real estate [Member] | Below Market Interest Rate and Extension of Amortization Period [Member]
Information pertaining to TDR's
Number of Loans	10
Pre- Modification Recorded Investment	1,185
Consumer secured [Member]
Information pertaining to TDR's
Number of Loans	1	7
Pre- Modification Recorded Investment		69
Post- Modification Recorded Investment		69
Consumer secured [Member] | Below Market Interest Rate [Member]
Information pertaining to TDR's
Number of Loans	1	6
Pre- Modification Recorded Investment		65
Consumer secured [Member] | Extension of Amortization Period [Member]
Information pertaining to TDR's
Number of Loans
Pre- Modification Recorded Investment
Consumer secured [Member] | Below Market Interest Rate and Extension of Amortization Period [Member]
Information pertaining to TDR's
Number of Loans		1
Pre- Modification Recorded Investment		4
Consumer unsecured [Member]
Information pertaining to TDR's
Number of Loans		2
Pre- Modification Recorded Investment		20
Post- Modification Recorded Investment		20
Consumer unsecured [Member] | Below Market Interest Rate [Member]
Information pertaining to TDR's
Number of Loans
Pre- Modification Recorded Investment
Consumer unsecured [Member] | Extension of Amortization Period [Member]
Information pertaining to TDR's
Number of Loans
Pre- Modification Recorded Investment
Consumer unsecured [Member] | Below Market Interest Rate and Extension of Amortization Period [Member]
Information pertaining to TDR's
Number of Loans		2
Pre- Modification Recorded Investment		20
Total consumer [Member]
Information pertaining to TDR's
Number of Loans	1	9
Pre- Modification Recorded Investment		89
Post- Modification Recorded Investment		89
Total consumer [Member] | Below Market Interest Rate [Member]
Information pertaining to TDR's
Number of Loans		6
Pre- Modification Recorded Investment		65
Total consumer [Member] | Extension of Amortization Period [Member]
Information pertaining to TDR's
Number of Loans
Pre- Modification Recorded Investment
Total consumer [Member] | Below Market Interest Rate and Extension of Amortization Period [Member]
Information pertaining to TDR's
Number of Loans		3
Pre- Modification Recorded Investment		$ 24

XML

Fair Value (Details 2) (Discounted appraisal value [Member], Foreclosed Assets [Member], Level 3 [Member], USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2012
Quantitative information related to foreclosed assets measured utilizing Level 3 fair value measurements
Discounted appraisal value at fair value	$ 2,018
Valuation Techniques	Discounted appraisal value
Equipment [Member]
Quantitative information related to foreclosed assets measured utilizing Level 3 fair value measurements
Fair Value Inputs, Discount Rate	50.00%
Maximum [Member] | Real Estate [Member]
Quantitative information related to foreclosed assets measured utilizing Level 3 fair value measurements
Fair Value Inputs, Discount Rate	30.00%
Minimum [Member] | Real Estate [Member]
Quantitative information related to foreclosed assets measured utilizing Level 3 fair value measurements
Fair Value Inputs, Discount Rate	20.00%

XML

AFS Securities (Details Textual) (USD $) In Thousands, unless otherwise specified	3 Months Ended	12 Months Ended
	Mar. 31, 2012 NumberofState Method	Dec. 31, 2012	Dec. 31, 2011
AFS Securities (Additional Textual) [Abstract]
Discount variable rate		5.64%
AFS Securities (Textual) [Abstract]
Other than temporary impairment loss recognized in earnings for the first quarter	$ 282
Number of method used for evaluation	2
Additional OTTI		0
Credit losses recognized on available-for-sale securities			$ 0
Number of state issued student loan	1
Credit discount rate [Member]
AFS Securities (Additional Textual) [Abstract]
Discount variable rate		4.00%

XML

Related Party Transactions (Tables)

12 Months Ended

Dec. 31, 2012

Related Party Transactions [Abstract]

Annual activity

	2012			2011
Balance, January 1	$	3,728		$	4,347
New loans		8,435			1,800
Repayments		(5,565	)		(2,419	)
Balance, December 31	$	6,598		$	3,728

Summary of assets and contribution made to entity

	2012		2011		2010
Ending assets	$	1,766	$	1,150	$	1,108
Contributions	$	850	$	250	$	250

XML

Nature of Operations and Summary of Significant Accounting Policies

12 Months Ended

Dec. 31, 2012

Nature of Operations and Summary of Significant Accounting Policies [Abstract]

NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NOTE 1 – NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION AND CONSOLIDATION: The consolidated financial statements include the accounts of Isabella Bank Corporation, a financial services holding company, and its wholly owned subsidiaries, Isabella Bank and Financial Group Information Services. All intercompany balances and accounts have been eliminated in consolidation.

NATURE OF OPERATIONS: Isabella Bank Corporation is a financial services holding company offering a wide array of financial products and services in several mid-Michigan counties. Our banking subsidiary, Isabella Bank, offers banking services through 26 locations, 24 hour banking services locally and nationally through shared automatic teller machines, 24 hour online banking, and direct deposits to businesses, institutions, and individuals. Lending services offered include commercial loans, agricultural loans, residential real estate loans, and consumer loans. Deposit services include interest and noninterest bearing checking accounts, savings accounts, money market accounts, and certificates of deposit. Other related financial products include trust and investment services, safe deposit box rentals, and credit life insurance. Active competition, principally from other commercial banks, savings banks and credit unions, exists in all of our principal markets. Our results of operations can be significantly affected by changes in interest rates or changes in the local economic environment.

Financial Group Information Services provides information technology services to Isabella Bank Corporation and our subsidiaries.

USE OF ESTIMATES: In preparing consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, we are required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated balance sheet and reported amounts of revenues and expenses during the reporting year. Actual results could differ from those estimates.

Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the ALLL, the fair value of certain AFS investment securities, the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans, valuation of goodwill and other intangible assets, and determinations of assumptions in accounting for the defined benefit pension plan.

FAIR VALUE MEASUREMENTS: Fair value refers to the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants in the market in which the reporting entity transacts such sales or transfers based on the assumptions market participants would use when pricing an asset or liability. Assumptions are developed based on prioritizing information within a fair value hierarchy that gives the highest priority to quoted prices in active markets and the lowest priority to unobservable data, such as the reporting entity’s own data. We may choose to measure eligible items at fair value at specified election dates. Unrealized gains and losses on items for which the fair value measurement option has been elected are reported in earnings at each subsequent reporting date. The fair value option (i) may be applied instrument by instrument, with certain exceptions, allowing us to record identical financial assets and liabilities at fair value or by another measurement basis permitted under generally accepted accounting principles, (ii) is irrevocable (unless a new election date occurs) and (iii) is applied only to entire instruments and not to portions of instruments.

For assets and liabilities recorded at fair value, it is our policy to maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements for those financial instruments for which there is an active market. In cases where the market for a financial asset or liability is not active, we include appropriate risk adjustments that market participants would make for nonperformance and liquidity risks when developing fair value measurements. Fair value measurements for assets and liabilities for which limited or no observable market data exists are accordingly based primarily upon estimates, are often calculated based on the economic and competitive environment, the characteristics of the asset or liability and other factors. Therefore, the results cannot be determined with precision and may not be realized in an actual sale or immediate settlement of the asset or liability. Additionally, there may be inherent weaknesses in any calculation technique, and changes in the underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect the results of current or future values.

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

Fair Value Hierarchy

Under fair value measurement and disclosure authoritative guidance, we group assets and liabilities measured at fair value into three levels, based on the markets in which the assets and liabilities are traded, and the reliability of the assumptions used to determine fair value, based on the prioritization of inputs in the valuation techniques. These levels are:

Level 1:	Valuation is based upon quoted prices for identical instruments traded in active markets.
Level 2:	Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model based valuation techniques for which all significant assumptions are observable in the market.
Level 3:	Valuation is generated from model based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability.

The asset’s or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques maximize the use of observable inputs and minimize the use of unobservable inputs. Transfers between measurement levels are recognized at the end of reporting periods.

For further discussion of fair value considerations, refer to “Note 20 – Fair Value.”

SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK: Most of our activities conducted are with customers located within the central Michigan area. A significant amount of our outstanding loans are secured by commercial and residential real estate. Other than these types of loans, there is no significant concentration to any other industry or any one customer.

CASH AND CASH EQUIVALENTS: For purposes of the consolidated statements of cash flows, cash and cash equivalents include cash and balances due from banks, federal funds sold, and other deposit accounts. Generally, federal funds sold are for a one day period. We maintain deposit accounts in various financial institutions which generally exceed federally insured limits or are not insured. We do not believe we are exposed to any significant interest, credit or other financial risk as a result of these deposits.

CERTIFICATES OF DEPOSIT HELD IN OTHER FINANCIAL INSTITUTIONS: Certificates of deposits held in other financial institutions consist of interest bearing certificates of deposit that mature within 3 years and are carried at cost.

TRADING SECURITIES: We engage in trading activities of our own accounts. Securities that are held principally for resale in the near term are recorded in the trading assets account at fair value with changes in fair value recorded in noninterest income. Interest income is included in net interest income.

AFS SECURITIES: Purchases of investment securities are generally classified as AFS. However, we may elect to classify securities as either held to maturity or trading. Securities classified as AFS are recorded at fair value, with unrealized gains and losses, net of the effect of deferred income taxes, excluded from earnings and reported in other comprehensive income. Included in AFS securities are auction rate money market preferreds and preferred stocks. These investments are considered equity securities for federal income tax purposes, and as such, no estimated federal income tax impact is expected or recorded. Auction rate money market preferred securities and preferred stocks are recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Realized gains and losses on the sale of AFS securities are determined using the specific identification method.

AFS securities are reviewed quarterly for possible OTTI. In determining whether an OTTI exists for debt securities, we must assert that: (a) we do not have the intent to sell the security; and (b) it is more likely than not we will not have to sell the security before recovery of its cost basis. If these conditions are not met, we must recognize an OTTI charge through earnings for the difference between the debt security’s amortized cost basis and its fair value, and such amount is included in noninterest income. For debt securities that do not meet the above criteria, and we do not expect to recover the security’s amortized cost basis, the security is considered other-than-temporarily impaired. For these debt securities, we separate the total impairment into the credit risk loss component and the amount of the loss related to market and other risk factors. In order to determine the amount of the credit loss for a debt security, we calculate the recovery value by performing a discounted cash flow analysis based on the current cash flows and future cash flows we expect to recover. The amount of the total OTTI related to the credit risk is recognized in earnings and is included in noninterest income. The amount of the total OTTI related to other risk factors is recognized as a component of other comprehensive income. For debt securities that have recognized an OTTI through earnings, if through subsequent evaluation there is a significant increase in the cash flow expected, the difference between the amortized cost basis and the cash flows expected to be collected is accreted as interest income.

AFS equity securities are reviewed for OTTI at each reporting date. This evaluation considers a number of factors including, but not limited to, the length of time and extent to which the fair value has been less than cost, the financial condition and near term prospects of the issuer, and our ability and intent to hold the securities until fair value recovers. If it is determined that we do not have the ability and intent to hold the securities until recovery or that there are conditions that indicate that a security may not recover in value then the difference between the fair value and the cost of the security is recognized in earnings and is included in noninterest income.

LOANS: Loans that we have the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at their outstanding principal balance adjusted for any charge-offs, the ALLL, and any deferred fees or costs on originated loans. 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 agricultural, commercial and mortgage loans is discontinued at the time the loan is 90 days or more past due unless the credit is well secured and in the process of collection. Consumer loans are typically charged off no later than 180 days past due. Past due status is based on contractual terms of the loan. In all cases, loans are placed 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 ALLL. The interest on these loans is accounted for on the cash-basis, until qualifying for return to accrual status. Loans are returned to accrual status when all principal and interest amounts contractually due are brought current and future payments are reasonably assured. For impaired loans not classified as nonaccrual, interest income continues to be accrued over the term of the loan based on the principal amount outstanding.

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

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

The ALLL consists of specific, general, and unallocated components. The specific component relates to loans that are deemed to be impaired. For such loans that are also analyzed for specific allowance allocations, an allowance is established when the discounted cash flows or collateral value or observable market price of the impaired loan is lower than the carrying value of that loan. The general component covers non classified loans and is based on historical loss experience. An unallocated component is maintained to cover uncertainties that we believe affect our estimate of probable losses based on qualitative factors. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.

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

1. There has been a charge-off of its principal balance;

2. The loan has been classified as a TDR; or

3. The loan is in nonaccrual status.

Impairment is measured on a loan by loan basis for commercial and agricultural loans by 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.

LOANS HELD FOR SALE: Mortgage loans held for sale in the secondary market are carried at the lower of cost or fair value as determined by aggregating outstanding commitments from investors or current investor yield requirements. Net unrealized losses, if any, would be recognized as a component of other noninterest expenses.

Mortgage loans held for sale are sold with the mortgage servicing rights retained by us. The carrying value of mortgage loans sold is reduced by the cost allocated to the associated mortgage servicing rights. Gains or losses on sales of mortgage loans are recognized based on the difference between the selling price and the carrying value of the related mortgage loans sold.

TRANSFERS OF FINANCIAL ASSETS: Transfers of financial assets, including mortgage loans and participation loans are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is determined to be surrendered when 1) the assets have been legally isolated from us, 2) the transferee obtains the right (free of conditions that constrain it from taking advantage of the right) to pledge or exchange the transferred assets, and 3) we do not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity. Other than servicing, we have no substantive continuing involvement related to these loans.

SERVICING: Servicing assets are recognized as separate assets when rights are acquired through purchase or through sale of financial assets. We have no purchased servicing rights. For sales of mortgage loans, a portion of the cost of originating the loan is allocated to the servicing right based on relative fair value. Fair value is based on market prices for comparable mortgage servicing contracts, when available, or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as the cost to service, the discount rate, the custodial earnings rate, an inflation rate, ancillary income, prepayment speeds and default rates and losses.

Servicing assets are evaluated for impairment based upon the fair value of the rights as compared to amortized cost. Impairment is determined by stratifying rights into tranches based on predominant risk characteristics, such as interest rate, loan type, and investor type. Impairment is recognized through a valuation allowance for an individual tranche, to the extent that fair value is less than the capitalized amount for the tranche. If we later determine that all or a portion of the impairment no longer exists for a particular tranche, a reduction of the valuation allowance may be recorded as an increase to income. Capitalized servicing rights are reported in other assets and are amortized into noninterest income in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets. The unpaid principal balance of mortgages serviced for others was $303,351 and $304,626 with capitalized servicing rights of $2,285 and $2,374 at December 31, 2012 and 2011, respectively.

Servicing fee income is recorded for fees earned for servicing loans for others. The fees are based on a contractual percentage of the outstanding principal; or a fixed amount per loan and are recorded as income when earned. We recorded servicing fee revenue of $757, $732, and $760 related to residential mortgage loans serviced for others during 2012, 2011, and 2010, respectively and is included in other noninterest income.

LOANS ACQUIRED THROUGH TRANSFER: Authoritative accounting guidance related to acquired loans requires that a valuation allowance for loans acquired in a transfer, including in a business combination, reflect only losses incurred after acquisition, and should not be recorded at acquisition. This standard applies to any loan acquired in a transfer that shows evidence of credit quality deterioration since it was originated.

FORECLOSED ASSETS: Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at the lower of our carrying amount or fair value less estimated selling costs at the date of transfer, establishing a new cost basis. Any write-downs based on the asset’s fair value at the date of acquisition are charged to the ALLL. After foreclosure, property held for sale is carried at the lower of the new cost basis or fair value less costs to sell. Impairment losses on property to be held and used are measured at the amount by which the carrying amount of property exceeds its fair value. Costs relating to holding these assets are expensed as incurred. We periodically perform valuations and any subsequent write-downs are recorded as a charge to operations, if necessary, to reduce the carrying value of a property to the lower of our carrying amount or fair value less costs to sell. Foreclosed assets of $2,018 and $1,876 as of December 31, 2012 and 2011, respectively, are included in other assets.

PREMISES AND EQUIPMENT: Land is carried at cost. Buildings and equipment are carried at cost, less accumulated depreciation which is computed principally by the straight-line method based upon the estimated useful lives of the related assets, which range from 3 to 40 years. Major improvements are capitalized and appropriately amortized based upon the useful lives of the related assets or the expected terms of the leases, if shorter, using the straight-line method. Maintenance, repairs and minor alterations are charged to current operations as expenditures occur. We annually review these assets to determine whether carrying values have been impaired.

FDIC INSURANCE PREMIUM: Included in other assets were prepaid FDIC assessments of $1,804 and $2,588 as of December 31, 2012 and 2011, respectively.

EQUITY SECURITIES WITHOUT READILY DETERMINABLE FAIR VALUES: Included in equity securities without readily determinable fair values are FHLB Stock and FRB Stock as well as our ownership interests in Corporate Settlement Solutions and Valley Financial Corporation. The investment in Corporate Settlement Solutions, a title insurance company, was made in the 1st quarter 2007. The Corporation is not the managing entity of Corporate Settlement Solutions, LLC, and accounts for its investment in that entity under the equity method of accounting. Valley Financial Corporation is the parent company of 1st State Bank in Saginaw, Michigan, which is a de novo bank that opened in 2005. The Corporation made investments in Valley Financial Corporation in 2004 and in 2007.

Equity securities without readily determinable fair values consist of the following as of December 31:

	2012		2011
Federal Home Loan Bank Stock	$	7,850	$	7,380
Investment in Corporate Settlement Solutions		7,040		6,611
Federal Reserve Bank Stock		1,879		1,879
Investment in Valley Financial Corporation		1,000		1,000
Other		349		319
Total	$	18,118	$	17,189

EQUITY COMPENSATION PLAN: At December 31, 2012, the Directors Plan had 170,566 shares eligible to be issued to participants, for which the Rabbi Trust held 5,130 shares. We had 218,023 shares to be issued in 2011, with 16,585 shares held in the Rabbi Trust. Compensation costs relating to share based payment transactions are recognized as the services are rendered, with the cost measured based on the fair value of the equity or liability instruments issued (see “Note 17 – Benefit Plans”). We have no other equity-based compensation plans.

CORPORATE OWNED LIFE INSURANCE: We have purchased life insurance policies on key members of management. In the event of death of one of these individuals, we would receive a specified cash payment equal to the face value of the policy. Such policies are recorded at their cash surrender value, or the amount that can be realized on the balance sheet dates. Increases in cash surrender value in excess of single premiums paid are reported as other noninterest income.

As of December 31, 2012 and 2011, the present value of the post retirement benefits payable by us to the covered employees was estimated to be $2,657 and $2,633, respectively, and is included in accrued interest payable and other liabilities . The periodic policy maintenance costs were $24, $60, and $68 for 2012, 2011, and 2010, respectively and is included in other noninterest expenses.

ACQUISITION INTANGIBLES AND GOODWILL: We previously acquired branch facilities and related deposits in business combinations accounted for as a purchase. The acquisitions included amounts related to the valuation of customer deposit relationships (core deposit intangibles). Core deposit intangibles arising from acquisitions are included in goodwill and other intangible assets are being amortized over their estimated lives and evaluated for potential impairment on at least an annual basis. Goodwill represents the excess of purchase price over identifiable assets, is not amortized but is evaluated for impairment on at least an annual basis. Acquisition intangibles and goodwill are typically qualitatively evaluated to determine if it is more likely than not that the carrying balance is impaired. If it is determined that the carrying balance is more likely than not to be impaired, we perform a cash flow valuation to determine the extent of the potential impairment. This valuation method requires a significant degree of our judgment. In the event the projected undiscounted net operating cash flows for these intangible assets are less than the carrying value, the asset is recorded at fair value as determined by the valuation model.

OFF BALANCE SHEET CREDIT RELATED FINANCIAL INSTRUMENTS: In the ordinary course of business, we have entered into commitments to extend credit, including commitments under credit card arrangements, home equity lines of credit, commercial letters of credit, and standby letters of credit. Such financial instruments are recorded only when funded.

FEDERAL INCOME TAXES: Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method. Under this method, the net deferred tax assets or liability is determined based on the tax effects of the temporary differences between the book and tax bases on the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws. Valuation allowances are established, where necessary, to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable or refundable for the year plus or minus the change during the year in deferred tax assets and liabilities.

We analyze our filing positions in the jurisdictions where it is required to file income tax returns, as well as all open tax years in these jurisdictions. We have also elected to retain our existing accounting policy with respect to the treatment of interest and penalties attributable to income taxes, and continue to reflect any charges for such, to the extent they arise, as a component of our noninterest expenses.

MARKETING COSTS: Marketing costs are expensed as incurred (see “Note 11 – Other Noninterest Expenses”).

RECLASSIFICATIONS: Certain amounts reported in the 2011 and 2010 consolidated financial statements have been reclassified to conform with the 2012 presentation.

