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Table of Contents

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
     
þ   Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
For the quarterly period ended March 31, 2011
or
     
o   Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
For the transition period from                      to                     
Commission File Number: 0-18415
Isabella Bank Corporation
(Exact name of registrant as specified in its charter)
     
Michigan   38-2830092
     
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
identification No.)
     
401 N. Main St, Mt. Pleasant, MI   48858
     
(Address of principal executive offices)   (Zip code)
(989) 772-9471
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
þ Yes o 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).
o Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “accelerated filer”, “large accelerated filer”, and “smaller reporting company”, in Rule 12b-2 of the Exchange Act (Check One).
             
Large accelerated filer o   Accelerated filer þ   Non-accelerated filer o   Smaller reporting company o
        (Do not check if a smaller reporting company)    
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes þ No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Common Stock no par value, 7,561,641 as of April 18, 2011
 
 

 


 


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PART I — FINANCIAL INFORMATION
Item 1 — Interim Condensed Consolidated Financial Statements (Unaudited)
INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
                 
    March 31     December 31  
    2011     2010  
ASSETS
               
Cash and cash equivalents
               
Cash and demand deposits due from banks
  $ 18,341     $ 16,978  
Interest bearing balances due from banks
    4,991       1,131  
 
           
Total cash and cash equivalents
    23,332       18,109  
Certificates of deposit held in other financial institutions
    13,868       15,808  
Trading securities
    5,433       5,837  
Available-for-sale securities (amortized cost of $358,918 in 2011 and $329,435 in 2010)
    361,960       330,724  
Mortgage loans available-for-sale
    252       1,182  
Loans
               
Agricultural
    69,993       71,446  
Commercial
    350,456       348,852  
Installment
    29,283       30,977  
Residential real estate mortgage
    288,245       284,029  
 
           
Total loans
    737,977       735,304  
Less allowance for loan losses
    12,381       12,373  
 
           
Net loans
    725,596       722,931  
Premises and equipment
    24,219       24,627  
Corporate owned life insurance
    17,608       17,466  
Accrued interest receivable
    6,258       5,456  
Equity securities without readily determinable fair values
    17,423       17,564  
Goodwill and other intangible assets
    47,015       47,091  
Other assets
    19,217       19,015  
 
           
TOTAL ASSETS
  $ 1,262,181     $ 1,225,810  
 
           
 
               
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
Deposits
               
Noninterest bearing
  $ 108,720     $ 104,902  
NOW accounts
    152,784       142,259  
Certificates of deposit under $100 and other savings
    449,856       425,981  
Certificates of deposit over $100
    211,887       204,197  
 
           
Total deposits
    923,247       877,339  
Borrowed funds ($10,343 in 2011 and $10,423 in 2010 at fair value)
    183,263       194,917  
Accrued interest payable and other liabilities
    8,070       8,393  
 
           
Total liabilities
    1,114,580       1,080,649  
 
           
Shareholders’ equity
               
Common stock — no par value 15,000,000 shares authorized; issued and outstanding —7,560,903 (including 29,720 shares to be issued) in 2011 and 7,550,074 (including 32,686 shares to be issued) in 2010
    133,794       133,592  
Shares to be issued for deferred compensation obligations
    4,680       4,682  
Retained earnings
    9,478       8,596  
Accumulated other comprehensive loss
    (351 )     (1,709 )
 
           
Total shareholders’ equity
    147,601       145,161  
 
           
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
  $ 1,262,181     $ 1,225,810  
 
           
See notes to interim condensed consolidated financial statements.