XML

Fair Value (Details Textual) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011
Fair Value (Textual) [Abstract]
Maturity dates of Interest bearing balances	3 years
Financial instruments measured on recurring basis	$ 0
Transferred loans	751,009
Maturity dates of borrowed funds	90 days
Level 3 [Member]
Fair Value (Textual) [Abstract]
Impairments recorded on goodwill and other acquisition intangibles	0	0
Impairments recorded on equity securities without readily determinable fair values	0	0
Foreclosed assets	$ 2,018

XML

Loans and Allowance for Loan Losses (Details) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011
Summary of changes in the ALLL and the recorded investment in loans by segments
Allowance for loan losses, Beginning Balance	$ 12,375	$ 12,373
Allowance for loan losses, Loans charged off	(3,356)	(4,776)
Allowance for loan losses, Recoveries	617	952
Allowance for loan losses, Provision for loan losses	2,300	3,826
Allowance for loan losses, Ending Balance	11,936	12,375
Commercial [Member]
Summary of changes in the ALLL and the recorded investment in loans by segments
Allowance for loan losses, Beginning Balance	6,284	6,048
Allowance for loan losses, Loans charged off	(1,672)	(1,863)
Allowance for loan losses, Recoveries	240	460
Allowance for loan losses, Provision for loan losses	2,010	1,639
Allowance for loan losses, Ending Balance	6,862	6,284
Agricultural [Member]
Summary of changes in the ALLL and the recorded investment in loans by segments
Allowance for loan losses, Beginning Balance	1,003	1,033
Allowance for loan losses, Loans charged off		(121)
Allowance for loan losses, Recoveries		1
Allowance for loan losses, Provision for loan losses	(596)	90
Allowance for loan losses, Ending Balance	407	1,003
Residential Real Estate [Member]
Summary of changes in the ALLL and the recorded investment in loans by segments
Allowance for loan losses, Beginning Balance	2,980	3,198
Allowance for loan losses, Loans charged off	(1,142)	(2,240)
Allowance for loan losses, Recoveries	122	177
Allowance for loan losses, Provision for loan losses	1,667	1,845
Allowance for loan losses, Ending Balance	3,627	2,980
Consumer [Member]
Summary of changes in the ALLL and the recorded investment in loans by segments
Allowance for loan losses, Beginning Balance	633	605
Allowance for loan losses, Loans charged off	(542)	(552)
Allowance for loan losses, Recoveries	255	314
Allowance for loan losses, Provision for loan losses	320	266
Allowance for loan losses, Ending Balance	666	633
Unallocated [Member]
Summary of changes in the ALLL and the recorded investment in loans by segments
Allowance for loan losses, Beginning Balance	1,475	1,489
Allowance for loan losses, Provision for loan losses	(1,101)	(14)
Allowance for loan losses, Ending Balance	$ 374	$ 1,475

XML

Off-Balance Sheet Activities (Tables)

12 Months Ended

Dec. 31, 2012

Off-Balance-Sheet Activities [Abstract]

Notional amount of financial instrument

	December 31
	2012		2011
Unfunded commitments under lines of credit	$	115,233	$	102,822
Commercial and standby letters of credit		3,935		4,461
Commitments to grant loans		40,507		21,806

XML

Parent Company Only Financial Information

12 Months Ended

Dec. 31, 2012

Parent Company Only Financial Information [Abstract]

PARENT COMPANY ONLY FINANCIAL INFORMATION

NOTE 21 – PARENT COMPANY ONLY FINANCIAL INFORMATION

Condensed Balance Sheets	December 31
	2012		2011
ASSETS
Cash on deposit at subsidiary Bank	$	332	$	1,474
Securities available for sale		3,939		3,567
Investments in subsidiaries		115,781		106,463
Premises and equipment		2,041		1,916
Other assets		52,398		52,060
TOTAL ASSETS	$	174,491	$	165,480
LIABILITIES AND SHAREHOLDERS’ EQUITY
Other liabilities	$	10,002	$	10,697
Shareholders’ equity		164,489		154,783
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	174,491	$	165,480

Condensed Statements of Income	Year Ended December 31
	2012		2011		2010
Income
Dividends from subsidiaries	$	6,125	$	6,500	$	6,250
Interest income		174		128		72
Management fee and other		2,037		1,201		1,340
Total income		8,336		7,829		7,662
Expenses
Compensation and benefits		2,424		2,267		2,286
Occupancy and equipment		370		370		356
Audit fees		351		378		476
Other		945		1,089		932
Total expenses		4,090		4,104		4,050
Income before income tax benefit and equity in undistributed earnings of subsidiaries		4,246		3,725		3,612
Federal income tax benefit		673		958		896
		4,919		4,683		4,508
Undistributed earnings of subsidiaries		7,287		5,527		4,537
Net income	$	12,206	$	10,210	$	9,045

Condensed Statements of Cash Flows	Year Ended December 31
	2012			2011			2010
OPERATING ACTIVITIES
Net income	$	12,206		$	10,210		$	9,045
Adjustments to reconcile net income to cash provided by operations
Undistributed earnings of subsidiaries		(7,287	)		(5,527	)		(4,537	)
Undistributed earnings of equity securities without readily determinable fair values		(459	)		160			(7	)
Share-based payment awards		643			615			650
Depreciation		114			123			147
Net amortization of investment securities		4			7			5
Deferred income tax expense (benefit)		425			(48	)		(172	)
Changes in operating assets and liabilities which (used) provided cash
Other assets		(513	)		7			305
Accrued interest and other liabilities		(98	)		757			1,883
NET CASH PROVIDED BY OPERATING ACTIVITIES		5,035			6,304			7,319
INVESTING ACTIVITIES
Activity in available-for-sale securities
Maturities, calls, and sales		370			585			110
Purchases		—			(3,000	)		—
(Purchases) sales of equipment and premises		(239	)		(87	)		247
Advances to subsidiaries		(50	)		—			(250	)
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES		81			(2,502	)		107
FINANCING ACTIVITIES
Net (decrease) increase in other borrowed funds		(597	)		2,772			(1,550	)
Cash dividends paid on common stock		(6,074	)		(5,770	)		(5,421	)
Proceeds from the issuance of common stock		2,279			2,302			2,208
Common stock repurchased		(1,361	)		(1,507	)		(2,020	)
Common stock purchased for deferred compensation obligations		(505	)		(426	)		(514	)
NET CASH USED IN FINANCING ACTIVITIES		(6,258	)		(2,629	)		(7,297	)
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS		(1,142	)		1,173			129
Cash and cash equivalents at beginning of year		1,474			301			172
CASH AND CASH EQUIVALENTS AT END OF YEAR	$	332		$	1,474		$	301

XML

Fair Value

12 Months Ended

Dec. 31, 2012

Fair Value [Abstract]

FAIR VALUE

NOTE 20 – 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 December 31, 2010. As the markets for these securities normalized and established regular trading patterns, we measured preferred stocks utilizing Level 1 inputs and the auction rate money market preferred security utilizing Level 2 inputs as of December 31, 2011 and continued to measure at these levels as of December 31, 2012.

The table below represents the activity in auction rate money market preferred and preferred stock AFS securities measured with Level 3 inputs on a recurring basis for the year ended December 31, 2011:

	Auction Rate Money Market Preferred			Preferred Stocks
Level 3 inputs—January 1, 2011	$	2,865		$	6,936
Calls		—			(1,000	)
Transfer to Level 1 inputs		—			(5,033	)
Transfer to Level 2 inputs		(2,049	)		—
Net unrealized losses on AFS securities		(816	)		(903	)
Level 3 inputs—December 31, 2011	$	—		$	—

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 subject to nonrecurring fair value adjustments as Level 2.

Loans: For variable rate loans with no significant change in credit risk, fair values are based on carrying values. Fair values for fixed rate loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. The resulting amounts are adjusted to estimate the effect of changes in the credit quality of borrowers since the loans were originated. Upon reviewing our assumptions related to the estimation of the fair value of loans, we transferred loans with an estimated fair value of $751,009 as of December 31, 2012 from nonrecurring Level 2 assets to nonrecurring Level 3 assets. As such, we classify loans as level 3 assets.

We do not record loans at fair value on a recurring basis. However, from time to time, loans are classified as impaired and a specific allowance for loan 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. Due to the inherent level of estimation in the valuation process, we record impaired loans as nonrecurring Level 3.

The table below lists the quantitative information about impaired loans measured utilizing Level 3 fair value measurements as of December 31, 2012:

Valuation Techniques	Fair Value	Unobservable Input	Range
		Duration of cash flows	14 - 120 Months
Discounted cash flow	$10,522	Reduction in interest rate from original loan terms	5.00% - 6.25%
		Discount applied to collateral appraisal:
		Real Estate	20% - 30%
		Equipment	50%
Discounted appraisal value	$11,499	Livestock	50%
		Cash crop inventory	50%
		Other inventory	75%
		Accounts receivable	75%

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. Acquisition intangibles and goodwill are typically qualitatively evaluated to determine if it is more likely than not that the carrying balance is impaired. If it is determined that the carrying balance of acquisition intangibles or goodwill is more likely than not to be impaired, we perform a cash flow valuation to determine the extent of the potential impairment. If the testing resulted in impairment, we would classify goodwill and other acquisition intangibles subjected to nonrecurring fair value adjustments as Level 3. During 2012 and 2011 there were no impairments recorded on goodwill and other acquisition intangibles.

Equity securities without readily determinable fair values: Included in equity securities without readily determinable fair values are FHLB Stock and FRB Stock as well as our ownership interests in Corporate Settlement Solutions and Valley Financial Corporation. The investment in Corporate Settlement Solutions, a title insurance company, was made in the 1st quarter 2007. The Corporation is not the managing entity of Corporate Settlement Solutions, LLC, and accounts for its investment in that entity under the equity method of accounting. Valley Financial Corporation is the parent company of 1st State Bank in Saginaw, Michigan, which is a de novo bank that opened in 2005. The Corporation made investments in Valley Financial Corporation in 2004 and in 2007.

The lack of an active market, or other independent sources to validate fair value estimates coupled with the impact of future capital calls and transfer restrictions, is an inherent limitation in the valuation process. As the fair values of these investments are not readily determinable, they are not disclosed under a specific fair value hierarchy; however, they are reviewed quarterly for impairment. If we were to record an impairment adjustment related to these securities, it would be classified as a nonrecurring Level 3 fair value adjustment. During 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. Upon reviewing our assumptions related to the estimation of the fair value of loans, we transferred foreclosed assets with an estimated fair value of $2,018 as of December 31, 2012 from nonrecurring Level 2 assets to nonrecurring Level 3 assets. Due to the inherent level of estimation in the valuation process, we record foreclosed assets as nonrecurring Level 3.

The table below lists the quantitative information related to foreclosed assets measured utilizing Level 3 fair value measurements as of December 31, 2012:

Valuation Technique	Fair Value	Unobservable Input	Range
		Discount applied to collateral appraisal:
		Real Estate	20% -30%
Discounted appraisal value	$2,018
		Equipment	50%

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 we have elected to carry at fair value was as follows for the years ended December 31:

	2012			2011
Borrowings carried at fair value—beginning of year	$	5,242		$	10,423
Paydowns and maturities		(5,209	)		(5,000	)
Net unrealized change in fair value		(33	)		(181	)
Borrowings carried at fair value—December 31	$	—		$	5,242
Unpaid principal balance—December 31	$	—		$	5,000

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 December 31:

	2012
	Carrying Value			Estimated Fair Value			(Level 1)		(Level 2)		(Level 3)
ASSETS
Cash and demand deposits due from banks	$	24,920		$	24,920		$	24,920	$	—	$	—
Certicates of deposit held in other financial institutions		4,465			4,475			—		4,475		—
Mortgage loans available-for-sale		3,633			3,680			—		3,680		—
Total loans		772,753			784,964			—		—		784,964
Less allowance for loan losses		(11,936	)		(11,936	)		—		—		(11,936	)
Net loans		760,817			773,028			—		—		773,028
Accrued interest receivable		5,227			5,227			5,227		—		—
Equity securities without readily determinable fair values (1)		18,118			18,118			—		—		—
Originated mortgage servicing rights		2,285			2,285			—		2,285		—
LIABILITIES
Deposits without stated maturities		553,332			553,332			553,332		—		—
Deposits with stated maturities		464,335			472,630			—		472,630		—
Borrowed funds		241,001			248,822			—		248,822		—
Accrued interest payable		751			751			751		—		—

	2011
	Carrying Value			Estimated Fair Value			(Level 1)		(Level 2)			(Level 3)
ASSETS
Cash and demand deposits due from banks	$	28,590		$	28,590		$	28,590	$	—		$	—
Certicates of deposit held in other financial institutions		8,924			8,977			—		8,977			—
Mortgage loans available-for-sale		3,205			3,252			—		3,252			—
Total loans		750,291			769,177			—		743,927			25,250
Less allowance for loan losses		(12,375	)		(12,375	)		—		(8,255	)		(4,120	)
Net loans		737,916			756,802			—		735,672			21,130
Accrued interest receivable		5,848			5,848			5,848		—			—
Equity securities without readily determinable fair values (1)		17,189			17,189			—		—			—
Originated mortgage servicing rights		2,374			2,374			—		2,374			—
LIABILITIES
Deposits without stated maturities		476,627			476,627			476,627		—			—
Deposits with stated maturities		481,537			499,644			—		499,644			—
Borrowed funds		210,894			222,538			—		222,538			—
Accrued interest payable		967			967			967		—			—

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

Financial Instruments Recorded at Fair Value

The table below presents the recorded amount of assets and liabilities measured at fair value on December 31:

	2012											2011
Description	Total		(Level 1)			(Level 2)			(Level 3)			Total		(Level 1)			(Level 2)			(Level 3)
Recurring items
Trading securities
States and political subdivisions	$	1,573	$	—		$	1,573		$	—		$	4,710				$	4,710		$	—
Available-for-sale investment securities
Government-sponsored enterprises		25,776		—			25,776			—			397					397			—
States and political subdivisions		182,743		—			182,743			—			174,938					174,938			—
Auction rate money market preferred		2,778		—			2,778			—			2,049					2,049			—
Preferred stock		6,363		6,363			—			—			5,033		5,033			—			—
Mortgage-backed		155,345		—			155,345			—			143,602					143,602			—
Collateralized mortgage obligations		131,005		—			131,005			—			99,101					99,101			—
Total available-for-sale investment securities		504,010		6,363			497,647			—			425,120		5,033			420,087			—
Borrowed funds		—		—			—			—			5,242		—			5,242			—
Nonrecurring items
Impaired loans		22,021		—			—			22,021			21,130		—			—			21,130
Originated mortgage servicing rights		2,285		—			2,285			—			2,374		—			2,374			—
Foreclosed assets		2,018		—			—			2,018			1,876		—			1,876			—
	$	531,907	$	6,363		$	501,505		$	24,039		$	460,452	$	5,033		$	434,289		$	21,130
Percent of assets and liabilities measured at fair value				1.20	%		94.28	%		4.52	%				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 years ended December 31:

	2012									2011
Description	Trading Losses			Other Gains and (Losses)			Total			Trading Losses			Other Gains and (Losses)			Total
Recurring items
Trading securities	$	(52	)	$	—		$	(52	)	$	(78	)	$	—		$	(78	)
Borrowed funds		—			33			33			—			181			181
Nonrecurring items
Foreclosed assets		—			(166	)		(166	)		—			(82	)		(82	)
Originated mortgage servicing rights		—			(58	)		(58	)		—			(243	)		(243	)
Total	$	(52	)	$	(191	)	$	(243	)	$	(78	)	$	(144	)	$	(222	)

XML

Benefit Plans (Details 5) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010
Fair values of the Corporations pension plan assets by asset category
Fair values of the Corporation's pension plan assets	$ 9,650	$ 8,603	$ 8,900
Short-term investments [Member]
Fair values of the Corporations pension plan assets by asset category
Fair values of the Corporation's pension plan assets	80	16
Equity investments [Member]
Fair values of the Corporations pension plan assets by asset category
Fair values of the Corporation's pension plan assets	4,738	4,230
Level 2 [Member]
Fair values of the Corporations pension plan assets by asset category
Fair values of the Corporation's pension plan assets	9,650	8,603
Level 2 [Member] | Short-term investments [Member]
Fair values of the Corporations pension plan assets by asset category
Fair values of the Corporation's pension plan assets	80	16
Level 2 [Member] | Equity investments [Member]
Fair values of the Corporations pension plan assets by asset category
Fair values of the Corporation's pension plan assets	4,738	4,230
Fixed income [Member]
Fair values of the Corporations pension plan assets by asset category
Fair values of the Corporation's pension plan assets	4,832	4,357
Fixed income [Member] | Level 2 [Member]
Fair values of the Corporations pension plan assets by asset category
Fair values of the Corporation's pension plan assets	$ 4,832	$ 4,357

XML

AFS Securities (Details 1) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2012
Amortized cost and fair value of available-for-sale securities by contractual maturity
Maturing, Due in One Year or Less	$ 11,670
Maturing, After One Year But Within Five Years	36,229
Maturing, After Five Years But Within Ten Years	111,658
Maturing, After Ten Years	40,229
Securities With Variable Monthly Payments or Noncontractual Maturities	290,634
Total	490,420
Maturing, Due in One Year or Less, Fair value	11,746
Maturing, After One Year But Within Five Years, Fair value	37,759
Maturing, After Five Years But Within Ten Years, Fair value	117,884
Maturing, After Ten Years, Fair value	41,130
Securities With Variable Monthly Payments or Noncontractual Maturities, Fair value	295,491
Total, Fair value	504,010
Auction rate money market preferred [Member]
Amortized cost and fair value of available-for-sale securities by contractual maturity
Securities With Variable Monthly Payments or Noncontractual Maturities	3,200
Total	3,200
Collateralized mortgage obligations [Member]
Amortized cost and fair value of available-for-sale securities by contractual maturity
Securities With Variable Monthly Payments or Noncontractual Maturities	128,378
Total	128,378
Government sponsored enterprises [Member]
Amortized cost and fair value of available-for-sale securities by contractual maturity
Maturing, After One Year But Within Five Years	72
Maturing, After Five Years But Within Ten Years	25,596
Total	25,668
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	11,670
Maturing, After One Year But Within Five Years	36,157
Maturing, After Five Years But Within Ten Years	86,062
Maturing, After Ten Years	40,229
Total	174,118
Preferred stocks [Member]
Amortized cost and fair value of available-for-sale securities by contractual maturity
Securities With Variable Monthly Payments or Noncontractual Maturities	6,800
Total	6,800
Mortgage-backed securities [Member]
Amortized cost and fair value of available-for-sale securities by contractual maturity
Securities With Variable Monthly Payments or Noncontractual Maturities	152,256
Total	$ 152,256

XML

Minimum Regulatory Capital Requirements (Tables)

12 Months Ended

Dec. 31, 2012

Deposits and Minimum Regulatory Capital Requirements [Abstract]

Summary of Compliance with Regulatory Capital Requirements

	Actual					Minimum Capital Requirement					Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
December 31, 2012
Total capital to risk weighted assets
Isabella Bank	$	112,498		13.40	%	$	67,150		8.00	%	$	83,937		10.00	%
Consolidated		123,388		14.48			68,161		8.00			N/A		N/A
Tier 1 capital to risk weighted assets
Isabella Bank		101,988		12.15			33,575		4.00			50,362		6.00
Consolidated		112,722		13.23			34,080		4.00			N/A		N/A
Tier 1 capital to average assets
Isabella Bank		101,988		7.57			53,916		4.00			67,395		5.00
Consolidated		112,722		8.29			54,411		4.00			N/A		N/A

	Actual					Minimum Capital Requirement					Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
December 31, 2011
Total capital to risk weighted assets
Isabella Bank	$	104,542		13.06	%	$	64,028		8.00	%	$	80,035		10.00	%
Consolidated		115,172		14.17			65,009		8.00			N/A		N/A
Tier 1 capital to risk weighted assets
Isabella Bank		94,508		11.81			32,014		4.00			48,021		6.00
Consolidated		104,987		12.92			32,505		4.00			N/A		N/A
Tier 1 capital to average assets
Isabella Bank		94,508		7.44			50,808		4.00			63,510		5.00
Consolidated		104,987		8.18			51,317		4.00			N/A		N/A

XML

Operating Segments

12 Months Ended

Dec. 31, 2012

Operating Segments [Abstract]

OPERATING SEGMENTS

NOTE 22 – OPERATING SEGMENTS

Our reportable segments are based on legal entities that account for at least 10 percent of net operating results. Retail banking operations for 2012, 2011, and 2010 represent approximately 90% or greater of our total assets and operating results. As such, no additional segment information is presented.

XML

Nature of Operations and Summary of Significant Accounting Policies (Policies)

12 Months Ended

Dec. 31, 2012

Nature of Operations and Summary of Significant Accounting Policies [Abstract]

BASIS OF PRESENTATION AND CONSOLIDATION

BASIS OF PRESENTATION AND CONSOLIDATION: The consolidated financial statements include the accounts of Isabella Bank Corporation, a financial services holding company, and its wholly owned subsidiaries, Isabella Bank and Financial Group Information Services. All intercompany balances and accounts have been eliminated in consolidation.

NATURE OF OPERATIONS

NATURE OF OPERATIONS: Isabella Bank Corporation is a financial services holding company offering a wide array of financial products and services in several mid-Michigan counties. Our banking subsidiary, Isabella Bank, offers banking services through 26 locations, 24 hour banking services locally and nationally through shared automatic teller machines, 24 hour online banking, and direct deposits to businesses, institutions, and individuals. Lending services offered include commercial loans, agricultural loans, residential real estate loans, and consumer loans. Deposit services include interest and noninterest bearing checking accounts, savings accounts, money market accounts, and certificates of deposit. Other related financial products include trust and investment services, safe deposit box rentals, and credit life insurance. Active competition, principally from other commercial banks, savings banks and credit unions, exists in all of our principal markets. Our results of operations can be significantly affected by changes in interest rates or changes in the local economic environment.

Financial Group Information Services provides information technology services to Isabella Bank Corporation and our subsidiaries.

USE OF ESTIMATES

USE OF ESTIMATES: In preparing consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, we are required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated balance sheet and reported amounts of revenues and expenses during the reporting year. Actual results could differ from those estimates.

Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the ALLL, the fair value of certain AFS investment securities, the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans, valuation of goodwill and other intangible assets, and determinations of assumptions in accounting for the defined benefit pension plan.

FAIR VALUE MEASUREMENTS

FAIR VALUE MEASUREMENTS: Fair value refers to the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants in the market in which the reporting entity transacts such sales or transfers based on the assumptions market participants would use when pricing an asset or liability. Assumptions are developed based on prioritizing information within a fair value hierarchy that gives the highest priority to quoted prices in active markets and the lowest priority to unobservable data, such as the reporting entity’s own data. We may choose to measure eligible items at fair value at specified election dates. Unrealized gains and losses on items for which the fair value measurement option has been elected are reported in earnings at each subsequent reporting date. The fair value option (i) may be applied instrument by instrument, with certain exceptions, allowing us to record identical financial assets and liabilities at fair value or by another measurement basis permitted under generally accepted accounting principles, (ii) is irrevocable (unless a new election date occurs) and (iii) is applied only to entire instruments and not to portions of instruments.

For assets and liabilities recorded at fair value, it is our policy to maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements for those financial instruments for which there is an active market. In cases where the market for a financial asset or liability is not active, we include appropriate risk adjustments that market participants would make for nonperformance and liquidity risks when developing fair value measurements. Fair value measurements for assets and liabilities for which limited or no observable market data exists are accordingly based primarily upon estimates, are often calculated based on the economic and competitive environment, the characteristics of the asset or liability and other factors. Therefore, the results cannot be determined with precision and may not be realized in an actual sale or immediate settlement of the asset or liability. Additionally, there may be inherent weaknesses in any calculation technique, and changes in the underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect the results of current or future values.

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

Fair Value Hierarchy

Under fair value measurement and disclosure authoritative guidance, we group assets and liabilities measured at fair value into three levels, based on the markets in which the assets and liabilities are traded, and the reliability of the assumptions used to determine fair value, based on the prioritization of inputs in the valuation techniques. These levels are:

Level 1:	Valuation is based upon quoted prices for identical instruments traded in active markets.
Level 2:	Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model based valuation techniques for which all significant assumptions are observable in the market.
Level 3:	Valuation is generated from model based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability.

The asset’s or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques maximize the use of observable inputs and minimize the use of unobservable inputs. Transfers between measurement levels are recognized at the end of reporting periods.

For further discussion of fair value considerations, refer to “Note 20 – Fair Value.”

SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK

SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK: Most of our activities conducted are with customers located within the central Michigan area. A significant amount of our outstanding loans are secured by commercial and residential real estate. Other than these types of loans, there is no significant concentration to any other industry or any one customer.

CASH AND CASH EQUIVALENTS

CASH AND CASH EQUIVALENTS: For purposes of the consolidated statements of cash flows, cash and cash equivalents include cash and balances due from banks, federal funds sold, and other deposit accounts. Generally, federal funds sold are for a one day period. We maintain deposit accounts in various financial institutions which generally exceed federally insured limits or are not insured. We do not believe we are exposed to any significant interest, credit or other financial risk as a result of these deposits.

CERTIFICATES OF DEPOSIT HELD IN OTHER FINANCIAL INSTITUTIONS

CERTIFICATES OF DEPOSIT HELD IN OTHER FINANCIAL INSTITUTIONS: Certificates of deposits held in other financial institutions consist of interest bearing certificates of deposit that mature within 3 years and are carried at cost.

TRADING SECURITIES

TRADING SECURITIES: We engage in trading activities of our own accounts. Securities that are held principally for resale in the near term are recorded in the trading assets account at fair value with changes in fair value recorded in noninterest income. Interest income is included in net interest income.

AFS SECURITIES

AFS SECURITIES: Purchases of investment securities are generally classified as AFS. However, we may elect to classify securities as either held to maturity or trading. Securities classified as AFS are recorded at fair value, with unrealized gains and losses, net of the effect of deferred income taxes, excluded from earnings and reported in other comprehensive income. Included in AFS securities are auction rate money market preferreds and preferred stocks. These investments are considered equity securities for federal income tax purposes, and as such, no estimated federal income tax impact is expected or recorded. Auction rate money market preferred securities and preferred stocks are recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Realized gains and losses on the sale of AFS securities are determined using the specific identification method.

AFS securities are reviewed quarterly for possible OTTI. In determining whether an OTTI exists for debt securities, we must assert that: (a) we do not have the intent to sell the security; and (b) it is more likely than not we will not have to sell the security before recovery of its cost basis. If these conditions are not met, we must recognize an OTTI charge through earnings for the difference between the debt security’s amortized cost basis and its fair value, and such amount is included in noninterest income. For debt securities that do not meet the above criteria, and we do not expect to recover the security’s amortized cost basis, the security is considered other-than-temporarily impaired. For these debt securities, we separate the total impairment into the credit risk loss component and the amount of the loss related to market and other risk factors. In order to determine the amount of the credit loss for a debt security, we calculate the recovery value by performing a discounted cash flow analysis based on the current cash flows and future cash flows we expect to recover. The amount of the total OTTI related to the credit risk is recognized in earnings and is included in noninterest income. The amount of the total OTTI related to other risk factors is recognized as a component of other comprehensive income. For debt securities that have recognized an OTTI through earnings, if through subsequent evaluation there is a significant increase in the cash flow expected, the difference between the amortized cost basis and the cash flows expected to be collected is accreted as interest income.

AFS equity securities are reviewed for OTTI at each reporting date. This evaluation considers a number of factors including, but not limited to, the length of time and extent to which the fair value has been less than cost, the financial condition and near term prospects of the issuer, and our ability and intent to hold the securities until fair value recovers. If it is determined that we do not have the ability and intent to hold the securities until recovery or that there are conditions that indicate that a security may not recover in value then the difference between the fair value and the cost of the security is recognized in earnings and is included in noninterest income.

LOANS

LOANS: Loans that we have the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at their outstanding principal balance adjusted for any charge-offs, the ALLL, and any deferred fees or costs on originated loans. 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 agricultural, commercial and mortgage loans is discontinued at the time the loan is 90 days or more past due unless the credit is well secured and in the process of collection. Consumer loans are typically charged off no later than 180 days past due. Past due status is based on contractual terms of the loan. In all cases, loans are placed 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 ALLL. The interest on these loans is accounted for on the cash-basis, until qualifying for return to accrual status. Loans are returned to accrual status when all principal and interest amounts contractually due are brought current and future payments are reasonably assured. For impaired loans not classified as nonaccrual, interest income continues to be accrued over the term of the loan based on the principal amount outstanding.

ALLOWANCE FOR LOAN LOSSES

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

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

The ALLL consists of specific, general, and unallocated components. The specific component relates to loans that are deemed to be impaired. For such loans that are also analyzed for specific allowance allocations, an allowance is established when the discounted cash flows or collateral value or observable market price of the impaired loan is lower than the carrying value of that loan. The general component covers non classified loans and is based on historical loss experience. An unallocated component is maintained to cover uncertainties that we believe affect our estimate of probable losses based on qualitative factors. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.

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

1. There has been a charge-off of its principal balance;

2. The loan has been classified as a TDR; or

3. The loan is in nonaccrual status.

Impairment is measured on a loan by loan basis for commercial and agricultural loans by 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.

LOANS HELD FOR SALE

LOANS HELD FOR SALE: Mortgage loans held for sale in the secondary market are carried at the lower of cost or fair value as determined by aggregating outstanding commitments from investors or current investor yield requirements. Net unrealized losses, if any, would be recognized as a component of other noninterest expenses.

Mortgage loans held for sale are sold with the mortgage servicing rights retained by us. The carrying value of mortgage loans sold is reduced by the cost allocated to the associated mortgage servicing rights. Gains or losses on sales of mortgage loans are recognized based on the difference between the selling price and the carrying value of the related mortgage loans sold.

TRANSFERS OF FINANCIAL ASSETS

TRANSFERS OF FINANCIAL ASSETS: Transfers of financial assets, including mortgage loans and participation loans are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is determined to be surrendered when 1) the assets have been legally isolated from us, 2) the transferee obtains the right (free of conditions that constrain it from taking advantage of the right) to pledge or exchange the transferred assets, and 3) we do not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity. Other than servicing, we have no substantive continuing involvement related to these loans.

SERVICING

SERVICING: Servicing assets are recognized as separate assets when rights are acquired through purchase or through sale of financial assets. We have no purchased servicing rights. For sales of mortgage loans, a portion of the cost of originating the loan is allocated to the servicing right based on relative fair value. Fair value is based on market prices for comparable mortgage servicing contracts, when available, or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as the cost to service, the discount rate, the custodial earnings rate, an inflation rate, ancillary income, prepayment speeds and default rates and losses.

Servicing assets are evaluated for impairment based upon the fair value of the rights as compared to amortized cost. Impairment is determined by stratifying rights into tranches based on predominant risk characteristics, such as interest rate, loan type, and investor type. Impairment is recognized through a valuation allowance for an individual tranche, to the extent that fair value is less than the capitalized amount for the tranche. If we later determine that all or a portion of the impairment no longer exists for a particular tranche, a reduction of the valuation allowance may be recorded as an increase to income. Capitalized servicing rights are reported in other assets and are amortized into noninterest income in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets. The unpaid principal balance of mortgages serviced for others was $303,351 and $304,626 with capitalized servicing rights of $2,285 and $2,374 at December 31, 2012 and 2011, respectively.

Servicing fee income is recorded for fees earned for servicing loans for others. The fees are based on a contractual percentage of the outstanding principal; or a fixed amount per loan and are recorded as income when earned. We recorded servicing fee revenue of $757, $732, and $760 related to residential mortgage loans serviced for others during 2012, 2011, and 2010, respectively and is included in other noninterest income.

LOANS ACQUIRED THROUGH TRANSFER

LOANS ACQUIRED THROUGH TRANSFER: Authoritative accounting guidance related to acquired loans requires that a valuation allowance for loans acquired in a transfer, including in a business combination, reflect only losses incurred after acquisition, and should not be recorded at acquisition. This standard applies to any loan acquired in a transfer that shows evidence of credit quality deterioration since it was originated.

FORECLOSED ASSETS

FORECLOSED ASSETS: Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at the lower of our carrying amount or fair value less estimated selling costs at the date of transfer, establishing a new cost basis. Any write-downs based on the asset’s fair value at the date of acquisition are charged to the ALLL. After foreclosure, property held for sale is carried at the lower of the new cost basis or fair value less costs to sell. Impairment losses on property to be held and used are measured at the amount by which the carrying amount of property exceeds its fair value. Costs relating to holding these assets are expensed as incurred. We periodically perform valuations and any subsequent write-downs are recorded as a charge to operations, if necessary, to reduce the carrying value of a property to the lower of our carrying amount or fair value less costs to sell. Foreclosed assets of $2,018 and $1,876 as of December 31, 2012 and 2011, respectively, are included in other assets.

PREMISES AND EQUIPMENT

PREMISES AND EQUIPMENT: Land is carried at cost. Buildings and equipment are carried at cost, less accumulated depreciation which is computed principally by the straight-line method based upon the estimated useful lives of the related assets, which range from 3 to 40 years. Major improvements are capitalized and appropriately amortized based upon the useful lives of the related assets or the expected terms of the leases, if shorter, using the straight-line method. Maintenance, repairs and minor alterations are charged to current operations as expenditures occur. We annually review these assets to determine whether carrying values have been impaired.

FDIC INSURANCE PREMIUM

FDIC INSURANCE PREMIUM: Included in other assets were prepaid FDIC assessments of $1,804 and $2,588 as of December 31, 2012 and 2011, respectively.

EQUITY SECURITIES WITHOUT READILY DETERMINABLE FAIR VALUES

EQUITY SECURITIES WITHOUT READILY DETERMINABLE FAIR VALUES: Included in equity securities without readily determinable fair values are FHLB Stock and FRB Stock as well as our ownership interests in Corporate Settlement Solutions and Valley Financial Corporation. The investment in Corporate Settlement Solutions, a title insurance company, was made in the 1st quarter 2007. The Corporation is not the managing entity of Corporate Settlement Solutions, LLC, and accounts for its investment in that entity under the equity method of accounting. Valley Financial Corporation is the parent company of 1st State Bank in Saginaw, Michigan, which is a de novo bank that opened in 2005. The Corporation made investments in Valley Financial Corporation in 2004 and in 2007.

Equity securities without readily determinable fair values consist of the following as of December 31:

	2012		2011
Federal Home Loan Bank Stock	$	7,850	$	7,380
Investment in Corporate Settlement Solutions		7,040		6,611
Federal Reserve Bank Stock		1,879		1,879
Investment in Valley Financial Corporation		1,000		1,000
Other		349		319
Total	$	18,118	$	17,189

EQUITY COMPENSATION PLAN

EQUITY COMPENSATION PLAN: At December 31, 2012, the Directors Plan had 170,566 shares eligible to be issued to participants, for which the Rabbi Trust held 5,130 shares. We had 218,023 shares to be issued in 2011, with 16,585 shares held in the Rabbi Trust. Compensation costs relating to share based payment transactions are recognized as the services are rendered, with the cost measured based on the fair value of the equity or liability instruments issued (see “Note 17 – Benefit Plans”). We have no other equity-based compensation plans.

CORPORATE OWNED LIFE INSURANCE

CORPORATE OWNED LIFE INSURANCE: We have purchased life insurance policies on key members of management. In the event of death of one of these individuals, we would receive a specified cash payment equal to the face value of the policy. Such policies are recorded at their cash surrender value, or the amount that can be realized on the balance sheet dates. Increases in cash surrender value in excess of single premiums paid are reported as other noninterest income.

As of December 31, 2012 and 2011, the present value of the post retirement benefits payable by us to the covered employees was estimated to be $2,657 and $2,633, respectively, and is included in accrued interest payable and other liabilities . The periodic policy maintenance costs were $24, $60, and $68 for 2012, 2011, and 2010, respectively and is included in other noninterest expenses.

ACQUISITION INTANGIBLES AND GOODWILL

ACQUISITION INTANGIBLES AND GOODWILL: We previously acquired branch facilities and related deposits in business combinations accounted for as a purchase. The acquisitions included amounts related to the valuation of customer deposit relationships (core deposit intangibles). Core deposit intangibles arising from acquisitions are included in goodwill and other intangible assets are being amortized over their estimated lives and evaluated for potential impairment on at least an annual basis. Goodwill represents the excess of purchase price over identifiable assets, is not amortized but is evaluated for impairment on at least an annual basis. Acquisition intangibles and goodwill are typically qualitatively evaluated to determine if it is more likely than not that the carrying balance is impaired. If it is determined that the carrying balance is more likely than not to be impaired, we perform a cash flow valuation to determine the extent of the potential impairment. This valuation method requires a significant degree of our judgment. In the event the projected undiscounted net operating cash flows for these intangible assets are less than the carrying value, the asset is recorded at fair value as determined by the valuation model.

OFF BALANCE SHEET CREDIT RELATED FINANCIAL INSTRUMENTS

OFF BALANCE SHEET CREDIT RELATED FINANCIAL INSTRUMENTS: In the ordinary course of business, we have entered into commitments to extend credit, including commitments under credit card arrangements, home equity lines of credit, commercial letters of credit, and standby letters of credit. Such financial instruments are recorded only when funded.

FEDERAL INCOME TAXES

FEDERAL INCOME TAXES: Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method. Under this method, the net deferred tax assets or liability is determined based on the tax effects of the temporary differences between the book and tax bases on the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws. Valuation allowances are established, where necessary, to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable or refundable for the year plus or minus the change during the year in deferred tax assets and liabilities.

We analyze our filing positions in the jurisdictions where it is required to file income tax returns, as well as all open tax years in these jurisdictions. We have also elected to retain our existing accounting policy with respect to the treatment of interest and penalties attributable to income taxes, and continue to reflect any charges for such, to the extent they arise, as a component of our noninterest expenses.

MARKETING COSTS

MARKETING COSTS: Marketing costs are expensed as incurred (see “Note 11 – Other Noninterest Expenses”).

RECLASSIFICATIONS

RECLASSIFICATIONS: Certain amounts reported in the 2011 and 2010 consolidated financial statements have been reclassified to conform with the 2012 presentation.

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.

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.

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.

Goodwill and Other

ASU No. 2012-02: “Intangibles—Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment”

In August 2012, ASU No. 2012-02 amended ASC Topic 350, “Goodwill and Other” to simplify the testing of intangible assets with indefinite lives. This update will allow for a qualitative assessment of intangible assets with indefinite lives to determine whether or not it is necessary to perform the impairment test described in ASC Topic 350. While the new authoritative guidance was effective for fiscal years beginning after September 15, 2012, we elected to early adopt the guidance as of December 31, 2012. This standard did not have any impact on our consolidated financial statements.

Business Combinations

ASU No. 2012-06: “Business Combinations (Topic 805): Subsequent Accounting for an Indemnification Asset Recognized at the Acquisition Date as a Result of a Government-Assisted Acquisition of a Financial Institution”

In October 2012, ASU No. 2012-06 amended ASC Topic 805, “Business Combinations” to clarify the applicable guidance for subsequently measuring an indemnification asset recognized as part of a government assisted acquisition of a financial institution. The new authoritative guidance is effective for fiscal years beginning after December 15, 2012 and at this time is not expected to have any impact on our consolidated financial statements.

XML

Consolidated Statements of Cash Flows (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010
OPERATING ACTIVITIES
Net income	$ 12,206	$ 10,210	$ 9,045
Reconciliation of net income to net cash provided by operations:
Provision for loan losses	2,300	3,826	4,857
Impairment of foreclosed assets	166	82	180
Depreciation	2,417	2,521	2,522
Amortization and impairment of originated mortgage servicing rights	787	714	543
Amortization of acquisition intangibles	260	299	338
Net amortization of available-for-sale securities	2,277	1,689	1,153
Available-for-sale security impairment loss	282
Gain on sale of available-for-sale securities	(1,119)	(3)	(348)
Net unrealized losses on trading securities	52	78	94
Net gain on sale of mortgage loans	(1,576)	(538)	(610)
Net unrealized gains on borrowings measured at fair value	(33)	(181)	(227)
Increase in cash value of corporate owned life insurance	(698)	(609)	(642)
Realized gain on redemption of corporate owned life insurance			(21)
Share-based payment awards under equity compensation plan	643	615	650
Deferred income tax expense	616	389	179
Origination of loans held for sale	(99,353)	(57,584)	(72,106)
Proceeds from loan sales	100,501	56,099	73,815
Net changes in operating assets and liabilities which provided (used) cash:
Trading securities	3,085	1,049	7,632
Accrued interest receivable	621	(392)	376
Other assets	(2,610)	147	(1,914)
Accrued interest payable and other liabilities	(1,360)	449	1,005
Net cash provided by operating activities	19,464	18,860	26,521
INVESTING ACTIVITIES
Net change in certificates of deposit held in other financial institutions	4,459	6,884	(10,428)
Activity in available-for-sale securities
Sales	40,677	8,877	18,303
Maturities and calls	89,112	69,275	66,970
Purchases	(207,035)	(165,017)	(156,928)
Loan principal originations, net	(27,103)	(20,743)	(21,319)
Proceeds from sales of foreclosed assets	1,594	2,041	2,778
Purchases of premises and equipment	(3,578)	(2,520)	(3,232)
Purchases of corporate owned life insurance		(4,000)	(175)
Net cash used in investing activities	(101,874)	(105,203)	(103,877)
FINANCING ACTIVITIES
Acceptances and withdrawals of deposits, net	59,503	80,825	74,687
Increase in other borrowed funds	24,898	21,400	2,043
Cash dividends paid on common stock	(6,074)	(5,770)	(5,421)
Proceeds from issuance of common stock	2,279	2,302	2,208
Common stock repurchased	(1,361)	(1,507)	(2,020)
Common stock purchased for deferred compensation obligations	(505)	(426)	(514)
Net cash provided by financing activities	78,740	96,824	70,983
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS	(3,670)	10,481	(6,373)
Cash and cash equivalents at beginning of year	28,590	18,109	24,482
CASH AND CASH EQUIVALENTS AT END OF YEAR	24,920	28,590	18,109
SUPPLEMENTAL CASH FLOWS INFORMATION:
Interest paid	13,639	16,239	17,344
Federal income taxes paid	2,357	878	1,261
SUPPLEMENTAL NONCASH INVESTING AND FINANCING INFORMATION:
Transfers of loans to foreclosed assets	1,902	1,932	3,868
Common stock issued for deferred compensation obligations	619	773	475
Common stock repurchased from the Rabbi Trust	$ (619)	$ (697)	$ (537)

XML

Nature of Operations and Summary of Significant Accounting Policies (Tables)

12 Months Ended

Dec. 31, 2012

Nature of Operations and Summary of Significant Accounting Policies [Abstract]

Schedule of equity securities without fair values

	2012		2011
Federal Home Loan Bank Stock	$	7,850	$	7,380
Investment in Corporate Settlement Solutions		7,040		6,611
Federal Reserve Bank Stock		1,879		1,879
Investment in Valley Financial Corporation		1,000		1,000
Other		349		319
Total	$	18,118	$	17,189

XML

Borrowed Funds (Details Textual) (USD $) In Thousands, unless otherwise specified				12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2012 Unused lines of credit [Member]	Dec. 31, 2012 Without stated maturity dates [Member] Maximum [Member]	Dec. 31, 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
Total unused lines of credit			$ 108,646
Borrowed Funds (Additional Textual) [Abstract]
Fair value of securities sold under agreements to repurchase	143,322	99,869
Investment securities restricted to be pledged	$ 0

XML

Fair Value (Details 5) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2012	Dec. 31, 2011
Available-for-sale investment securities
Securities available for sale	$ 504,010	$ 425,120
Borrowed funds	0	5,242
Fair value, total	531,907	460,452
Level 1 [Member]
Available-for-sale investment securities
Fair value, total	6,363	5,033
Percent of assets and liabilities measured at fair value	1.20%	1.09%
Level 2 [Member]
Available-for-sale investment securities
Fair value, total	501,505	434,289
Percent of assets and liabilities measured at fair value	94.28%	94.32%
Level 3 [Member]
Available-for-sale investment securities
Fair value, total	24,029	21,130
Percent of assets and liabilities measured at fair value	4.52%	4.59%
Recurring items [Member]
Trading securities
Trading securities States and political subdivisions	1,573	4,710
Available-for-sale investment securities
Securities available for sale	504,010	425,120
Borrowed funds		5,242
Recurring items [Member] | Government sponsored enterprises [Member]
Available-for-sale investment securities
Securities available for sale	25,776	397
Recurring items [Member] | States and political subdivisions [Member]
Available-for-sale investment securities
Securities available for sale	182,743	174,938
Recurring items [Member] | Auction rate money market preferred [Member]
Available-for-sale investment securities
Securities available for sale	2,778	2,049
Recurring items [Member] | Preferred stock [Member]
Available-for-sale investment securities
Securities available for sale	6,363	5,033
Recurring items [Member] | Mortgage-backed [Member]
Available-for-sale investment securities
Securities available for sale	155,345	143,602
Recurring items [Member] | Collateralized mortgage obligations [Member]
Available-for-sale investment securities
Securities available for sale	131,005	99,101
Recurring items [Member] | Level 1 [Member]
Available-for-sale investment securities
Securities available for sale	6,363	5,033
Recurring items [Member] | Level 1 [Member] | Preferred stock [Member]
Available-for-sale investment securities
Securities available for sale	6,363	5,033
Recurring items [Member] | Level 2 [Member]
Trading securities
Trading securities States and political subdivisions	1,573	4,710
Available-for-sale investment securities
Securities available for sale	497,647	420,087
Borrowed funds		5,242
Recurring items [Member] | Level 2 [Member] | Government sponsored enterprises [Member]
Available-for-sale investment securities
Securities available for sale	25,776	397
Recurring items [Member] | Level 2 [Member] | States and political subdivisions [Member]
Available-for-sale investment securities
Securities available for sale	182,743	174,938
Recurring items [Member] | Level 2 [Member] | Auction rate money market preferred [Member]
Available-for-sale investment securities
Securities available for sale	2,778	2,049
Recurring items [Member] | Level 2 [Member] | Mortgage-backed [Member]
Available-for-sale investment securities
Securities available for sale	155,345	143,602
Recurring items [Member] | Level 2 [Member] | Collateralized mortgage obligations [Member]
Available-for-sale investment securities
Securities available for sale	131,005	99,101
Nonrecurring items [Member]
Available-for-sale investment securities
Impaired loans	22,021	21,130
Originated mortgage servicing right	2,285	2,374
Foreclosed assets	2,018	1,876
Nonrecurring items [Member] | Level 2 [Member]
Available-for-sale investment securities
Originated mortgage servicing right	2,285	2,374
Foreclosed assets		1,876
Nonrecurring items [Member] | Level 3 [Member]
Available-for-sale investment securities
Impaired loans	22,021	21,130
Foreclosed assets	$ 2,018

XML

Borrowed Funds (Tables)

12 Months Ended

Dec. 31, 2012

Borrowed Funds [Abstract]

Summary of borrowed funds

	2012					2011
	Amount		Rate			Amount		Rate
FHLB advances	$	152,000		2.05	%	$	142,242		3.16	%
Securities sold under agreements to repurchase without stated maturity dates		66,147		0.15	%		57,198		0.25	%
Securities sold under agreements to repurchase with stated maturity dates		16,284		3.57	%		16,696		3.51	%
Federal funds purchased		6,570		0.50	%		—		—
Total	$	241,001		1.59	%	$	216,136		2.42	%

Schedule of maturity and weighted average interest rates of FHLB advances

	2012					2011
	Amount		Rate			Amount		Rate
Fixed rate advances due 2012	$	—		—		$	17,000		2.97	%
One year putable fixed rate advances due 2012		—		—			15,000		4.10	%
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		10,000		0.48	%		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	$	152,000		2.05	%	$	142,242		3.16	%

Maturity and weighted average interest rates of securities sold

	2012					2011
	Amount		Rate			Amount		Rate
Repurchase agreements due 2012	$	—		—		$	428		2.08	%
Repurchase agreements due 2013		5,000		4.51	%		5,000		4.51	%
Repurchase agreements due 2014		10,872		3.15	%		10,869		3.12	%
Repurchase agreements due 2015		412		3.25	%		399		3.25	%
Total	$	16,284		3.57	%	$	16,696		3.51	%

Summary of short term borrowings

	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	$	66,147	$	57,466		0.20	%	$	57,198	$	45,397		0.25	%
Federal funds purchased		17,900		3,386		0.47	%		18,300		3,467		0.51	%

Summary of pledged certificates of deposit

	2012		2011
Pledged to secure borrowed funds	$	308,628	$	292,092
Pledged to secure repurchase agreements		143,322		99,869
Pledged for public deposits and for other purposes necessary or required by law		22,955		26,761
Total	$	474,905	$	418,722

XML

Trading Securities (Details) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2012	Dec. 31, 2011
Schedule of trading securities, at fair value
States and political subdivisions	$ 1,573	$ 4,710

XML

Premises and Equipment (Details Textual) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010
Premises and Equipment (Textual) [Abstract]
Depreciation expense	$ 2,417	$ 2,521	$ 2,522

XML

Consolidated Balance Sheets (USD $) In Thousands, unless otherwise specified	Dec. 31, 2012	Dec. 31, 2011
Cash and cash equivalents
Cash and demand deposits due from banks	$ 22,634	$ 24,514
Interest bearing balances due from banks	2,286	4,076
Total cash and cash equivalents	24,920	28,590
Certificates of deposit held in other financial institutions	4,465	8,924
Trading securities	1,573	4,710
AFS securities (amortized cost of $490,420 in 2012 and $414,614 in 2011)	504,010	425,120
Mortgage loans available-for-sale	3,633	3,205
Loans
Commercial	371,505	365,714
Agricultural	83,606	74,645
Residential real estate	284,148	278,360
Consumer	33,494	31,572
Total loans	772,753	750,291
Less allowance for loan losses	11,936	12,375
Net loans	760,817	737,916
Premises and equipment	25,787	24,626
Corporate owned life insurance	22,773	22,075
Accrued interest receivable	5,227	5,848
Equity securities without readily determinable fair values	18,118	17,189
Goodwill and other intangible assets	46,532	46,792
Other assets	12,784	12,930
TOTAL ASSETS	1,430,639	1,337,925
Deposits
Noninterest bearing	143,735	119,072
NOW accounts	181,259	163,653
Certificates of deposit under $100 and other savings	455,546	440,123
Certificates of deposit over $100	237,127	235,316
Total deposits	1,017,667	958,164
Borrowed funds ($0 in 2012 and $5,242 in 2011 at fair value)	241,001	216,136
Accrued interest payable and other liabilities	7,482	8,842
Total liabilities	1,266,150	1,183,142
Shareholders' equity
Common stock - no par value, 15,000,000 shares authorized; issued and outstanding 7,671,846 shares (including 5,130 shares held in the Rabbi Trust) in 2012 and 7,589,226 shares (including 16,585 shares held in the Rabbi Trust) in 2011	136,580	134,734
Shares to be issued for deferred compensation obligations	3,734	4,524
Retained earnings	19,168	13,036
Accumulated other comprehensive income	5,007	2,489
Total shareholders' equity	164,489	154,783
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$ 1,430,639	$ 1,337,925

XML

Benefit Plans (Tables)

12 Months Ended

Dec. 31, 2012

Benefit Plans [Abstract]

Changes in the projected benefit obligation, plan assets and Accrued pension benefit costs

	2012			2011
Change in benefit obligation
Benefit obligation, January 1	$	11,334		$	9,660
Interest cost		470			507
Actuarial loss		888			1,750
Benefits paid, including plan expenses		(483	)		(583	)
Benefit obligation, December 31		12,209			11,334
Change in plan assets
Fair value of plan assets, January 1		8,603			8,900
Investment return		778			148
Contributions		752			138
Benefits paid, including plan expenses		(483	)		(583	)
Fair value of plan assets, December 31		9,650			8,603
Deficiency in funded status at December 31, included on the consolidated balance sheets in accrued interest payable and other liabilities	$	(2,559	)	$	(2,731	)

	2012			2011
Change in accrued pension benefit costs
Accrued benefit cost at January 1	$	(2,731	)	$	(760	)
Contributions		752			138
Net periodic cost for the year		(251	)		(138	)
Net change in unrecognized actuarial loss and prior service cost		(329	)		(1,971	)
Accrued pension benefit cost at December 31	$	(2,559	)	$	(2,731	)

Summary of other comprehensive income

	2012			2011			2010
Change in unrecognized pension cost	$	(329	)	$	(1,971	)	$	(72	)
Tax effect		111			671			25
Net	$	(218	)	$	(1,300	)	$	(47	)

Components of net periodic benefit cost

	2012			2011			2010
Interest cost on projected benefit obligation	$	470		$	507		$	531
Expected return on plan assets		(511	)		(522	)		(491	)
Amortization of unrecognized actuarial net loss		292			153			153
Total	$	251		$	138		$	193

Actuarial assumptions used in determining the projected benefit obligation

	2012			2011			2010
Discount rate		3.75	%		4.22	%		5.36	%
Expected long-term rate of return		6.00	%		6.00	%		6.00	%

Actuarial weighted average assumptions used in determining the net periodic pension costs

	2012			2011			2010
Discount rate		4.22	%		5.36	%		6.10	%
Expected long-term return on plan assets		6.00	%		6.00	%		6.00	%

Fair values of the Corporations pension plan assets by asset category

	2012				2011
Description	Total		(Level 2)		Total		(Level 2)
Asset Category
Short-term investments	$	80	$	80	$	16	$	16
Common collective trusts
Fixed income		4,832		4,832		4,357		4,357
Equity investments		4,738		4,738		4,230		4,230
	$	9,650	$	9,650	$	8,603	$	8,603

Summary of Estimated future benefit payments

Year	Amount
2013	$	432
2014		526
2015		567
2016		567
2017		593
Years 2018 - 2022		3,281

Components of projected net periodic benefit cost

	2013
Interest cost on projected benefit obligation	$	450
Expected return on plan assets		(572	)
Amortization of unrecognized actuarial net loss		330
Net periodic benefit cost	$	208

Components of shares eligible to be issued under the Directors Plan

	2012				2011
	Eligible Shares		Market Value		Eligible Shares		Market Value
Unissued		165,436	$	3,598		201,438	$	4,774
Shares held in Rabbi Trust		5,130		112		16,585		393
Total		170,566	$	3,710		218,023	$	5,167

XML

Benefit Plans (Details 1) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010
Summary of other comprehensive income
Increase in unrecognized pension cost	$ (329)	$ (1,971)	$ (72)
Tax effect	111	671	25
Net unrealized loss on defined benefit pension plan	$ (218)	$ (1,300)	$ (47)

XML

Fair Value (Details 4) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010
ASSETS
Cash and demand deposits due from banks	$ 22,634	$ 24,514
Certicates of deposit held in other financial institutions	4,465	8,924
Total loans	772,753	750,291
Less allowance for loan losses	(11,936)	(12,375)	(12,373)
Net loans	760,817	737,916
Accrued interest receivable	5,227	5,848
Equity securities without readily determinable fair values	18,118	17,189
LIABILITIES
Borrowed funds	241,001	216,136
Accrued interest payable	7,482	8,842
Carrying Value [Member]
ASSETS
Cash and demand deposits due from banks	24,920	28,590
Certicates of deposit held in other financial institutions	4,465	8,924
Mortgage loans available-for-sale	3,633	3,205
Total loans	772,753	750,291
Less allowance for loan losses	(11,936)	(12,375)
Net loans	760,817	737,916
Accrued interest receivable	5,227	5,848
Equity securities without readily determinable fair values	18,118	17,189
Originated mortgage servicing rights	2,285	2,374
LIABILITIES
Deposits without stated maturities	553,332	476,627
Deposits with stated maturities	464,335	481,537
Borrowed funds	241,001	210,894
Accrued interest payable	751	967
Estimated Fair Value [Member]
ASSETS
Cash and demand deposits due from banks	24,920	28,590
Certicates of deposit held in other financial institutions	4,475	8,977
Mortgage loans available-for-sale	3,680	3,252
Total loans	784,964	769,177
Less allowance for loan losses	(11,936)	(12,375)
Net loans	773,028	756,802
Accrued interest receivable	5,227	5,848
Equity securities without readily determinable fair values	18,118	17,189
Originated mortgage servicing rights	2,285	2,374
LIABILITIES
Deposits without stated maturities	553,332	476,627
Deposits with stated maturities	472,630	499,644
Borrowed funds	248,822	222,538
Accrued interest payable	751	967
Level 1 [Member]
ASSETS
Cash and demand deposits due from banks	24,920	28,590
Accrued interest receivable	5,227	5,848
LIABILITIES
Deposits without stated maturities	553,332	476,627
Accrued interest payable	751	967
Level 2 [Member]
ASSETS
Certicates of deposit held in other financial institutions	4,475	8,977
Mortgage loans available-for-sale	3,680	3,252
Total loans		743,927
Less allowance for loan losses		(8,255)
Net loans		735,672
Originated mortgage servicing rights	2,285	2,374
LIABILITIES
Deposits with stated maturities	472,630	499,644
Borrowed funds	248,822	222,538
Level 3 [Member]
ASSETS
Total loans	784,964	25,250
Less allowance for loan losses	(11,936)	(4,120)
Net loans	$ 773,028	$ 21,130

XML

Consolidated Statements of Income (USD $) In Thousands, except Per Share data, unless otherwise specified	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010
Interest income
Loans, including fees	$ 43,396	$ 45,463	$ 46,794
AFS securities
Taxable	7,555	6,941	5,271
Nontaxable	4,870	4,806	4,367
Trading securities	94	189	306
Federal funds sold and other	486	506	479
Total interest income	56,401	57,905	57,217
Interest expense
Deposits	9,131	10,935	11,530
Borrowings	4,292	5,268	5,674
Total interest expense	13,423	16,203	17,204
Net interest income	42,978	41,702	40,013
Provision for loan losses	2,300	3,826	4,857
Net interest income after provision for loan losses	40,678	37,876	35,156
Noninterest income
Service charges and fees	6,432	6,118	6,480
Gain on sale of mortgage loans	1,576	538	610
Gain on sale of available-for-sale investment securities	1,119	3	348
Earnings on corporate owned life insurance policies	698	609	663
Other	1,705	950	1,199
Total noninterest income	11,530	8,218	9,300
Noninterest expenses
Compensation and benefits	21,227	19,292	18,552
Occupancy	2,519	2,470	2,351
Furniture and equipment	4,560	4,497	4,344
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
Other	9,051	8,271	8,560
Total noninterest expenses	37,639	34,530	33,807
Income before federal income tax expense	14,569	11,564	10,649
Federal income tax expense	2,363	1,354	1,604
NET INCOME	$ 12,206	$ 10,210	$ 9,045
Earnings per share
Basic	$ 1.61	$ 1.35	$ 1.20
Diluted	$ 1.56	$ 1.31	$ 1.17
Cash dividends per basic share	$ 0.80	$ 0.76	$ 0.72

XML

Minimum Regulatory Capital Requirements (Details) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2012	Dec. 31, 2011
Total capital to risk weighted assets
Actual Amount	$ 123,388	$ 115,172
Actual Ratio	14.48%	14.17%
Minimum Capital Requirement Amount	68,161	65,009
Minimum Capital Requirement Ratio	8.00%	8.00%
Tier 1 capital to risk weighted assets
Actual Amount	112,722	104,987
Actual Ratio	13.23%	12.92%
Minimum Capital Requirement Amount	34,080	32,505
Minimum Capital Requirement Ratio	4.00%	4.00%
Tier 1 capital to average assets
Actual Amount	112,722	104,987
Actual Ratio	8.29%	8.18%
Minimum Capital Requirement Amount	54,411	51,317
Minimum Capital Requirement Ratio	4.00%	4.00%
Isabella Bank [Member]
Total capital to risk weighted assets
Actual Amount	112,498	104,542
Actual Ratio	13.40%	13.06%
Minimum Capital Requirement Amount	67,150	64,028
Minimum Capital Requirement Ratio	8.00%	8.00%
Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions Amount	83,937	80,035
Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions Ratio	10.00%	10.00%
Tier 1 capital to risk weighted assets
Actual Amount	101,988	94,508
Actual Ratio	12.15%	11.81%
Minimum Capital Requirement Amount	33,575	32,014
Minimum Capital Requirement Ratio	4.00%	4.00%
Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions Amount	50,362	48,021
Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions Ratio	6.00%	6.00%
Tier 1 capital to average assets
Actual Amount	101,988	94,508
Actual Ratio	7.57%	7.44%
Minimum Capital Requirement Amount	53,916	50,808
Minimum Capital Requirement Ratio	4.00%	4.00%
Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions Amount	$ 67,395	$ 63,510
Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions Ratio	5.00%	5.00%

XML

AFS Securities (Details 4)	12 Months Ended
	Dec. 31, 2012
Key valuation assumptions
Seniority	Senior
Discount rate	LIBOR + 5.64%
Credit discount rate	LIBOR + 4.00%
Average observed discounts based on closed transactions	17.06%
Fitch [Member]
Key valuation assumptions
Ratings by credit quality indicator	Not Rated
Moody's [Member]
Key valuation assumptions
Ratings by credit quality indicator	Caa3
S&P [Member]
Key valuation assumptions
Ratings by credit quality indicator	A

XML

Benefit Plans (Details 4)	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010
Actuarial weighted average assumptions used in determining the net periodic pension costs
Discount rate	4.22%	5.36%	6.10%
Expected long-term return on plan assets	6.00%	6.00%	6.00%

XML

AFS Securities (Tables)

12 Months Ended

Dec. 31, 2012

Trading Securities and AFS Securities [Abstract]

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

	2012
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Government sponsored enterprises	$	25,668	$	108	$	—	$	25,776
States and political subdivisions		174,118		9,190		565		182,743
Auction rate money market preferred		3,200		—		422		2,778
Preferred stocks		6,800		—		437		6,363
Mortgage-backed securities		152,256		3,199		110		155,345
Collateralized mortgage obligations		128,378		2,627		—		131,005
Total	$	490,420	$	15,124	$	1,534	$	504,010
	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

	Maturing
	Due in One Year or Less		After One Year  But Within Five Years		After Five Years  But Within Ten Years		After Ten Years		Securities With Variable Monthly Payments or Noncontractual Maturities		Total
Government sponsored enterprises	$	—	$	72	$	25,596	$	—	$	—	$	25,668
States and political subdivisions		11,670		36,157		86,062		40,229		—		174,118
Auction rate money market preferred		—		—		—		—		3,200		3,200
Preferred stocks		—		—		—		—		6,800		6,800
Mortgage-backed securities		—		—		—		—		152,256		152,256
Collateralized mortgage obligations		—		—		—		—		128,378		128,378
Total amortized cost	$	11,670	$	36,229	$	111,658	$	40,229	$	290,634	$	490,420
Fair value	$	11,746	$	37,759	$	117,884	$	41,130	$	295,491	$	504,010

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

	2012		2011		2010
Proceeds from sales AFS of securities	$	40,677	$	8,877	$	18,303
Gross realized gains	$	1,119	$	3	$	351
Gross realized losses		—		—		(3	)
Net realized gains	$	1,119	$	3	$	348
Applicable income tax expense	$	380	$	1	$	118

Available-for-sale securities with gross unrealized losses

	2012
	Less Than Twelve Months				Over Twelve Months
	Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Total Unrealized Losses
States and political subdivisions	$	80	$	5,019	$	485	$	2,352	$	565
Auction rate money market preferred		—		—		422		2,778		422
Preferred stocks		—		—		437		3,363		437
Mortgage-backed securities		110		25,499		—		—		110
Total	$	190	$	30,518	$	1,344	$	8,493	$	1,534
Number of securities in an unrealized loss position:				15				6		21

	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

	Discounted Cash Flow Method
Ratings
Fitch	Not Rated
Moody’s	Caa3
S&P	A
Seniority	Senior
Discount rate	LIBOR + 5.64%
	Credit Yield Analysis Method
Credit discount rate	LIBOR + 4.00%
Average observed discounts based on closed transactions	17.06%

Impairment recognized in earnings on available-for-sale securities

January 1, 2012	$	—
Additions to credit losses for which no previous OTTI was recognized		282
December 31, 2012	$	282

XML

Loans and Allowance for Loan Losses (Details 3) (USD $) In Thousands, unless otherwise specified	Dec. 31, 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: 30-59 Days	$ 4,627	$ 5,312
Accruing Interest and Past Due: 60-89 Days	543	442
Accruing Interest and Pass Due: 90 Days or More	428	760
Nonaccrual	7,303	6,389
Total Past Due and Nonaccrual	12,901	12,903
Current	759,852	737,388
Total	772,753	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: 30-59 Days	1,304	1,721
Accruing Interest and Past Due: 60-89 Days	161
Accruing Interest and Pass Due: 90 Days or More	63	364
Nonaccrual	2,544	4,176
Total Past Due and Nonaccrual	4,072	6,261
Current	271,548	251,834
Total	275,620	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: 30-59 Days	606	388
Accruing Interest and Past Due: 60-89 Days		38
Accruing Interest and Pass Due: 90 Days or More	40	3
Nonaccrual	2,294	25
Total Past Due and Nonaccrual	2,940	454
Current	92,945	107,165
Total	95,885	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: 30-59 Days	1,910	2,109
Accruing Interest and Past Due: 60-89 Days	161	38
Accruing Interest and Pass Due: 90 Days or More	103	367
Nonaccrual	4,838	4,201
Total Past Due and Nonaccrual	7,012	6,715
Current	364,493	358,999
Total	371,505	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: 30-59 Days
Accruing Interest and Past Due: 60-89 Days
Accruing Interest and Pass Due: 90 Days or More		99
Nonaccrual		189
Total Past Due and Nonaccrual		288
Current	49,393	44,395
Total	49,393	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: 30-59 Days	90
Accruing Interest and Past Due: 60-89 Days		2
Nonaccrual	169	415
Total Past Due and Nonaccrual	259	417
Current	33,954	29,545
Total	34,213	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: 30-59 Days	90
Accruing Interest and Past Due: 60-89 Days		2
Accruing Interest and Pass Due: 90 Days or More		99
Nonaccrual	169	604
Total Past Due and Nonaccrual	259	705
Current	83,347	73,940
Total	83,606	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: 30-59 Days	2,000	2,668
Accruing Interest and Past Due: 60-89 Days	346	336
Accruing Interest and Pass Due: 90 Days or More	320	124
Nonaccrual	2,064	1,292
Total Past Due and Nonaccrual	4,730	4,420
Current	223,532	213,181
Total	228,262	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: 30-59 Days	232	203
Accruing Interest and Past Due: 60-89 Days		32
Accruing Interest and Pass Due: 90 Days or More		40
Nonaccrual	50	94
Total Past Due and Nonaccrual	282	369
Current	16,207	20,877
Total	16,489	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: 30-59 Days	237	185
Accruing Interest and Past Due: 60-89 Days
Accruing Interest and Pass Due: 90 Days or More		125
Nonaccrual	182	198
Total Past Due and Nonaccrual	419	508
Current	38,978	39,005
Total	39,397	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: 30-59 Days	2,469	3,056
Accruing Interest and Past Due: 60-89 Days	346	368
Accruing Interest and Pass Due: 90 Days or More	320	289
Nonaccrual	2,296	1,584
Total Past Due and Nonaccrual	5,431	5,297
Current	278,717	273,063
Total	284,148	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: 30-59 Days	127	127
Accruing Interest and Past Due: 60-89 Days	33	31
Accruing Interest and Pass Due: 90 Days or More	4	5
Nonaccrual
Total Past Due and Nonaccrual	164	163
Current	28,118	26,011
Total	28,282	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: 30-59 Days	31	20
Accruing Interest and Past Due: 60-89 Days	3	3
Accruing Interest and Pass Due: 90 Days or More	1
Nonaccrual
Total Past Due and Nonaccrual	35	23
Current	5,177	5,375
Total	5,212	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: 30-59 Days	158	147
Accruing Interest and Past Due: 60-89 Days	36	34
Accruing Interest and Pass Due: 90 Days or More	5	5
Nonaccrual
Total Past Due and Nonaccrual	199	186
Current	33,295	31,386
Total	$ 33,494	$ 31,572

XML

On-Balance Sheet Activities

12 Months Ended

Dec. 31, 2012

On-Balance Sheet Activities [Abstract]

ON-BALANCE SHEET ACTIVITIES

NOTE 14 – ON-BALANCE SHEET ACTIVITIES

Derivative Loan Commitments

Mortgage loan commitments are referred to as derivative loan commitments if the loan that will result from exercise of the commitment will be held for sale upon funding. We enter into commitments to fund residential mortgage loans at specific times in the future, with the intention that these loans will subsequently be sold in the secondary market. A mortgage loan commitment binds us to lend funds to a potential borrower at a specified interest rate within a specified period of time, generally up to 60 days after inception of the rate lock.

Outstanding derivative loan commitments expose us to the risk that the price of the loans arising from the exercise of the loan commitment might decline from the inception of the rate lock to funding of the loan due to increases in mortgage interest rates. If interest rates increase, the value of these loan commitments decreases. Conversely, if interest rates decrease, the value of these loan commitments increase. The notional amount of undesignated interest rate lock commitments was $1,912 and $875 at December 31, 2012 and 2011, respectively.

Forward Loan Sale Commitments

To protect against the price risk inherent in derivative loan commitments, we utilize both “mandatory delivery” and “best efforts” forward loan sale commitments to mitigate the risk of potential decreases in the values of loan that would result from the exercise of the derivative loan commitments.

With a “mandatory delivery” contract, we commit to deliver a certain principal amount of mortgage loans to an investor at a specified price on or before a specified date. If we fail to deliver the amount of mortgages necessary to fulfill the commitment by the specified date, we are obligated to pay a “pair-off” fee, based on then current market prices, to the investor to compensate the investor for the shortfall.

With a “best efforts” contract, we commit to deliver an individual mortgage loan of a specified principal amount and quality to an investor if the loan to the underlying borrower closes. Generally, the price the investor will pay the seller for an individual loan is specified prior to the loan being funded (e.g. on the same day the lender commits to lend funds to a potential borrower).

We expect that these forward loan sale commitments will experience changes in fair value opposite to the change in fair value of derivative loan commitments. The notional amount of undesignated forward loan sale commitments was $5,545 and $4,080 at December 31, 2012 and 2011, respectively.

The fair values of the rate lock loan commitments related to the origination of mortgage loans that will be held for sale and the forward loan sale commitments are deemed insignificant by management and, accordingly, are not recorded in our consolidated financial statements.

XML

Loans and Allowance for Loan Losses (Tables)

12 Months Ended

Dec. 31, 2012

Loans and Allowance for Loan Losses [Abstract]

Summary of changes in the ALLL and the recorded investment in loans by segments

	Allowance for Loan Losses Year Ended December 31, 2012
	Commercial			Agricultural			Residential Real Estate			Consumer			Unallocated			Total
January 1, 2012	$	6,284		$	1,003		$	2,980		$	633		$	1,475		$	12,375
Loans charged off		(1,672	)		—			(1,142	)		(542	)		—			(3,356	)
Recoveries		240			—			122			255			—			617
Provision for loan losses		2,010			(596	)		1,667			320			(1,101	)		2,300
December 31, 2012	$	6,862		$	407		$	3,627		$	666		$	374		$	11,936

	Allowance for Loan Losses Year Ended December 31, 2011
	Commercial			Agricultural			Residential Real Estate			Consumer			Unallocated			Total
January 1, 2011	$	6,048		$	1,033		$	3,198		$	605		$	1,489		$	12,373
Loans charged off		(1,863	)		(121	)		(2,240	)		(552	)		—			(4,776	)
Recoveries		460			1			177			314			—			952
Provision for loan losses		1,639			90			1,845			266			(14	)		3,826
December 31, 2011	$	6,284		$	1,003		$	2,980		$	633		$	1,475		$	12,375

Allowance for Loan Losses and Recorded Investment in Loans

	Allowance for Loan Losses and Recorded Investment in Loans As of December 31, 2012
	Commercial		Agricultural		Residential Real Estate		Consumer		Unallocated		Total
ALLL
Individually evaluated for impairment	$	2,050	$	91	$	1,796	$	—	$	—	$	3,937
Collectively evaluated for impairment		4,812		316		1,831		666		374		7,999
Total	$	6,862	$	407	$	3,627	$	666	$	374	$	11,936
Loans
Individually evaluated for impairment	$	14,456	$	723	$	10,704	$	75			$	25,958
Collectively evaluated for impairment		357,049		82,883		273,444		33,419				746,795
Total	$	371,505	$	83,606	$	284,148	$	33,494			$	772,753

	Allowance for Loan Losses and Recorded Investment in Loans As of December 31, 2011
	Commercial		Agricultural		Residential Real Estate		Consumer		Unallocated		Total
ALLL
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

	2012
	Commercial						Agricultural
	Real Estate		Other		Total		Real Estate		Other		Total
Rating
2 - High quality	$	25,209	$	15,536	$	40,745	$	2,955	$	2,313	$	5,268
3 - High satisfactory		83,805		28,974		112,779		16,972		11,886		28,858
4 - Low satisfactory		127,423		45,143		172,566		27,291		15,437		42,728
5 - Special mention		16,046		1,692		17,738		1,008		3,191		4,199
6 - Substandard		20,029		2,224		22,253		1,167		1,217		2,384
7 - Vulnerable		1,512		2,294		3,806		—		—		—
8 - Doubtful		1,596		22		1,618		—		169		169
Total	$	275,620	$	95,885	$	371,505	$	49,393	$	34,213	$	83,606
	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 loan's past due aging

	2012
	Accruing Interest and Past Due:						Nonaccrual		Total Past  Due and Nonaccrual		Current		Total
	30-59 Days		60-89 Days		90 Days or More
Commercial
Commercial real estate	$	1,304	$	161	$	63	$	2,544	$	4,072	$	271,548	$	275,620
Commercial other		606		—		40		2,294		2,940		92,945		95,885
Total commercial		1,910		161		103		4,838		7,012		364,493		371,505
Agricultural
Agricultural real estate		—		—		—		—		—		49,393		49,393
Agricultural other		90		—		—		169		259		33,954		34,213
Total agricultural		90		—		—		169		259		83,347		83,606
Residential real estate
Senior liens		2,000		346		320		2,064		4,730		223,532		228,262
Junior liens		232		—		—		50		282		16,207		16,489
Home equity lines of credit		237		—		—		182		419		38,978		39,397
Total residential real estate		2,469		346		320		2,296		5,431		278,717		284,148
Consumer
Secured		127		33		4		—		164		28,118		28,282
Unsecured		31		3		1		—		35		5,177		5,212
Total consumer		158		36		5		—		199		33,295		33,494
Total	$	4,627	$	543	$	428	$	7,303	$	12,901	$	759,852	$	772,753
	2011
	Accruing Interest and Past Due:						Nonaccrual		Total Past  Due and Nonaccrual		Current		Total
	30-59 Days		60-89 Days		90 Days or More
Commercial
Commercial real estate	$	1,721	$	—	$	364	$	4,176	$	6,261	$	251,834	$	258,095
Commercial other		388		38		3		25		454		107,165		107,619
Total commercial		2,109		38		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		2,668		336		124		1,292		4,420		213,181		217,601
Junior liens		203		32		40		94		369		20,877		21,246
Home equity lines of credit		185		—		125		198		508		39,005		39,513
Total residential real estate		3,056		368		289		1,584		5,297		273,063		278,360
Consumer
Secured		127		31		5		—		163		26,011		26,174
Unsecured		20		3		—		—		23		5,375		5,398
Total consumer		147		34		5		—		186		31,386		31,572
Total	$	5,312	$	442	$	760	$	6,389	$	12,903	$	737,388	$	750,291

Information pertaining to impaired loans

	2012
	Outstanding Balance		Unpaid Principal Balance		Valuation Allowance		Average Outstanding Balance		Interest Income Recognized
Impaired loans with a valuation allowance
Commercial real estate	$	7,295	$	7,536	$	1,653	$	6,155	$	237
Commercial other		2,140		2,140		397		1,437		93
Agricultural real estate		91		91		32		413		—
Agricultural other		420		420		59		1,555		54
Residential real estate senior liens		10,450		11,654		1,783		8,860		405
Residential real estate junior liens		72		118		13		134		6
Total impaired loans with a valuation allowance		20,468		21,959		3,937		18,554		795
Impaired loans without a valuation allowance
Commercial real estate		3,749		4,408				5,867		321
Commercial other		1,272		1,433				819		87
Agricultural real estate		—		—				183		—
Agricultural other		212		332				201		4
Residential real estate senior liens		—		18				1		1
Home equity lines of credit		182		482				190		16
Consumer secured		75		84				90		6
Total impaired loans without a valuation allowance		5,490		6,757				7,351		435
Impaired loans
Commercial		14,456		15,517		2,050		14,278		738
Agricultural		723		843		91		2,352		58
Residential real estate		10,704		12,272		1,796		9,185		428
Consumer		75		84		—		90		6
Total impaired loans	$	25,958	$	28,716	$	3,937	$	25,905	$	1,230

	2011
	Outstanding Balance		Unpaid Principal Balance		Valuation Allowance		Average Outstanding Balance		Interest Income Recognized
Impaired loans with a valuation allowance
Commercial real estate	$	5,014	$	5,142	$	1,881	$	4,012	$	247
Commercial other		734		734		271		376		25
Agricultural real estate		—		—		—		9		—
Agricultural other		2,689		2,689		822		2,443		138
Residential mortgage senior liens		7,269		8,825		1,111		5,781		331
Residential mortgage junior liens		195		260		35		184		11
Total impaired loans with a valuation allowance		15,901		17,650		4,120		12,805		752
Impaired loans without a valuation allowance
Commercial real estate		7,984		10,570				4,863		375
Commercial other		365		460				267		10
Agricultural real estate		190		190				180		—
Agricultural other		505		625				253		18
Residential mortgage senior liens		2		2				202		—
Home equity lines of credit		198		498				99		12
Consumer secured		105		114				77		4
Total impaired loans without a valuation allowance		9,349		12,459				5,941		419
Impaired loans
Commercial		14,097		16,906		2,152		9,518		657
Agricultural		3,384		3,504		822		2,885		156
Residential mortgage		7,664		9,585		1,146		6,266		354
Consumer		105		114		—		77		4
Total impaired loans	$	25,250	$	30,109	$	4,120	$	18,746	$	1,171

Information pertaining to TDR's

	2012						2011
	Number of Loans		Pre- Modification Recorded Investment		Post- Modification Recorded Investment		Number of Loans		Pre- Modification Recorded Investment		Post- Modification Recorded Investment
Commercial
Commercial real estate		1	$	912	$	792		1	$	408	$	408
Commercial other		28		6,437		6,437		42		12,575		12,132
Total commercial		29		7,349		7,229		43		12,983		12,540
Agricultural other		7		652		652		8		1,321		1,321
Residential real estate
Senior liens		29		3,463		3,463		36		3,915		3,865
Junior liens		1		22		22		—		—		—
Total residential real estate		30		3,485		3,485		36		3,915		3,865
Consumer
Secured		1		—		—		7		69		69
Unsecured		—		—		—		2		20		20
Total consumer		1		—		—		9		89		89
Total		67	$	11,486	$	11,366		96	$	18,308	$	17,815

The following tables summarize concessions we granted to borrowers in financial difficulty during 2012:

	Below Market Interest Rate				Extension of Amortization Period				Below Market Interest Rate and Extension of Amortization Period
	Number of Loans		Pre- Modification Recorded Investment		Number of Loans		Pre- Modification Recorded Investment		Number of Loans		Pre- Modification Recorded Investment
Commercial
Commercial real estate		—	$	—		—	$	—		1	$	912
Commercial other		25		4,924		1		1,368		2		145
Total commercial		25		4,924		1		1,368		3		1,057
Agricultural other		6		561		1		91		—		—
Residential real estate
Senior liens		17		1,779		3		521		9		1,163
Junior liens		—		—		—		—		1		22
Total residential real estate		17		1,779		3		521		10		1,185
Consumer secured		1		—		—		—		—		—
Total		49	$	7,264		5	$	1,980		13	$	2,242

	Below Market Interest Rate				Extension of Amortization Period				Below Market Interest Rate and Extension of Amortization Period
	Number of Loans		Pre- Modification Recorded Investment		Number of Loans		Pre- Modification Recorded Investment		Number of Loans		Pre- Modification Recorded Investment
Commercial
Commercial real estate		1	$	408		—	$	—		—	$	—
Commercial other		38		9,932		—		—		4		2,643
Total commercial		39		10,340		—		—		4		2,643
Agricultural other		8		1,321		—		—		—		—
Residential real estate Senior liens		19		2,161		—		—		17		1,754
Consumer
Secured		6		65		—		—		1		4
Unsecured		—		—		—		—		2		20
Total consumer		6		65		—		—		3		24
Total		72	$	13,887		—	$	—		24	$	4,421

Summary of defaulted loans

	Number of Loans		Pre- Default Recorded Investment		Charge-Off Recorded Upon Default		Post- Default Recorded Investment
Commercial other		5	$	342	$	143	$	199
Residential real estate senior liens		1		47		43		4
Consumer secured		1		8		8		—
Total		7	$	397	$	194	$	203

Summary of TDR loan balances

	2012		2011
Troubled debt restructurings	$	19,355	$	18,756

XML

Benefit Plans (Details 3)	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010
Actuarial assumptions used in determining the projected benefit obligation
Discount rate	3.75%	4.22%	5.36%
Expected long-term rate of return	6.00%	6.00%	6.00%

XML

Minimum Regulatory Capital Requirements

12 Months Ended

Dec. 31, 2012

Deposits and Minimum Regulatory Capital Requirements [Abstract]

MINIMUM REGULATORY CAPITAL REQUIREMENTS

NOTE 16 – MINIMUM REGULATORY CAPITAL REQUIREMENTS

The Corporation (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by the FRB and the FDIC. Failure to meet minimum capital requirements can initiate mandatory and possibly additional discretionary actions by the FRB and the FDIC that if undertaken, could have a material effect on our financial statements. Under regulatory capital adequacy guidelines and the regulatory framework for prompt corrective action, we must meet specific capital guidelines that include quantitative measures of assets, liabilities, capital, and certain off-balance-sheet items, as calculated under regulatory accounting standards. Our capital amounts and classifications are also subject to qualitative judgments by the FRB and the FDIC about components, risk weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding companies.

Quantitative measures established by regulation to ensure capital adequacy require us to maintain minimum amounts and ratios (set forth in the following table) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined) and Tier 1 capital to average assets (as defined). We believe, as of December 31, 2012 and 2011, that we met all capital adequacy requirements.

As of December 31, 2012, the most recent notifications from the FRB and the FDIC categorized us as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, an institution must maintain total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the following tables. There are no conditions or events since the notifications that we believe has changed our categories. Our actual capital amounts and ratios are also presented in the table.

	Actual					Minimum Capital Requirement					Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
December 31, 2012
Total capital to risk weighted assets
Isabella Bank	$	112,498		13.40	%	$	67,150		8.00	%	$	83,937		10.00	%
Consolidated		123,388		14.48			68,161		8.00			N/A		N/A
Tier 1 capital to risk weighted assets
Isabella Bank		101,988		12.15			33,575		4.00			50,362		6.00
Consolidated		112,722		13.23			34,080		4.00			N/A		N/A
Tier 1 capital to average assets
Isabella Bank		101,988		7.57			53,916		4.00			67,395		5.00
Consolidated		112,722		8.29			54,411		4.00			N/A		N/A

	Actual					Minimum Capital Requirement					Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
December 31, 2011
Total capital to risk weighted assets
Isabella Bank	$	104,542		13.06	%	$	64,028		8.00	%	$	80,035		10.00	%
Consolidated		115,172		14.17			65,009		8.00			N/A		N/A
Tier 1 capital to risk weighted assets
Isabella Bank		94,508		11.81			32,014		4.00			48,021		6.00
Consolidated		104,987		12.92			32,505		4.00			N/A		N/A
Tier 1 capital to average assets
Isabella Bank		94,508		7.44			50,808		4.00			63,510		5.00
Consolidated		104,987		8.18			51,317		4.00			N/A		N/A

XML

Loans and Allowance for Loan Losses (Details 6) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2012 NumberofLoan
Summary of defaulted loans
Number of Loans	7
Pre-Default Recorded Investment	$ 397
Charge- Off Recorded Upon Default	194
Post- Default Recorded Investment	203
Commercial other [Member]
Summary of defaulted loans
Number of Loans	5
Pre-Default Recorded Investment	342
Charge- Off Recorded Upon Default	143
Post- Default Recorded Investment	199
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
Pre-Default Recorded Investment	8
Charge- Off Recorded Upon Default	8
Post- Default Recorded Investment

XML

Related Party Transactions (Details Textual) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2012	Dec. 31, 2011
Related Party Transactions (Textual) [Abstract]
Percentage of ownership for classification as affiliate	10.00%
Total deposits	$ 6,871	$ 7,664
Deposit with the bank	$ 517	$ 275

XML

Consolidated Statements of Comprehensive Income (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2012		Dec. 31, 2011		Dec. 31, 2010
Consolidated Statements of Comprehensive Income [Abstract]
Net income	$ 12,206		$ 10,210		$ 9,045
Unrealized holding gains on available-for-sale securities:
Unrealized losses arising during the year	3,921		9,220		1,156
Reclassification adjustment for net realized gains included in net income	(1,119)		(3)		(348)
Reclassification adjustment for impairment loss included in net income	282
Net unrealized gains	3,084		9,217		808
Tax effect (1)	(348)	[1]	(3,719)	[1]	(351)	[1]
Unrealized gains, net of tax	2,736		5,498		457
Increase in unrecognized pension cost	(329)		(1,971)		(72)
Tax effect	111		671		25
Net unrealized loss on defined benefit pension plan	(218)		(1,300)		(47)
Other comprehensive income, net of tax	2,518		4,198		410
Comprehensive income	$ 14,724		$ 14,408		$ 9,455

[1] See "Note 12 - Federal Income Taxes" for tax effect reconciliation.

XML

Consolidated Balance Sheets (Parenthetical) (USD $) In Thousands, except Share data, unless otherwise specified	Dec. 31, 2012	Dec. 31, 2011
Consolidated Balance Sheets [Abstract]
Available-for-sale securities, amortized cost	$ 490,420	$ 414,614
Borrowed funds at fair value	$ 0	$ 5,242
Common stock, no par value
Common stock, shares authorized	15,000,000	15,000,000
Common stock, shares issued	7,671,846	7,589,226
Common stock, shares outstanding	7,671,846	7,589,226
Common stock, shares to be issued	5,130	16,585

XML

Deposits

12 Months Ended

Dec. 31, 2012

Deposits and Minimum Regulatory Capital Requirements [Abstract]

DEPOSITS

NOTE 9 – DEPOSITS

Scheduled maturities of time deposits for the next five years, and thereafter, are as follows:

Year	Amount
2013	$	205,754
2014		76,742
2015		71,685
2016		51,232
2017		40,523
Thereafter		18,399
	$	464,335

Interest expense on time deposits greater than $100 was $3,854 in 2012, $4,302 in 2011, and $4,427 in 2010.

XML

Benefit Plans (Details 8) (Director [Member], USD $) In Thousands, except Share data, unless otherwise specified	Dec. 31, 2012	Dec. 31, 2011
Components of shares eligible to be issued under the Directors Plan
Eligible Shares	170,566	218,023
Market Value	$ 3,710	$ 5,167
Unissued Shares [Member]
Components of shares eligible to be issued under the Directors Plan
Eligible Shares	165,436	201,438
Market Value	3,598	4,774
Shares Held in Rabbi Trust [Member]
Components of shares eligible to be issued under the Directors Plan
Eligible Shares	5,130	16,585
Market Value	$ 112	$ 393

XML

Commitments and Other Matters (Details Textual) (USD $) In Thousands, unless otherwise specified	Jan. 01, 2013	Dec. 31, 2012	Dec. 31, 2011
Commitments and other Matters (Textual) [Abstract]
Cash reserve balances		$ 885	$ 821
Amount available for dividends without regulatory approval	$ 17,000

XML

Off-Balance-Sheet Activities (Details Textual) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2012
Off-Balance-Sheet Activities (Textual) [Abstract]
Maximum maturity period of commitments to extend credit	1 year
Significant losses anticipated as a result of commitments	$ 0

XML

Parent Company Only Financial Information (Details 2) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010
OPERATING ACTIVITIES
Net income	$ 12,206	$ 10,210	$ 9,045
Adjustments to reconcile net income to cash provided by operations
Share-based payment awards	643	615	650
Depreciation	2,417	2,521	2,522
Deferred income tax expense (benefit)	616	389	179
Changes in operating assets and liabilities which (used) provided cash
Other assets	(2,610)	147	(1,914)
Accrued interest and other liabilities	(1,360)	449	1,005
NET CASH PROVIDED BY OPERATING ACTIVITIES	19,464	18,860	26,521
Activity in available-for-sale securities
Purchases	(207,035)	(165,017)	(156,928)
(Purchases) sales of equipment and premises	(3,578)	(2,520)	(3,232)
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES	(101,874)	(105,203)	(103,877)
FINANCING ACTIVITIES
Net (decrease) increase in other borrowed funds	24,898	21,400	2,043
Cash dividends paid on common stock	(6,074)	(5,770)	(5,421)
Proceeds from issuance of common stock	2,279	2,302	2,208
Common stock repurchased	(1,361)	(1,507)	(2,020)
Common stock purchased for deferred compensation obligations	(505)	(426)	(514)
NET CASH USED IN FINANCING ACTIVITIES	78,740	96,824	70,983
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS	(3,670)	10,481	(6,373)
Cash and cash equivalents at beginning of year	28,590	18,109	24,482
CASH AND CASH EQUIVALENTS AT END OF YEAR	24,920	28,590	18,109
Parent Company [Member]
OPERATING ACTIVITIES
Net income	12,206	10,210	9,045
Adjustments to reconcile net income to cash provided by operations
Undistributed earnings of subsidiaries	(7,287)	(5,527)	(4,537)
Undistributed earnings of equity securities without readily determinable fair values	(459)	160	(7)
Share-based payment awards	643	615	650
Depreciation	114	123	147
Net amortization of investment securities	4	7	5
Deferred income tax expense (benefit)	425	(48)	(172)
Changes in operating assets and liabilities which (used) provided cash
Other assets	(513)	7	305
Accrued interest and other liabilities	(98)	757	1,883
NET CASH PROVIDED BY OPERATING ACTIVITIES	5,035	6,304	7,319
Activity in available-for-sale securities
Maturities, calls, and sales	370	585	110
Purchases		(3,000)
(Purchases) sales of equipment and premises	(239)	(87)	247
Advances to subsidiaries	(50)		(250)
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES	81	(2,502)	107
FINANCING ACTIVITIES
Net (decrease) increase in other borrowed funds	(597)	2,772	(1,550)
Cash dividends paid on common stock	(6,074)	(5,770)	(5,421)
Proceeds from issuance of common stock	2,279	2,302	2,208
Common stock repurchased	(1,361)	(1,507)	(2,020)
Common stock purchased for deferred compensation obligations	(505)	(426)	(514)
NET CASH USED IN FINANCING ACTIVITIES	(6,258)	(2,629)	(7,297)
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS	(1,142)	1,173	129
Cash and cash equivalents at beginning of year	1,474	301	172
CASH AND CASH EQUIVALENTS AT END OF YEAR	$ 332	$ 1,474	$ 301

XML

Document and Entity Information (USD $)	12 Months Ended
	Dec. 31, 2012	Mar. 07, 2013	Jun. 30, 2012
Document and Entity Information [Abstract]
Entity Registrant Name	ISABELLA BANK CORP
Entity Central Index Key	0000842517
Document Type	10-K
Document Period End Date	Dec. 31, 2012
Amendment Flag	false
Document Fiscal Year Focus	2012
Document Fiscal Period Focus	FY
Current Fiscal Year End Date	--12-31
Entity Well-known Seasoned Issuer	No
Entity Voluntary Filers	No
Entity Current Reporting Status	Yes
Entity Filer Category	Accelerated Filer
Entity Public Float			$ 188,923,000
Entity Common Stock, Shares Outstanding		7,669,684

XML

Borrowed Funds

12 Months Ended

Dec. 31, 2012

Borrowed Funds [Abstract]

BORROWED FUNDS

NOTE 10 – BORROWED FUNDS

Borrowed funds consist of the following obligations at December 31:

	2012					2011
	Amount		Rate			Amount		Rate
FHLB advances	$	152,000		2.05	%	$	142,242		3.16	%
Securities sold under agreements to repurchase without stated maturity dates		66,147		0.15	%		57,198		0.25	%
Securities sold under agreements to repurchase with stated maturity dates		16,284		3.57	%		16,696		3.51	%
Federal funds purchased		6,570		0.50	%		—		—
Total	$	241,001		1.59	%	$	216,136		2.42	%

The FHLB borrowings are collateralized by U.S. government and federal agency securities and a blanket lien on all qualified 1-to-4 family mortgage loans. Advances are also secured by FHLB stock that we own. As of December 31, 2012, we had total unused lines of credit of $108,646.

The maturity and weighted average interest rates of FHLB advances are as follows as of December 31:

	2012					2011
	Amount		Rate			Amount		Rate
Fixed rate advances due 2012	$	—		—		$	17,000		2.97	%
One year putable fixed rate advances due 2012		—		—			15,000		4.10	%
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		10,000		0.48	%		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	$	152,000		2.05	%	$	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 had a fair value of $143,322 and $99,869 at December 31, 2012 and 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 maturity and weighted average interest rates of securities sold under agreements to repurchase with stated maturity dates are as follows at December 31:

	2012					2011
	Amount		Rate			Amount		Rate
Repurchase agreements due 2012	$	—		—		$	428		2.08	%
Repurchase agreements due 2013		5,000		4.51	%		5,000		4.51	%
Repurchase agreements due 2014		10,872		3.15	%		10,869		3.12	%
Repurchase agreements due 2015		412		3.25	%		399		3.25	%
Total	$	16,284		3.57	%	$	16,696		3.51	%

Securities sold under repurchase agreements without stated maturity dates, federal funds purchased, and FRB discount window advances generally mature within one to four days from the transaction date. The following table provides a summary of short term borrowings for the years ended December 31:

	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	$	66,147	$	57,466		0.20	%	$	57,198	$	45,397		0.25	%
Federal funds purchased		17,900		3,386		0.47	%		18,300		3,467		0.51	%

We had pledged certificates of deposit held in other financial institutions, trading securities, AFS securities, and 1-4 family mortgage loans in the following amounts at December 31:

	2012		2011
Pledged to secure borrowed funds	$	308,628	$	292,092
Pledged to secure repurchase agreements		143,322		99,869
Pledged for public deposits and for other purposes necessary or required by law		22,955		26,761
Total	$	474,905	$	418,722

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

XML

Borrowed Funds (Details 2) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2012	Dec. 31, 2011
Maturity and weighted average interest rates of securities sold
Repurchase agreements due 2012		$ 428
Repurchase agreements due 2012, Rate		2.08%
Repurchase agreements due 2013	5,000	5,000
Repurchase agreements due 2013, Rate	4.51%	4.51%
Repurchase agreements due 2014	10,872	10,869
Repurchase agreements due 2014, Rate	3.15%	3.12%
Repurchase agreements due 2015	412	399
Repurchase agreements due 2015, Rate	3.25%	3.25%
Total	$ 16,284	$ 16,696
Total, Rate	3.57%	3.51%

XML

Off-Balance-Sheet Activities (Details) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2012	Dec. 31, 2011
Unfunded commitments under lines of credit [Member]
Notional Amount of financial instrument
Contract Amount	$ 115,233	$ 102,822
Commercial and standby letters of credit [Member]
Notional Amount of financial instrument
Contract Amount	3,935	4,461
Commitments to grant loans [Member]
Notional Amount of financial instrument
Contract Amount	$ 40,507	$ 21,806

XML

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 balances at Dec. 31, 2009	$ 140,803	$ 133,443	$ 4,507	$ 4,972	$ (2,119)
Beginning balances, shares at Dec. 31, 2009		7,535,193
Comprehensive income	9,455			9,045	410
Issuance of common stock	2,683	2,683
Issuance of common stock, shares		124,953
Common stock issued for deferred compensation obligations	62	537	(475)
Common stock issued for deferred compensation obligations, shares		28,898
Share based payment awards under equity compensation plan	650		650
Common stock purchased for deferred compensation obligations	(514)	(514)
Common stock repurchased pursuant to publicly announced repurchase plan	(2,557)	(2,557)
Common stock repurchased pursuant to publicly announced repurchase plan, shares		(138,970)
Cash dividends	(5,421)			(5,421)
Ending balances at Dec. 31, 2010	145,161	133,592	4,682	8,596	(1,709)
Ending balances, shares at Dec. 31, 2010		7,550,074
Comprehensive income	14,408			10,210	4,198
Issuance of common stock	3,075	3,075
Issuance of common stock, shares		120,336
Common stock issued for deferred compensation obligations	(76)	697	(773)
Common stock issued for deferred compensation obligations, shares		39,257
Share based payment awards under equity compensation plan	615		615
Common stock purchased for deferred compensation obligations	(426)	(426)
Common stock repurchased pursuant to publicly announced repurchase plan	(2,204)	(2,204)
Common stock repurchased pursuant to publicly announced repurchase plan, shares		(120,441)
Cash dividends	(5,770)			(5,770)
Ending balances at Dec. 31, 2011	154,783	134,734	4,524	13,036	2,489
Ending balances, shares at Dec. 31, 2011		7,589,226
Comprehensive income	14,724			12,206	2,518
Issuance of common stock	2,898	2,898
Issuance of common stock, shares		124,530
Common stock issued for deferred compensation obligations		814	(814)
Common stock issued for deferred compensation obligations, shares		41,676
Common stock transferred from the Rabbi Trust to satisfy deferred compensation obligations		619	(619)
Share based payment awards under equity compensation plan	643		643
Common stock purchased for deferred compensation obligations	(505)	(505)
Common stock repurchased pursuant to publicly announced repurchase plan	(1,980)	(1,980)
Common stock repurchased pursuant to publicly announced repurchase plan, shares		(83,586)
Cash dividends	(6,074)			(6,074)
Ending balances at Dec. 31, 2012	$ 164,489	$ 136,580	$ 3,734	$ 19,168	$ 5,007
Ending balances, shares at Dec. 31, 2012		7,671,846

XML

Trading Securities

12 Months Ended

Dec. 31, 2012

Trading Securities and AFS Securities [Abstract]

TRADING SECURITIES

NOTE 4 – TRADING SECURITIES

Trading securities, at fair value, consist of the following investments at December 31:

	2012		2011
States and political subdivisions	$	1,573	$	4,710

Included in net trading losses of $52 during 2012, were $18 of net trading losses on securities that relate to our trading portfolio as of December 31, 2012. Included in net trading gains of $78 during 2011, were $60 of net trading gains on securities that relate to our trading portfolio as of December 31, 2011.

XML

Accounting Standards Updates

12 Months Ended

Dec. 31, 2012

Accounting Standards Updates [Abstract]

ACCOUNTING STANDARDS UPDATES

NOTE 3 – ACCOUNTING STANDARDS UPDATES

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 shareholders’ 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 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.

ASU No. 2012-02: “Intangibles—Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment”

In August 2012, ASU No. 2012-02 amended ASC Topic 350, “Goodwill and Other” to simplify the testing of intangible assets with indefinite lives. This update will allow for a qualitative assessment of intangible assets with indefinite lives to determine whether or not it is necessary to perform the impairment test described in ASC Topic 350. While the new authoritative guidance was effective for fiscal years beginning after September 15, 2012, we elected to early adopt the guidance as of December 31, 2012. This standard did not have any impact on our consolidated financial statements.

Pending Accounting Standards Updates

ASU No. 2012-06: “Business Combinations (Topic 805): Subsequent Accounting for an Indemnification Asset Recognized at the Acquisition Date as a Result of a Government-Assisted Acquisition of a Financial Institution”

In October 2012, ASU No. 2012-06 amended ASC Topic 805, “Business Combinations” to clarify the applicable guidance for subsequently measuring an indemnification asset recognized as part of a government assisted acquisition of a financial institution. The new authoritative guidance is effective for fiscal years beginning after December 15, 2012 and at this time is not expected to have any impact on our consolidated financial statements.

XML

Commitments and Other Matters

12 Months Ended

Dec. 31, 2012

Commitments and Other Matters [Abstract]

COMMITMENTS AND OTHER MATTERS

NOTE 15 – COMMITMENTS AND OTHER MATTERS

Banking regulations require us to maintain cash reserve balances in currency or as deposits with the FRB. At December 31, 2012 and 2011, the reserve balances amounted to $885 and $821, respectively.

Banking regulations limit the transfer of assets in the form of dividends, loans, or advances from the Bank to the Corporation. At December 31, 2012, substantially all of the Bank’s assets were restricted from transfer to the Corporation in the form of loans or advances. Consequently, Bank dividends are the principal source of funds for the Corporation. Payment of dividends without regulatory approval is limited to the current year’s retained net income plus retained net income for the preceding two years, less any required transfers to common stock. At January 1, 2013, the amount available to the Corporation for dividends from the Bank, without regulatory approval, was approximately $17,000.

XML

Other Noninterest Expenses

12 Months Ended

Dec. 31, 2012

Other Noninterest Expenses [Abstract]

OTHER NONINTEREST EXPENSES

NOTE 11 – OTHER NONINTEREST EXPENSES

A summary of expenses included in other noninterest expenses is as follows for the years ended December 31:

	2012		2011		2010
Marketing and community relations	$	1,965	$	1,174	$	1,093
Directors fees		885		842		887
FDIC insurance premiums		864		1,086		1,254
Audit fees		711		714		710
Education and travel		588		526		499
Consulting fees		482		386		167
Printing and supplies		424		405		420
Postage and freight		389		388		395
Other losses		300		54		72
Legal fees		268		302		382
Amortization of deposit premium		260		299		338
Foreclosed asset and collection		202		576		916
State taxes		187		57		51
All other		1,526		1,462		1,376
Total other	$	9,051	$	8,271	$	8,560

XML

Other Noninterest Expenses (Details) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010
Summary of expenses included in other noninterest expenses
Marketing and community relations	$ 1,965	$ 1,174	$ 1,093
Directors fees	885	842	887
FDIC insurance premiums	864	1,086	1,254
Audit fees	711	714	710
Education and travel	588	526	499
Consulting fees	482	386	167
Printing and supplies	424	405	420
Postage and freight	389	388	395
Other losses	300	54	72
Legal fees	268	302	382
Amortization of deposit premium	260	299	338
Foreclosed asset and collection	202	576	916
State taxes	187	57	51
All other	1,526	1,462	1,376
Total other	$ 9,051	$ 8,271	$ 8,560

XML

Premises and Equipment

12 Months Ended

Dec. 31, 2012

Premises and Equipment [Abstract]

PREMISES AND EQUIPMENT

NOTE 7 – PREMISES AND EQUIPMENT

A summary of premises and equipment at December 31 follows:

	2012		2011
Land	$	5,435	$	5,174
Buildings and improvements		22,705		22,397
Furniture and equipment		29,755		26,926
Total		57,895		54,497
Less: accumulated depreciation		32,108		29,871
Premises and equipment, net	$	25,787	$	24,626

Depreciation expense amounted to $2,417, $2,521 and $2,522 in 2012, 2011, and 2010, respectively.

XML

AFS Securities (Details 5) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2012
Impairment recognized in earnings on available-for-sale securities
January 1, 2012
Additions to credit losses for which no previous OTTI was recognized	282
December 31, 2012	$ 282

XML

Fair Value (Details 1) (Impaired Loans [Member], Level 3 [Member], USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2012
Discounted cash flow [Member]
Quantitative information about impaired loans measured utilizing Level 3 fair value measurement
Discounted cash flow fair value	$ 10,522
Valuation Techniques	Discounted cash flow
Discounted cash flow [Member] | Maximum [Member]
Quantitative information about impaired loans measured utilizing Level 3 fair value measurement
Duration of cash flows	120 months
Discounted cash flow [Member] | Maximum [Member] | Reduction in interest rate from original loan terms [Member]
Quantitative information about impaired loans measured utilizing Level 3 fair value measurement
Fair Value Inputs, Discount Rate	6.25%
Discounted cash flow [Member] | Minimum [Member]
Quantitative information about impaired loans measured utilizing Level 3 fair value measurement
Duration of cash flows	14 months
Discounted cash flow [Member] | Minimum [Member] | Reduction in interest rate from original loan terms [Member]
Quantitative information about impaired loans measured utilizing Level 3 fair value measurement
Fair Value Inputs, Discount Rate	5.00%
Discounted appraisal value [Member]
Quantitative information about impaired loans measured utilizing Level 3 fair value measurement
Discounted appraisal value at fair value	$ 11,499
Valuation Techniques	Discounted appraisal value
Discounted appraisal value [Member] | Equipment [Member]
Quantitative information about impaired loans measured utilizing Level 3 fair value measurement
Fair Value Inputs, Discount Rate	50.00%
Discounted appraisal value [Member] | Livestock [Member]
Quantitative information about impaired loans measured utilizing Level 3 fair value measurement
Fair Value Inputs, Discount Rate	50.00%
Discounted appraisal value [Member] | Cash crop inventory [Member]
Quantitative information about impaired loans measured utilizing Level 3 fair value measurement
Fair Value Inputs, Discount Rate	50.00%
Discounted appraisal value [Member] | Other inventory [Member]
Quantitative information about impaired loans measured utilizing Level 3 fair value measurement
Fair Value Inputs, Discount Rate	75.00%
Discounted appraisal value [Member] | Accounts receivable [Member]
Quantitative information about impaired loans measured utilizing Level 3 fair value measurement
Fair Value Inputs, Discount Rate	75.00%
Discounted appraisal value [Member] | Maximum [Member] | Real Estate [Member]
Quantitative information about impaired loans measured utilizing Level 3 fair value measurement
Fair Value Inputs, Discount Rate	30.00%
Discounted appraisal value [Member] | Minimum [Member] | Real Estate [Member]
Quantitative information about impaired loans measured utilizing Level 3 fair value measurement
Fair Value Inputs, Discount Rate	20.00%

XML

AFS Securities

12 Months Ended

Dec. 31, 2012

Trading Securities and AFS Securities [Abstract]

AFS SECURITIES

NOTE 5 – AFS SECURITIES

The amortized cost and fair value of AFS securities, with gross unrealized gains and losses, are as follows as of December 31:

	2012
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Government sponsored enterprises	$	25,668	$	108	$	—	$	25,776
States and political subdivisions		174,118		9,190		565		182,743
Auction rate money market preferred		3,200		—		422		2,778
Preferred stocks		6,800		—		437		6,363
Mortgage-backed securities		152,256		3,199		110		155,345
Collateralized mortgage obligations		128,378		2,627		—		131,005
Total	$	490,420	$	15,124	$	1,534	$	504,010
	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 December 31, 2012 are as follows:

	Maturing
	Due in One Year or Less		After One Year  But Within Five Years		After Five Years  But Within Ten Years		After Ten Years		Securities With Variable Monthly Payments or Noncontractual Maturities		Total
Government sponsored enterprises	$	—	$	72	$	25,596	$	—	$	—	$	25,668
States and political subdivisions		11,670		36,157		86,062		40,229		—		174,118
Auction rate money market preferred		—		—		—		—		3,200		3,200
Preferred stocks		—		—		—		—		6,800		6,800
Mortgage-backed securities		—		—		—		—		152,256		152,256
Collateralized mortgage obligations		—		—		—		—		128,378		128,378
Total amortized cost	$	11,670	$	36,229	$	111,658	$	40,229	$	290,634	$	490,420
Fair value	$	11,746	$	37,759	$	117,884	$	41,130	$	295,491	$	504,010

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 preferreds and preferred stocks have noncontractual maturities 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 the sale of AFS securities is as follows during the years ended December 31:

	2012		2011		2010
Proceeds from sales AFS of securities	$	40,677	$	8,877	$	18,303
Gross realized gains	$	1,119	$	3	$	351
Gross realized losses		—		—		(3	)
Net realized gains	$	1,119	$	3	$	348
Applicable income tax expense	$	380	$	1	$	118

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 December 31 aggregated by investment category and length of time that individual securities have been in continuous loss position, follows:

	2012
	Less Than Twelve Months				Over Twelve Months
	Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Total Unrealized Losses
States and political subdivisions	$	80	$	5,019	$	485	$	2,352	$	565
Auction rate money market preferred		—		—		422		2,778		422
Preferred stocks		—		—		437		3,363		437
Mortgage-backed securities		110		25,499		—		—		110
Total	$	190	$	30,518	$	1,344	$	8,493	$	1,534
Number of securities in an unrealized loss position:				15				6		21

	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 December 31, 2012 and 2011, we conducted an analysis to determine whether any AFS securities currently in an unrealized loss position, should be considered OTTI. Such analyses considered, among other factors, the following criteria:

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

• Is the investment credit rating below investment grade?

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

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

• Has the duration of the investment been extended?

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 earnings 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 + 5.64%
	Credit Yield Analysis Method
Credit discount rate	LIBOR + 4.00%
Average observed discounts based on closed transactions	17.06%

To test for additional impairment of this security as of December 31, 2012, we obtained another investment valuation (from the same independent firm engaged to perform the initial valuation as of March 31, 2012) as of December 31, 2012. Based on the results of this valuation, no additional OTTI was indicated.

A rollforward of credit related impairment recognized in earnings on AFS securities was as follows:

January 1, 2012	$	—
Additions to credit losses for which no previous OTTI was recognized		282
December 31, 2012	$	282

There were no credit losses recognized in earnings on AFS 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 our testing that it is unlikely that we will 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 December 31, 2012 or December 31, 2011.

XML

Loans and Allowance for Loan Losses

12 Months Ended

Dec. 31, 2012

Loans and Allowance for Loan Losses [Abstract]

LOANS AND ALLOWANCE FOR LOAN LOSSES

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 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 and agricultural loans are secured primarily by real estate, business assets, and personal guarantees; a portion of loans are unsecured.

Commercial and agricultural loans include loans for commercial real estate, commercial operating loans, farmland and agricultural production, and states and political subdivisions. Repayment of these loans is often dependent upon the successful operation and management of a business; 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 80% or less. Depending upon the type of loan, past credit history, and current operating results, we may require borrowers 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 FHLMC. 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 these loans to FHLMC.

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 Year Ended December 31, 2012
	Commercial			Agricultural			Residential Real Estate			Consumer			Unallocated			Total
January 1, 2012	$	6,284		$	1,003		$	2,980		$	633		$	1,475		$	12,375
Loans charged off		(1,672	)		—			(1,142	)		(542	)		—			(3,356	)
Recoveries		240			—			122			255			—			617
Provision for loan losses		2,010			(596	)		1,667			320			(1,101	)		2,300
December 31, 2012	$	6,862		$	407		$	3,627		$	666		$	374		$	11,936
	Allowance for Loan Losses and Recorded Investment in Loans As of December 31, 2012
	Commercial			Agricultural			Residential Real Estate			Consumer			Unallocated			Total
ALLL
Individually evaluated for impairment	$	2,050		$	91		$	1,796		$	—		$	—		$	3,937
Collectively evaluated for impairment		4,812			316			1,831			666			374			7,999
Total	$	6,862		$	407		$	3,627		$	666		$	374		$	11,936
Loans
Individually evaluated for impairment	$	14,456		$	723		$	10,704		$	75					$	25,958
Collectively evaluated for impairment		357,049			82,883			273,444			33,419						746,795
Total	$	371,505		$	83,606		$	284,148		$	33,494					$	772,753

	Allowance for Loan Losses Year Ended December 31, 2011
	Commercial			Agricultural			Residential Real Estate			Consumer			Unallocated			Total
January 1, 2011	$	6,048		$	1,033		$	3,198		$	605		$	1,489		$	12,373
Loans charged off		(1,863	)		(121	)		(2,240	)		(552	)		—			(4,776	)
Recoveries		460			1			177			314			—			952
Provision for loan losses		1,639			90			1,845			266			(14	)		3,826
December 31, 2011	$	6,284		$	1,003		$	2,980		$	633		$	1,475		$	12,375
	Allowance for Loan Losses and Recorded Investment in Loans As of December 31, 2011
	Commercial			Agricultural			Residential Real Estate			Consumer			Unallocated			Total
ALLL
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 December 31:

	2012
	Commercial						Agricultural
	Real Estate		Other		Total		Real Estate		Other		Total
Rating
2 - High quality	$	25,209	$	15,536	$	40,745	$	2,955	$	2,313	$	5,268
3 - High satisfactory		83,805		28,974		112,779		16,972		11,886		28,858
4 - Low satisfactory		127,423		45,143		172,566		27,291		15,437		42,728
5 - Special mention		16,046		1,692		17,738		1,008		3,191		4,199
6 - Substandard		20,029		2,224		22,253		1,167		1,217		2,384
7 - Vulnerable		1,512		2,294		3,806		—		—		—
8 - Doubtful		1,596		22		1,618		—		169		169
Total	$	275,620	$	95,885	$	371,505	$	49,393	$	34,213	$	83,606
	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 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 our past due and current loans as of December 31:

	2012
	Accruing Interest and Past Due:						Nonaccrual		Total Past  Due and Nonaccrual		Current		Total
	30-59 Days		60-89 Days		90 Days or More
Commercial
Commercial real estate	$	1,304	$	161	$	63	$	2,544	$	4,072	$	271,548	$	275,620
Commercial other		606		—		40		2,294		2,940		92,945		95,885
Total commercial		1,910		161		103		4,838		7,012		364,493		371,505
Agricultural
Agricultural real estate		—		—		—		—		—		49,393		49,393
Agricultural other		90		—		—		169		259		33,954		34,213
Total agricultural		90		—		—		169		259		83,347		83,606
Residential real estate
Senior liens		2,000		346		320		2,064		4,730		223,532		228,262
Junior liens		232		—		—		50		282		16,207		16,489
Home equity lines of credit		237		—		—		182		419		38,978		39,397
Total residential real estate		2,469		346		320		2,296		5,431		278,717		284,148
Consumer
Secured		127		33		4		—		164		28,118		28,282
Unsecured		31		3		1		—		35		5,177		5,212
Total consumer		158		36		5		—		199		33,295		33,494
Total	$	4,627	$	543	$	428	$	7,303	$	12,901	$	759,852	$	772,753
	2011
	Accruing Interest and Past Due:						Nonaccrual		Total Past  Due and Nonaccrual		Current		Total
	30-59 Days		60-89 Days		90 Days or More
Commercial
Commercial real estate	$	1,721	$	—	$	364	$	4,176	$	6,261	$	251,834	$	258,095
Commercial other		388		38		3		25		454		107,165		107,619
Total commercial		2,109		38		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		2,668		336		124		1,292		4,420		213,181		217,601
Junior liens		203		32		40		94		369		20,877		21,246
Home equity lines of credit		185		—		125		198		508		39,005		39,513
Total residential real estate		3,056		368		289		1,584		5,297		273,063		278,360
Consumer
Secured		127		31		5		—		163		26,011		26,174
Unsecured		20		3		—		—		23		5,375		5,398
Total consumer		147		34		5		—		186		31,386		31,572
Total	$	5,312	$	442	$	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 charge-off of its principal balance (in whole or in part);

2. The loan has been classified as a TDR; or

3. The loan is in nonaccrual status.

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

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 year ended December 31:

	2012
	Outstanding Balance		Unpaid Principal Balance		Valuation Allowance		Average Outstanding Balance		Interest Income Recognized
Impaired loans with a valuation allowance
Commercial real estate	$	7,295	$	7,536	$	1,653	$	6,155	$	237
Commercial other		2,140		2,140		397		1,437		93
Agricultural real estate		91		91		32		413		—
Agricultural other		420		420		59		1,555		54
Residential real estate senior liens		10,450		11,654		1,783		8,860		405
Residential real estate junior liens		72		118		13		134		6
Total impaired loans with a valuation allowance		20,468		21,959		3,937		18,554		795
Impaired loans without a valuation allowance
Commercial real estate		3,749		4,408				5,867		321
Commercial other		1,272		1,433				819		87
Agricultural real estate		—		—				183		—
Agricultural other		212		332				201		4
Residential real estate senior liens		—		18				1		1
Home equity lines of credit		182		482				190		16
Consumer secured		75		84				90		6
Total impaired loans without a valuation allowance		5,490		6,757				7,351		435
Impaired loans
Commercial		14,456		15,517		2,050		14,278		738
Agricultural		723		843		91		2,352		58
Residential real estate		10,704		12,272		1,796		9,185		428
Consumer		75		84		—		90		6
Total impaired loans	$	25,958	$	28,716	$	3,937	$	25,905	$	1,230

	2011
	Outstanding Balance		Unpaid Principal Balance		Valuation Allowance		Average Outstanding Balance		Interest Income Recognized
Impaired loans with a valuation allowance
Commercial real estate	$	5,014	$	5,142	$	1,881	$	4,012	$	247
Commercial other		734		734		271		376		25
Agricultural real estate		—		—		—		9		—
Agricultural other		2,689		2,689		822		2,443		138
Residential mortgage senior liens		7,269		8,825		1,111		5,781		331
Residential mortgage junior liens		195		260		35		184		11
Total impaired loans with a valuation allowance		15,901		17,650		4,120		12,805		752
Impaired loans without a valuation allowance
Commercial real estate		7,984		10,570				4,863		375
Commercial other		365		460				267		10
Agricultural real estate		190		190				180		—
Agricultural other		505		625				253		18
Residential mortgage senior liens		2		2				202		—
Home equity lines of credit		198		498				99		12
Consumer secured		105		114				77		4
Total impaired loans without a valuation allowance		9,349		12,459				5,941		419
Impaired loans
Commercial		14,097		16,906		2,152		9,518		657
Agricultural		3,384		3,504		822		2,885		156
Residential mortgage		7,664		9,585		1,146		6,266		354
Consumer		105		114		—		77		4
Total impaired loans	$	25,250	$	30,109	$	4,120	$	18,746	$	1,171

As of December 31, 2012 and 2011, we had committed to advance $9 and $243, respectively, in connection with impaired loans, which include TDR’s.

Troubled Debt Restructurings

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

Typical concessions granted include, but are not limited to:

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

2. Extending the amortization period beyond typical lending guidelines for 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. The borrower would likely default on any of their debt if the concession was not granted.

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

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

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

The following is a summary of information pertaining to TDR’s granted in the years ended December 31:

	2012						2011
	Number of Loans		Pre- Modification Recorded Investment		Post- Modification Recorded Investment		Number of Loans		Pre- Modification Recorded Investment		Post- Modification Recorded Investment
Commercial
Commercial real estate		1	$	912	$	792		1	$	408	$	408
Commercial other		28		6,437		6,437		42		12,575		12,132
Total commercial		29		7,349		7,229		43		12,983		12,540
Agricultural other		7		652		652		8		1,321		1,321
Residential real estate
Senior liens		29		3,463		3,463		36		3,915		3,865
Junior liens		1		22		22		—		—		—
Total residential real estate		30		3,485		3,485		36		3,915		3,865
Consumer
Secured		1		—		—		7		69		69
Unsecured		—		—		—		2		20		20
Total consumer		1		—		—		9		89		89
Total		67	$	11,486	$	11,366		96	$	18,308	$	17,815

The following tables summarize concessions we granted to borrowers in financial difficulty during 2012:

	Below Market Interest Rate				Extension of Amortization Period				Below Market Interest Rate and Extension of Amortization Period
	Number of Loans		Pre- Modification Recorded Investment		Number of Loans		Pre- Modification Recorded Investment		Number of Loans		Pre- Modification Recorded Investment
Commercial
Commercial real estate		—	$	—		—	$	—		1	$	912
Commercial other		25		4,924		1		1,368		2		145
Total commercial		25		4,924		1		1,368		3		1,057
Agricultural other		6		561		1		91		—		—
Residential real estate
Senior liens		17		1,779		3		521		9		1,163
Junior liens		—		—		—		—		1		22
Total residential real estate		17		1,779		3		521		10		1,185
Consumer secured		1		—		—		—		—		—
Total		49	$	7,264		5	$	1,980		13	$	2,242

The following tables summarize concessions we granted to borrowers in financial difficulty during 2011:

	Below Market Interest Rate				Extension of Amortization Period				Below Market Interest Rate and Extension of Amortization Period
	Number of Loans		Pre- Modification Recorded Investment		Number of Loans		Pre- Modification Recorded Investment		Number of Loans		Pre- Modification Recorded Investment
Commercial
Commercial real estate		1	$	408		—	$	—		—	$	—
Commercial other		38		9,932		—		—		4		2,643
Total commercial		39		10,340		—		—		4		2,643
Agricultural other		8		1,321		—		—		—		—
Residential real estate Senior liens		19		2,161		—		—		17		1,754
Consumer
Secured		6		65		—		—		1		4
Unsecured		—		—		—		—		2		20
Total consumer		6		65		—		—		3		24
Total		72	$	13,887		—	$	—		24	$	4,421

We did not restructure any loans through the forbearance of principal or accrued interest during 2012 and 2011.

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 during 2012, which were modified within 12 months prior to the default date:

	Number of Loans		Pre- Default Recorded Investment		Charge-Off Recorded Upon Default		Post- Default Recorded Investment
Commercial other		5	$	342	$	143	$	199
Residential real estate senior liens		1		47		43		4
Consumer secured		1		8		8		—
Total		7	$	397	$	194	$	203

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

The following is a summary of TDR loan balances as of December 31:

	2012		2011
Troubled debt restructurings	$	19,355	$	18,756

XML

Goodwill and Other Intangible Assets

12 Months Ended

Dec. 31, 2012

Goodwill and Other Intangible Assets [Abstract]

GOODWILL AND OTHER INTANGIBLE ASSETS

NOTE 8 – GOODWILL AND OTHER INTANGIBLE ASSETS

The carrying amount of goodwill was $45,618 at December 31, 2012 and 2011.

Identifiable intangible assets at year end were as follows:

	2012
	Gross Intangible Assets		Accumulated Amortization		Net Intangible Assets
Core deposit premium resulting from acquisitions	$	5,373	$	4,459	$	914
	2011
	Gross Intangible Assets		Accumulated Amortization		Net Intangible Assets
Core deposit premium resulting from acquisitions	$	5,373	$	4,199	$	1,174

Amortization expense associated with identifiable intangible assets was $260, $299, and $338 in 2012, 2011, and 2010, respectively.

Estimated amortization expense associated with identifiable intangibles for each of the next five years succeeding December 31, 2012, and thereafter is as follows:

Year	Amount
2013	$	221
2014		183
2015		145
2016		106
2017		74
Thereafter		185
	$	914

XML

Loans and Allowance for Loan Losses (Details 2) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2012	Dec. 31, 2011
Credit quality indicators for commercial and agricultural credit exposures
Total	$ 760,817	$ 737,916
Commercial real estate [Member]
Credit quality indicators for commercial and agricultural credit exposures
Total	275,620	258,095
Commercial other [Member]
Credit quality indicators for commercial and agricultural credit exposures
Total	95,885	107,619
Total commercial [Member]
Credit quality indicators for commercial and agricultural credit exposures
Total	371,505	365,714
Agricultural real estate [Member]
Credit quality indicators for commercial and agricultural credit exposures
Total	49,393	44,683
Agricultural other [Member]
Credit quality indicators for commercial and agricultural credit exposures
Total	34,213	29,962
Total agricultural [Member]
Credit quality indicators for commercial and agricultural credit exposures
Total	83,606	74,645
2 - High quality [Member] | Commercial real estate [Member]
Credit quality indicators for commercial and agricultural credit exposures
Total	25,209	11,113
2 - High quality [Member] | Commercial other [Member]
Credit quality indicators for commercial and agricultural credit exposures
Total	15,536	11,013
2 - High quality [Member] | Total commercial [Member]
Credit quality indicators for commercial and agricultural credit exposures
Total	40,745	22,126
2 - High quality [Member] | Agricultural real estate [Member]
Credit quality indicators for commercial and agricultural credit exposures
Total	2,955	3,583
2 - High quality [Member] | Agricultural other [Member]
Credit quality indicators for commercial and agricultural credit exposures
Total	2,313	1,390
2 - High quality [Member] | Total agricultural [Member]
Credit quality indicators for commercial and agricultural credit exposures
Total	5,268	4,973
3 - High satisfactory [Member] | Commercial real estate [Member]
Credit quality indicators for commercial and agricultural credit exposures
Total	83,805	90,064
3 - High satisfactory [Member] | Commercial other [Member]
Credit quality indicators for commercial and agricultural credit exposures
Total	28,974	29,972
3 - High satisfactory [Member] | Total commercial [Member]
Credit quality indicators for commercial and agricultural credit exposures
Total	112,779	120,036
3 - High satisfactory [Member] | Agricultural real estate [Member]
Credit quality indicators for commercial and agricultural credit exposures
Total	16,972	11,154
3 - High satisfactory [Member] | Agricultural other [Member]
Credit quality indicators for commercial and agricultural credit exposures
Total	11,886	5,186
3 - High satisfactory [Member] | Total agricultural [Member]
Credit quality indicators for commercial and agricultural credit exposures
Total	28,858	16,340
4 - Low satisfactory [Member] | Commercial real estate [Member]
Credit quality indicators for commercial and agricultural credit exposures
Total	127,423	118,611
4 - Low satisfactory [Member] | Commercial other [Member]
Credit quality indicators for commercial and agricultural credit exposures
Total	45,143	57,572
4 - Low satisfactory [Member] | Total commercial [Member]
Credit quality indicators for commercial and agricultural credit exposures
Total	172,566	176,183
4 - Low satisfactory [Member] | Agricultural real estate [Member]
Credit quality indicators for commercial and agricultural credit exposures
Total	27,291	24,253
4 - Low satisfactory [Member] | Agricultural other [Member]
Credit quality indicators for commercial and agricultural credit exposures
Total	15,437	15,750
4 - Low satisfactory [Member] | Total agricultural [Member]
Credit quality indicators for commercial and agricultural credit exposures
Total	42,728	40,003
5 - Special mention [Member] | Commercial real estate [Member]
Credit quality indicators for commercial and agricultural credit exposures
Total	16,046	15,482
5 - Special mention [Member] | Commercial other [Member]
Credit quality indicators for commercial and agricultural credit exposures
Total	1,692	4,200
5 - Special mention [Member] | Total commercial [Member]
Credit quality indicators for commercial and agricultural credit exposures
Total	17,738	19,682
5 - Special mention [Member] | Agricultural real estate [Member]
Credit quality indicators for commercial and agricultural credit exposures
Total	1,008	3,863
5 - Special mention [Member] | Agricultural other [Member]
Credit quality indicators for commercial and agricultural credit exposures
Total	3,191	2,907
5 - Special mention [Member] | Total agricultural [Member]
Credit quality indicators for commercial and agricultural credit exposures
Total	4,199	6,770
6 - Substandard [Member] | Commercial real estate [Member]
Credit quality indicators for commercial and agricultural credit exposures
Total	20,029	19,017
6 - Substandard [Member] | Commercial other [Member]
Credit quality indicators for commercial and agricultural credit exposures
Total	2,224	4,819
6 - Substandard [Member] | Total commercial [Member]
Credit quality indicators for commercial and agricultural credit exposures
Total	22,253	23,836
6 - Substandard [Member] | Agricultural real estate [Member]
Credit quality indicators for commercial and agricultural credit exposures
Total	1,167	1,640
6 - Substandard [Member] | Agricultural other [Member]
Credit quality indicators for commercial and agricultural credit exposures
Total	1,217	4,314
6 - Substandard [Member] | Total agricultural [Member]
Credit quality indicators for commercial and agricultural credit exposures
Total	2,384	5,954
7 - Vulnerable [Member] | Commercial real estate [Member]
Credit quality indicators for commercial and agricultural credit exposures
Total	1,512	187
7 - Vulnerable [Member] | Commercial other [Member]
Credit quality indicators for commercial and agricultural credit exposures
Total	2,294
7 - Vulnerable [Member] | Total commercial [Member]
Credit quality indicators for commercial and agricultural credit exposures
Total	3,806	187
8 - Doubtful [Member] | Commercial real estate [Member]
Credit quality indicators for commercial and agricultural credit exposures
Total	1,596	3,621
8 - Doubtful [Member] | Commercial other [Member]
Credit quality indicators for commercial and agricultural credit exposures
Total	22	43
8 - Doubtful [Member] | Total commercial [Member]
Credit quality indicators for commercial and agricultural credit exposures
Total	1,618	3,664
8 - Doubtful [Member] | Agricultural real estate [Member]
Credit quality indicators for commercial and agricultural credit exposures
Total		190
8 - Doubtful [Member] | Agricultural other [Member]
Credit quality indicators for commercial and agricultural credit exposures
Total	169	415
8 - Doubtful [Member] | Total agricultural [Member]
Credit quality indicators for commercial and agricultural credit exposures
Total	$ 169	$ 605

XML

Operating Segments (Details)	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010
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%

XML

Federal Income Taxes (Details) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010
Components of the consolidated provision for federal income taxes
Currently payable	$ 1,747	$ 965	$ 1,425
Deferred expense	616	389	179
Income tax expense	$ 2,363	$ 1,354	$ 1,604

XML

Loans and Allowance for Loan Losses (Details 4) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011
Information pertaining to impaired loans
Impaired loans with a valuation allowance, Outstanding Balance	$ 20,468	$ 15,901
Impaired loans without a valuation allowance, Outstanding Balance	5,490	9,349
Impaired loans, Outstanding Balance	25,958	25,250
Impaired loans with a valuation allowance, Unpaid Principal Balance	21,959	17,650
Impaired loans without a valuation allowance, Unpaid Principal Balance	6,757	12,459
Impaired loans, Unpaid Principal Balance	28,716	30,109
Impaired loans with a valuation allowance, Valuation Allowance	3,937	4,120
Impaired loans without a valuation allowance, Valuation Allowance
Impaired loans, Valuation Allowance	3,937	4,120
Impaired loans with a valuation allowance, Average Outstanding Balance	18,554	12,805
Impaired loans without a valuation allowance, Average Outstanding Balance	7,351	5,941
Impaired loans, Average Outstanding Balance	25,905	18,746
Impaired loans with a valuation allowance, Interest Income Recognized	795	752
Impaired loans without a valuation allowance, Interest Income Recognized	435	419
Impaired loans, Interest Income Recognized	1,230	1,171
Commercial real estate [Member]
Information pertaining to impaired loans
Impaired loans with a valuation allowance, Outstanding Balance	7,295	5,014
Impaired loans without a valuation allowance, Outstanding Balance	3,749	7,984
Impaired loans with a valuation allowance, Unpaid Principal Balance	7,536	5,142
Impaired loans without a valuation allowance, Unpaid Principal Balance	4,408	10,570
Impaired loans with a valuation allowance, Valuation Allowance	1,653	1,881
Impaired loans with a valuation allowance, Average Outstanding Balance	6,155	4,012
Impaired loans without a valuation allowance, Average Outstanding Balance	5,867	4,863
Impaired loans with a valuation allowance, Interest Income Recognized	237	247
Impaired loans without a valuation allowance, Interest Income Recognized	321	375
Commercial other [Member]
Information pertaining to impaired loans
Impaired loans with a valuation allowance, Outstanding Balance	2,140	734
Impaired loans without a valuation allowance, Outstanding Balance	1,272	365
Impaired loans with a valuation allowance, Unpaid Principal Balance	2,140	734
Impaired loans without a valuation allowance, Unpaid Principal Balance	1,433	460
Impaired loans with a valuation allowance, Valuation Allowance	397	271
Impaired loans with a valuation allowance, Average Outstanding Balance	1,437	376
Impaired loans without a valuation allowance, Average Outstanding Balance	819	267
Impaired loans with a valuation allowance, Interest Income Recognized	93	25
Impaired loans without a valuation allowance, Interest Income Recognized	87	10
Commercial [Member]
Information pertaining to impaired loans
Impaired loans, Outstanding Balance	14,456	14,097
Impaired loans, Unpaid Principal Balance	15,517	16,906
Impaired loans, Valuation Allowance	2,050	2,152
Impaired loans, Average Outstanding Balance	14,278	9,518
Impaired loans, Interest Income Recognized	738	657
Agricultural real estate [Member]
Information pertaining to impaired loans
Impaired loans with a valuation allowance, Outstanding Balance	91
Impaired loans without a valuation allowance, Outstanding Balance		190
Impaired loans with a valuation allowance, Unpaid Principal Balance	91
Impaired loans without a valuation allowance, Unpaid Principal Balance		190
Impaired loans with a valuation allowance, Valuation Allowance	32
Impaired loans with a valuation allowance, Average Outstanding Balance	413	9
Impaired loans without a valuation allowance, Average Outstanding Balance	183	180
Agricultural other [Member]
Information pertaining to impaired loans
Impaired loans with a valuation allowance, Outstanding Balance	420	2,689
Impaired loans without a valuation allowance, Outstanding Balance	212	505
Impaired loans with a valuation allowance, Unpaid Principal Balance	420	2,689
Impaired loans without a valuation allowance, Unpaid Principal Balance	332	625
Impaired loans with a valuation allowance, Valuation Allowance	59	822
Impaired loans with a valuation allowance, Average Outstanding Balance	1,555	2,443
Impaired loans without a valuation allowance, Average Outstanding Balance	201	253
Impaired loans with a valuation allowance, Interest Income Recognized	54	138
Impaired loans without a valuation allowance, Interest Income Recognized	4	18
Agricultural [Member]
Information pertaining to impaired loans
Impaired loans, Outstanding Balance	723	3,384
Impaired loans, Unpaid Principal Balance	843	3,504
Impaired loans, Valuation Allowance	91	822
Impaired loans, Average Outstanding Balance	2,352	2,885
Impaired loans, Interest Income Recognized	58	156
Residential real estate senior liens [Member]
Information pertaining to impaired loans
Impaired loans with a valuation allowance, Outstanding Balance	10,450
Impaired loans with a valuation allowance, Unpaid Principal Balance	11,654
Impaired loans without a valuation allowance, Unpaid Principal Balance	18
Impaired loans with a valuation allowance, Valuation Allowance	1,783
Impaired loans with a valuation allowance, Average Outstanding Balance	8,860
Impaired loans without a valuation allowance, Average Outstanding Balance	1
Impaired loans with a valuation allowance, Interest Income Recognized	405
Impaired loans without a valuation allowance, Interest Income Recognized	1
Residential real estate junior liens [Member]
Information pertaining to impaired loans
Impaired loans with a valuation allowance, Outstanding Balance	72
Impaired loans with a valuation allowance, Unpaid Principal Balance	118
Impaired loans with a valuation allowance, Valuation Allowance	13
Impaired loans with a valuation allowance, Average Outstanding Balance	134
Impaired loans with a valuation allowance, Interest Income Recognized	6
Residential mortgage senior liens [Member]
Information pertaining to impaired loans
Impaired loans with a valuation allowance, Outstanding Balance		7,269
Impaired loans without a valuation allowance, Outstanding Balance		2
Impaired loans with a valuation allowance, Unpaid Principal Balance		8,825
Impaired loans without a valuation allowance, Unpaid Principal Balance		2
Impaired loans with a valuation allowance, Valuation Allowance		1,111
Impaired loans with a valuation allowance, Average Outstanding Balance		5,781
Impaired loans without a valuation allowance, Average Outstanding Balance		202
Impaired loans with a valuation allowance, Interest Income Recognized		331
Residential mortgage junior liens [Member]
Information pertaining to impaired loans
Impaired loans with a valuation allowance, Outstanding Balance		195
Impaired loans with a valuation allowance, Unpaid Principal Balance		260
Impaired loans with a valuation allowance, Valuation Allowance		35
Impaired loans with a valuation allowance, Average Outstanding Balance		184
Impaired loans with a valuation allowance, Interest Income Recognized		11
Home equity lines of credit [Member]
Information pertaining to impaired loans
Impaired loans without a valuation allowance, Outstanding Balance	182	198
Impaired loans without a valuation allowance, Unpaid Principal Balance	482	498
Impaired loans without a valuation allowance, Average Outstanding Balance	190	99
Impaired loans without a valuation allowance, Interest Income Recognized	16	12
Residential mortgages [Member]
Information pertaining to impaired loans
Impaired loans, Outstanding Balance		7,664
Impaired loans, Unpaid Principal Balance		9,585
Impaired loans, Valuation Allowance		1,146
Impaired loans, Average Outstanding Balance		6,266
Impaired loans, Interest Income Recognized		354
Consumer secured [Member]
Information pertaining to impaired loans
Impaired loans without a valuation allowance, Outstanding Balance	75	105
Impaired loans without a valuation allowance, Unpaid Principal Balance	84	114
Impaired loans without a valuation allowance, Average Outstanding Balance	90	77
Impaired loans without a valuation allowance, Interest Income Recognized	6	4
Residential Real Estate [Member]
Information pertaining to impaired loans
Impaired loans, Outstanding Balance	10,704
Impaired loans, Unpaid Principal Balance	12,272
Impaired loans, Valuation Allowance	1,796
Impaired loans, Average Outstanding Balance	9,185
Impaired loans, Interest Income Recognized	428
Consumer [Member]
Information pertaining to impaired loans
Impaired loans, Outstanding Balance	75	105
Impaired loans, Unpaid Principal Balance	84	114
Impaired loans, Average Outstanding Balance	90	77
Impaired loans, Interest Income Recognized	$ 6	$ 4

XML

Benefit Plans (Details 7) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010
Components of projected net periodic benefit cost
Interest cost on projected benefit obligation	$ 450	$ 470	$ 507	$ 531
Expected return on plan assets	(572)	(511)	(522)	(491)
Amortization of unrecognized actuarial net loss	330	292	153	153
Total	$ 208	$ 251	$ 138	$ 193

XML

Loans and Allowance for Loan Losses (Details 1) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2012	Dec. 31, 2011
Allowance for loan losses [Member]
Allowance for Loan Losses and Recorded Investment in Loans
Individually evaluated for impairment	$ 3,937	$ 4,120
Collectively evaluated for impairment	7,999	8,255
Total	11,936	12,375
Loans [Member]
Allowance for Loan Losses and Recorded Investment in Loans
Individually evaluated for impairment	25,958	25,250
Collectively evaluated for impairment	746,795	725,041
Total	772,753	750,291
Commercial [Member] | Allowance for loan losses [Member]
Allowance for Loan Losses and Recorded Investment in Loans
Individually evaluated for impairment	2,050	2,152
Collectively evaluated for impairment	4,812	4,132
Total	6,862	6,284
Commercial [Member] | Loans [Member]
Allowance for Loan Losses and Recorded Investment in Loans
Individually evaluated for impairment	14,456	14,097
Collectively evaluated for impairment	357,049	351,617
Total	371,505	365,714
Agricultural [Member] | Allowance for loan losses [Member]
Allowance for Loan Losses and Recorded Investment in Loans
Individually evaluated for impairment	91	822
Collectively evaluated for impairment	316	181
Total	407	1,003
Agricultural [Member] | Loans [Member]
Allowance for Loan Losses and Recorded Investment in Loans
Individually evaluated for impairment	723	3,384
Collectively evaluated for impairment	82,883	71,261
Total	83,606	74,645
Residential Real Estate [Member] | Allowance for loan losses [Member]
Allowance for Loan Losses and Recorded Investment in Loans
Individually evaluated for impairment	1,796	1,146
Collectively evaluated for impairment	1,831	1,834
Total	3,627	2,980
Residential Real Estate [Member] | Loans [Member]
Allowance for Loan Losses and Recorded Investment in Loans
Individually evaluated for impairment	10,704	7,664
Collectively evaluated for impairment	273,444	270,696
Total	284,148	278,360
Consumer [Member] | Allowance for loan losses [Member]
Allowance for Loan Losses and Recorded Investment in Loans
Collectively evaluated for impairment	666	633
Total	666	633
Consumer [Member] | Loans [Member]
Allowance for Loan Losses and Recorded Investment in Loans
Individually evaluated for impairment	75	105
Collectively evaluated for impairment	33,419	31,467
Total	33,494	31,572
Unallocated [Member] | Allowance for loan losses [Member]
Allowance for Loan Losses and Recorded Investment in Loans
Collectively evaluated for impairment	374	1,475
Total	$ 374	$ 1,475

XML

On-Balance Sheet Activities (Details Textual) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2012 Interest Rate Lock Commitments [Member]	Dec. 31, 2011 Interest Rate Lock Commitments [Member]	Dec. 31, 2012 Forward Loan Sale Commitments [Member]	Dec. 31, 2011 Forward Loan Sale Commitments [Member]
On-Balance Sheet Activities (Textual) [Abstract]
Notional Amount of undesignated commitments		$ 1,912	$ 875	$ 5,545	$ 4,080
On-Balance Sheet Activities (Additional Textual) [Abstract]
Time period within which corporation can lend funds to borrower	60 days

XML

Trading Securities (Tables)

12 Months Ended

Dec. 31, 2012

Trading Securities and AFS Securities [Abstract]

Schedule of trading securities, at fair value

	2012		2011
States and political subdivisions	$	1,573	$	4,710

XML

Nature of Operations and Summary of Significant Accounting Policies (Details Textual) (USD $) In Thousands, except Share data, unless otherwise specified	12 Months Ended
	Dec. 31, 2012 Location	Dec. 31, 2011	Dec. 31, 2010
Nature of Operations and Summary of Significant Accounting Policies (Textual) [Abstract]
Number of location of banking operations	26
Period for federal fund sold	1 day
Maturity date of certificates of deposit	3 years
Number of days for discontinuance of accrual of interest	90 days
Maximum period for consumer loans charge off	180 days
Purchase servicing rights	$ 0
Corporation recorded servicing fee revenue	757	732	760
Foreclosed assets included in Other Assets on the accompanying consolidated balance sheets	2,018	1,876
Present value of the post retirement benefits payable	2,657	2,633
Periodic policy maintenance costs	24	60	68
Director Plan [Member]
Deferred Compensation Arrangement with Individual, Share-based Payments [Line Items]
Shares under deferred compensation plan	170,566	218,023
Director Plan [Member] | Rabbi Trust [Member]
Deferred Compensation Arrangement with Individual, Share-based Payments [Line Items]
Shares under deferred compensation plan	5,130	16,585
Federal Deposit Insurance Corporation [Member]
Entity Information [Line Items]
Carrying balance of FDIC INSURANCE PREMIUM	1,804	2,588
Minimum [Member]
Property, Plant and Equipment [Line Items]
Useful lives of the related assets	3 years
Maximum [Member]
Property, Plant and Equipment [Line Items]
Useful lives of the related assets	40 years
Originated mortgage servicing rights [Member]
Mortgage Loans on Real Estate [Line Items]
Unpaid principal balance of mortgages serviced for others	303,351	304,626
Capitalized mortgage loans on real estate carrying amount	$ 2,285	$ 2,374

XML

Off-Balance-Sheet Activities

12 Months Ended

Dec. 31, 2012

Off-Balance-Sheet Activities [Abstract]

OFF-BALANCE-SHEET ACTIVITIES

NOTE 13 – OFF-BALANCE-SHEET ACTIVITIES

Credit-Related Financial Instruments

We are party to credit related financial instruments with off-balance-sheet risk. These financial instruments are entered into in the normal course of business to meet the financing needs of our customers. These financial instruments, which include commitments to extend credit and standby letters of credit, involve, to varying degrees, elements of credit and IRR 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.

	December 31
	2012		2011
Unfunded commitments under lines of credit	$	115,233	$	102,822
Commercial and standby letters of credit		3,935		4,461
Commitments to grant loans		40,507		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 we issued to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support private borrowing arrangements, including commercial paper, bond financing, and similar transactions. These commitments to extend credit and letters of credit 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 we deem necessary upon the extension of credit, is based on our credit evaluation of the borrower. While we consider standby letters of credit to be guarantees, the amount of the liability related to such guarantees on the commitment date is not significant and a liability related to such guarantees is not recorded on the consolidated balance sheets.

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 we deem necessary, is based on our 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 in deciding to make these commitments as we do for extending loans to customers. No significant losses are anticipated as a result of these commitments.

XML

Fair Value (Details 6) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011
Changes in fair value of assets and liabilities recorded at fair value
Total	$ (243)	$ (222)
Recurring items [Member]
Changes in fair value of assets and liabilities recorded at fair value
Trading securities	(52)	(78)
Borrowed funds	33	181
Nonrecurring items [Member]
Changes in fair value of assets and liabilities recorded at fair value
Foreclosed assets	(166)	(82)
Originated mortgage servicing rights	(58)	(243)
Trading Losses [Member]
Changes in fair value of assets and liabilities recorded at fair value
Total	(52)	(78)
Trading Losses [Member] | Recurring items [Member]
Changes in fair value of assets and liabilities recorded at fair value
Trading securities	(52)	(78)
Other Gains and (Losses) [Member]
Changes in fair value of assets and liabilities recorded at fair value
Total	(191)	(144)
Other Gains and (Losses) [Member] | Recurring items [Member]
Changes in fair value of assets and liabilities recorded at fair value
Borrowed funds	33	181
Other Gains and (Losses) [Member] | Nonrecurring items [Member]
Changes in fair value of assets and liabilities recorded at fair value
Foreclosed assets	(166)	(82)
Originated mortgage servicing rights	$ (58)	$ (243)

XML

Accumulated Other Comprehensive Income

12 Months Ended

Dec. 31, 2012

Accumulated Other Comprehensive Income [Abstract]

ACCUMULATED OTHER COMPREHENSIVE INCOME

NOTE 18 – ACCUMULATED OTHER COMPREHENSIVE INCOME

Accumulated other comprehensive income includes net income as well as unrealized gains and losses, net of tax, on AFS investment securities owned and changes in the funded status of our defined benefit pension plan, which are excluded from net income. Unrealized AFS securities gains and losses and changes in the funded status of the pension plan, net of tax, are excluded from net income, and are reflected as a direct charge or credit to shareholders’ equity. Comprehensive income (loss) and the related components are disclosed in the consolidated statements of comprehensive.

The following is a summary of the components comprising the balance of accumulated other comprehensive income (loss) reported on the consolidated balance sheets as of December 31 (presented net of tax):

	2012			2011
Unrealized gains on available-for-sale investment securities	$	8,678		$	5,942
Unrecognized pension costs		(3,671	)		(3,453	)
Accumulated other comprehensive income	$	5,007		$	2,489

XML

Benefit Plans (Details) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010
Change in benefit obligation
Benefit obligation, January 1		$ 11,334	$ 9,660
Interest cost	450	470	507	531
Actuarial loss		888	1,750
Benefits paid, including plan expenses		(483)	(583)
Benefit obligation, December 31		12,209	11,334	9,660
Change in plan assets
Fair value of plan assets, January 1		8,603	8,900
Investment return		778	148
Contributions		752	138
Benefits paid, including plan expenses		(483)	(583)
Fair value of plan assets, December 31		9,650	8,603	8,900
Deficiency in funded status at December31, included on the consolidated balance sheets in accrued interest payable and other liabilities		(2,559)	(2,731)
Change in accrued pension benefit costs
Accrued benefit cost at January 1		(2,731)	(760)
Contributions		752	138
Net periodic cost for the year	(208)	(251)	(138)	(193)
Net change in unrecognized actuarial loss and prior service cost		(329)	(1,971)
Accrued benefit cost at December 31		$ (2,559)	$ (2,731)	$ (760)

XML

Parent Company Only Financial Information (Tables)

12 Months Ended

Dec. 31, 2012

Parent Company Only Financial Information [Abstract]

Condensed Balance Sheets

Condensed Balance Sheets	December 31
	2012		2011
ASSETS
Cash on deposit at subsidiary Bank	$	332	$	1,474
Securities available for sale		3,939		3,567
Investments in subsidiaries		115,781		106,463
Premises and equipment		2,041		1,916
Other assets		52,398		52,060
TOTAL ASSETS	$	174,491	$	165,480
LIABILITIES AND SHAREHOLDERS’ EQUITY
Other liabilities	$	10,002	$	10,697
Shareholders’ equity		164,489		154,783
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	174,491	$	165,480

Condensed Statements of Income

Condensed Statements of Income	Year Ended December 31
	2012		2011		2010
Income
Dividends from subsidiaries	$	6,125	$	6,500	$	6,250
Interest income		174		128		72
Management fee and other		2,037		1,201		1,340
Total income		8,336		7,829		7,662
Expenses
Compensation and benefits		2,424		2,267		2,286
Occupancy and equipment		370		370		356
Audit fees		351		378		476
Other		945		1,089		932
Total expenses		4,090		4,104		4,050
Income before income tax benefit and equity in undistributed earnings of subsidiaries		4,246		3,725		3,612
Federal income tax benefit		673		958		896
		4,919		4,683		4,508
Undistributed earnings of subsidiaries		7,287		5,527		4,537
Net income	$	12,206	$	10,210	$	9,045

Condensed Statements of Cash Flows

Condensed Statements of Cash Flows	Year Ended December 31
	2012			2011			2010
OPERATING ACTIVITIES
Net income	$	12,206		$	10,210		$	9,045
Adjustments to reconcile net income to cash provided by operations
Undistributed earnings of subsidiaries		(7,287	)		(5,527	)		(4,537	)
Undistributed earnings of equity securities without readily determinable fair values		(459	)		160			(7	)
Share-based payment awards		643			615			650
Depreciation		114			123			147
Net amortization of investment securities		4			7			5
Deferred income tax expense (benefit)		425			(48	)		(172	)
Changes in operating assets and liabilities which (used) provided cash
Other assets		(513	)		7			305
Accrued interest and other liabilities		(98	)		757			1,883
NET CASH PROVIDED BY OPERATING ACTIVITIES		5,035			6,304			7,319
INVESTING ACTIVITIES
Activity in available-for-sale securities
Maturities, calls, and sales		370			585			110
Purchases		—			(3,000	)		—
(Purchases) sales of equipment and premises		(239	)		(87	)		247
Advances to subsidiaries		(50	)		—			(250	)
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES		81			(2,502	)		107
FINANCING ACTIVITIES
Net (decrease) increase in other borrowed funds		(597	)		2,772			(1,550	)
Cash dividends paid on common stock		(6,074	)		(5,770	)		(5,421	)
Proceeds from the issuance of common stock		2,279			2,302			2,208
Common stock repurchased		(1,361	)		(1,507	)		(2,020	)
Common stock purchased for deferred compensation obligations		(505	)		(426	)		(514	)
NET CASH USED IN FINANCING ACTIVITIES		(6,258	)		(2,629	)		(7,297	)
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS		(1,142	)		1,173			129
Cash and cash equivalents at beginning of year		1,474			301			172
CASH AND CASH EQUIVALENTS AT END OF YEAR	$	332		$	1,474		$	301

XML

Accumulated Other Comprehensive Income (Details) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2012	Dec. 31, 2011
Summary of the components of accumulated other comprehensive income
Unrealized gains on available-for-sale investment securities	$ 8,678	$ 5,942
Unrecognized pension costs	(3,671)	(3,453)
Accumulated other comprehensive income	$ 5,007	$ 2,489

XML

Other Noninterest Expenses (Tables)

12 Months Ended

Dec. 31, 2012

Other Noninterest Expenses [Abstract]

Summary of expenses included in other noninterest expenses

	2012		2011		2010
Marketing and community relations	$	1,965	$	1,174	$	1,093
Directors fees		885		842		887
FDIC insurance premiums		864		1,086		1,254
Audit fees		711		714		710
Education and travel		588		526		499
Consulting fees		482		386		167
Printing and supplies		424		405		420
Postage and freight		389		388		395
Other losses		300		54		72
Legal fees		268		302		382
Amortization of deposit premium		260		299		338
Foreclosed asset and collection		202		576		916
State taxes		187		57		51
All other		1,526		1,462		1,376
Total other	$	9,051	$	8,271	$	8,560

XML

Related Party Transactions (Details 1) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010
Summary of assets and contribution made to entity
Ending assets	$ 1,430,639	$ 1,337,925
Isabella Bank Foundation [Member]
Summary of assets and contribution made to entity
Ending assets	1,766	1,150	1,108
Contributions	$ 850	$ 250	$ 2,503

XML

Consolidated Statements of Changes in Shareholders' Equity (Parenthetical) (USD $)	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010
Cash dividends per share	$ 0.80	$ 0.76	$ 0.72
Retained Earnings
Cash dividends per share	$ 0.80	$ 0.76	$ 0.72

XML

Federal Income Taxes (Details 3) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2012	Dec. 31, 2011
Deferred tax assets
Allowance for loan losses	$ 3,133	$ 3,278
Deferred directors' fees	2,100	2,384
Employee benefit plans	189	158
Core deposit premium and acquisition expenses	892	800
Net unrealized losses on trading securities	351	364
Net unrecognized actuarial loss on pension plan	1,891	1,780
Life insurance death benefit payable	804	804
Alternative minimum tax	729	729
Other	195	260
Total deferred tax assets	10,284	10,557
Deferred tax liabilities
Prepaid pension cost	1,021	851
Premises and equipment	724	992
Accretion on securities	37	34
Core deposit premium and acquisition expenses	1,203	1,102
Net unrealized gains on available-for-sale securities	4,912	4,564
Other	1,163	937
Total deferred tax liabilities	9,060	8,480
Net deferred tax assets	$ 1,224	$ 2,077

XML

Computation of Earnings Per Share

12 Months Ended

Dec. 31, 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 year. 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 we may issue relate solely to outstanding shares in the Directors Plan, see “Note 17 – Benefit Plans.”

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

	2012		2011		2010
Average number of common shares outstanding for basic calculation		7,604,303		7,572,841		7,541,676
Average potential effect of shares in the Directors Plan (1)		195,063		194,634		187,744
Average number of common shares outstanding used to calculate diluted earnings per common share		7,799,366		7,767,475		7,729,420
Net income	$	12,206	$	10,210	$	9,045
Earnings per share
Basic	$	1.61	$	1.35	$	1.20
Diluted	$	1.56	$	1.31	$	1.17

(1) Exclusive of shares held in the Rabbi Trust

XML

AFS Securities (Details 3) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2012 Securities	Dec. 31, 2011 Securities
Available-for-sale securities with gross unrealized losses
Gross Unrealized Losses, Less Than Twelve Months	$ 190	$ 98
Fair Value, Less Than Twelve Months	30,518	25,701
Gross Unrealized Losses, Over Twelve Months	1,344	2,918
Fair Value, Over Twelve Months	8,493	7,082
Total Unrealized Losses	1,534	3,016
Number of Securities in an unrealized loss position, Less Than Twelve Months, Fair Value	15	6
Number of Securities in an unrealized loss position, Over Twelve Months, Fair Value	6	6
Number of Securities in an unrealized loss position, Total Unrealized Losses	21	12
Auction rate money market preferred [Member]
Available-for-sale securities with gross unrealized losses
Gross Unrealized Losses, Over Twelve Months	422	1,151
Fair Value, Over Twelve Months	2,778	2,049
Total Unrealized Losses	422	1,151
States and political subdivisions [Member]
Available-for-sale securities with gross unrealized losses
Gross Unrealized Losses, Less Than Twelve Months	80	51
Fair Value, Less Than Twelve Months	5,019	1,410
Gross Unrealized Losses, Over Twelve Months	485
Fair Value, Over Twelve Months	2,352
Total Unrealized Losses	565	51
Preferred stocks [Member]
Available-for-sale securities with gross unrealized losses
Gross Unrealized Losses, Over Twelve Months	437	1,767
Fair Value, Over Twelve Months	3,363	5,033
Total Unrealized Losses	437	1,767
Mortgage-backed securities [Member]
Available-for-sale securities with gross unrealized losses
Gross Unrealized Losses, Less Than Twelve Months	110	47
Fair Value, Less Than Twelve Months	25,499	24,291
Total Unrealized Losses	$ 110	$ 47

XML

Borrowed Funds (Details 4) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2012	Dec. 31, 2011
Summary of pledged certificates of deposit
Pledged to secure borrowed funds	$ 308,628	$ 292,092
Pledged to secure repurchase agreements	143,322	99,869
Pledged for public deposits and for other purposes necessary or required by law	22,955	26,761
Total	$ 474,905	$ 418,722

XML

Related Party Transactions (Details) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011
Annual activity
Balance, January 1	$ 3,728	$ 4,347
New loans	8,435	1,800
Repayments	(5,565)	(2,419)
Balance, December 31	$ 6,598	$ 3,728

XML

Loans and Allowance for Loan Losses (Details 7) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2012	Dec. 31, 2011
Summary of TDR loan balances
Troubled debt restructurings	$ 19,355	$ 18,756

XML

Related Party Transactions

12 Months Ended

Dec. 31, 2012

Related Party Transactions [Abstract]

RELATED PARTY TRANSACTIONS

NOTE 19 – RELATED PARTY TRANSACTIONS

In the ordinary course of business, we grant loans to principal officers and directors and their affiliates (including their families and companies in which they have 10% or more ownership). Annual activity during the years ended December 31 consisted of the following:

	2012			2011
Balance, January 1	$	3,728		$	4,347
New loans		8,435			1,800
Repayments		(5,565	)		(2,419	)
Balance, December 31	$	6,598		$	3,728

Total deposits of these principal officers and directors and their affiliates amounted to $6,871 and $7,664 at December 31, 2012 and 2011, respectively. In addition, the ESOP held deposits with the Bank aggregating $517 and $275, respectively, at December 31, 2012 and 2011.

From time to time, we make charitable donations to the Isabella Bank Foundation (the “Foundation”), which is an affiliated nonprofit entity formed for the purpose of distributing charitable donations to recipient organizations generally located in the communities we service. Donations are expensed when committed to the Foundation as they are non-refundable. The assets and transactions of the Foundation are not included in our consolidated financial statements.

The following table displays ending balances of, and our contributions to, the Foundation as of, and for the years ended, December 31:

	2012		2011		2010
Ending assets	$	1,766	$	1,150	$	1,108
Contributions	$	850	$	250	$	250

XML

Parent Company Only Financial Information (Details) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010	Dec. 31, 2009
ASSETS
Cash on deposit at subsidiary Bank	$ 24,920	$ 28,590	$ 18,109	$ 24,482
Securities available for sale	504,010	425,120
Premises and equipment	25,787	24,626
Other assets	12,784	12,930
TOTAL ASSETS	1,430,639	1,337,925
LIABILITIES AND SHAREHOLDERS' EQUITY
Shareholders' equity	164,489	154,783	145,161	140,803
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	1,430,639	1,337,925
Parent Company [Member]
ASSETS
Cash on deposit at subsidiary Bank	332	1,474	301	172
Securities available for sale	3,939	3,567
Investments in subsidiaries	115,781	106,463
Premises and equipment	2,041	1,916
Other assets	52,398	52,060
TOTAL ASSETS	174,491	165,480
LIABILITIES AND SHAREHOLDERS' EQUITY
Other liabilities	10,002	10,697
Shareholders' equity	164,489	154,783
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$ 174,491	$ 165,480

XML

Goodwill and Other Intangible Assets (Details 1) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2012
Summary of estimated amortization expense associated with identifiable intangibles
2013	$ 221
2014	183
2015	145
2016	106
2017	74
Thereafter	185
Net Intangible Assets	$ 914

XML

Goodwill and Other Intangible Assets (Tables)

12 Months Ended

Dec. 31, 2012

Goodwill and Other Intangible Assets [Abstract]

Summary of identifiable intangible assets

	2012
	Gross Intangible Assets		Accumulated Amortization		Net Intangible Assets
Core deposit premium resulting from acquisitions	$	5,373	$	4,459	$	914
	2011
	Gross Intangible Assets		Accumulated Amortization		Net Intangible Assets
Core deposit premium resulting from acquisitions	$	5,373	$	4,199	$	1,174

Summary of estimated amortization expense associated with identifiable intangibles

Year	Amount
2013	$	221
2014		183
2015		145
2016		106
2017		74
Thereafter		185
	$	914

XML

Federal Income Taxes

12 Months Ended

Dec. 31, 2012

Federal Income Taxes [Abstract]

FEDERAL INCOME TAXES

NOTE 12 – FEDERAL INCOME TAXES

Components of the consolidated provision for federal income taxes are as follows for the year ended December 31:

	2012		2011		2010
Currently payable	$	1,747	$	965	$	1,425
Deferred expense		616		389		179
Income tax expense	$	2,363	$	1,354	$	1,604

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 taxes is as follows for the years ended December 31:

	2012			2011			2010
Income taxes at 34% statutory rate	$	4,953		$	3,932		$	3,621
Effect of nontaxable income
Interest income on tax exempt municipal bonds		(1,675	)		(1,687	)		(1,565	)
Earnings on corporate owned life insurance		(238	)		(207	)		(225	)
Other		(147	)		(65	)		(132	)
Total effect of nontaxable income		(2,060	)		(1,959	)		(1,922	)
Effect of tax credits		(667	)		(793	)		(263	)
Effect of nondeductible expenses		137			174			168
Income tax expense	$	2,363		$	1,354		$	1,604

Included in OCI are unrealized gains (losses) on 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 the components of unrealized holding gains on AFS securities included in OCI follows for the years ended December 31:

	2012								2011									2010
	Auction Rate Money Market Preferred and Preferred Stocks		All Other AFS Securities			Total			Auction Rate Money Market Preferred and Preferred Stocks			All Other AFS Securities			Total			Auction Rate Money Market Preferred and Preferred Stocks			All Other AFS Securities			Total
Unrealized gains arising during the year	$	2,059	$	1,862		$	3,921		$	(1,719	)	$	10,939		$	9,220		$	(226	)	$	1,382		$	1,156
Reclassification adjustment for net realized gains included in net income		—		(1,119	)		(1,119	)		—			(3	)		(3	)		—			(348	)		(348	)
Reclassification adjustment for impairment loss included in net income		—		282			282			—			—			—			—			—			—
Net unrealized gains		2,059		1,025			3,084			(1,719	)		10,936			9,217			(226	)		1,034			808
Tax effect		—		(348	)		(348	)		—			(3,719	)		(3,719	)		—			(351	)		(351	)
Unrealized gains, net of tax	$	2,059	$	677		$	2,736		$	(1,719	)	$	7,217		$	5,498		$	(226	)	$	683		$	457

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for federal income tax purposes. Significant components of our deferred tax assets and liabilities, included in other assets in the accompanying consolidated balance sheets, are as follows as of December 31:

	2012		2011
Deferred tax assets
Allowance for loan losses	$	3,133	$	3,278
Deferred directors’ fees		2,100		2,384
Employee benefit plans		189		158
Core deposit premium and acquisition expenses		892		800
Net unrealized losses on trading securities		351		364
Net unrecognized actuarial loss on pension plan		1,891		1,780
Life insurance death benefit payable		804		804
Alternative minimum tax		729		729
Other		195		260
Total deferred tax assets		10,284		10,557
Deferred tax liabilities
Prepaid pension cost		1,021		851
Premises and equipment		724		992
Accretion on securities		37		34
Core deposit premium and acquisition expenses		1,203		1,102
Net unrealized gains on available-for-sale securities		4,912		4,564
Other		1,163		937
Total deferred tax liabilities		9,060		8,480
Net deferred tax assets	$	1,224	$	2,077

We are subject to U.S. federal income tax; however, we are no longer subject to examination by taxing authorities for years before 2009. There are no material uncertain tax positions requiring recognition in our consolidated financial statements. We do not expect the total amount of unrecognized tax benefits to significantly increase in the next twelve months.

We recognize interest and/or penalties related to income tax matters in income tax expense. We do not have any amounts accrued for interest and penalties at December 31, 2012 and 2011 and we not aware of any claims for such amounts by federal income tax authorities.

XML

Benefit Plans (Details 6) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2012
Summary of Estimated future benefit payments
2013	$ 432
2014	526
2015	567
2016	567
2017	593
Years 2018 - 2022	$ 3,281