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

(Dollars in thousands except per share data)
                                                 
                    Shares to be                      
                    Issued for             Accumulated        
    Common             Deferred             Other        
    Stock Shares     Common     Compensation     Retained     Comprehensive        
    Outstanding     Stock     Obligations     Earnings     Loss     Totals  
Balance, January 1, 2010
    7,535,193     $ 133,443     $ 4,507     $ 4,972     $ (2,119 )   $ 140,803  
Comprehensive income
                      2,023       815       2,838  
Issuance of common stock
    29,147       736                         736  
Common stock issued for deferred compensation obligations
    13,331       247       (195 )                 52  
Share based payment awards under equity compensation plan
                181                   181  
Common stock purchased for deferred compensation obligations
          (157 )                       (157 )
Common stock repurchased pursuant to publicly announced repurchase plan
    (34,165 )     (629 )                       (629 )
Cash dividends ($0.18 per share)
                      (1,354 )           (1,354 )
 
                                               
 
                                   
Balance, March 31, 2010
    7,543,506     $ 133,640     $ 4,493     $ 5,641     $ (1,304 )   $ 142,470  
 
                                   
 
                                               
Balance, January 1, 2011
    7,550,074     $ 133,592     $ 4,682     $ 8,596     $ (1,709 )   $ 145,161  
Comprehensive income
                      2,316       1,358       3,674  
Issuance of common stock
    30,531       728                         728  
Common stock issued for deferred compensation obligations
    12,037       215       (182 )                 33  
Share based payment awards under equity compensation plan
                180                   180  
Common stock purchased for deferred compensation obligations
          (164 )                       (164 )
Common stock repurchased pursuant to publicly announced repurchase plan
    (31,739 )     (577 )                       (577 )
Cash dividends ($0.19 per share)
                      (1,434 )           (1,434 )
 
                                               
 
                                   
Balance, March 31, 2011
    7,560,903     $ 133,794     $ 4,680     $ 9,478     $ (351 )   $ 147,601  
 
                                   
See notes to interim condensed consolidated financial statements.

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INTERIM CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)

(Dollars in thousands except per share data)
                 
    Three Months Ended  
    March 31  
    2011     2010  
Interest income
               
Loans, including fees
  $ 11,361     $ 11,517  
Investment securities
               
Taxable
    1,513       1,279  
Nontaxable
    1,179       1,094  
Trading account securities
    51       105  
Federal funds sold and other
    134       104  
Total interest income
    14,238       14,099  
 
           
Interest expense
               
Deposits
    2,785       2,883  
Borrowings
    1,268       1,517  
 
           
Total interest expense
    4,053       4,400  
 
           
Net interest income
    10,185       9,699  
Provision for loan losses
    817       1,207  
 
           
 
               
Net interest income after provision for loan losses
    9,368       8,492  
 
           
 
               
Noninterest income
               
Service charges and fees
    1,476       1,628  
Gain on sale of mortgage loans
    129       93  
Net loss on trading securities
    (19 )     (1 )
Net gain on borrowings measured at fair value
    80       56  
Gain on sale of available-for-sale investment securities
          56  
Other
    282       335  
 
           
Total noninterest income
    1,948       2,167  
 
           
 
               
Noninterest expenses
               
Compensation and benefits
    5,005       4,595  
Occupancy
    646       562  
Furniture and equipment
    1,106       1,031  
FDIC insurance premiums
    334       306  
Other
    1,496       1,860  
 
           
Total noninterest expenses
    8,587       8,354  
 
           
Income before federal income tax expense
    2,729       2,305  
Federal income tax expense
    413       282  
 
           
NET INCOME
  $ 2,316     $ 2,023  
 
           
 
               
Earnings per share
               
Basic
  $ 0.31     $ 0.27  
 
           
Diluted
  $ 0.30     $ 0.26  
 
           
Cash dividends per basic share
  $ 0.19     $ 0.18  
 
           
See notes to interim condensed consolidated financial statements.

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INTERIM CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)

(Dollars in thousands)
                 
    Three Months Ended  
    March 31  
    2011     2010  
Net income
  $ 2,316     $ 2,023  
 
           
Unrealized holding gains on available-for-sale securities:
               
Unrealized holding gains arising during the period
    1,753       1,360  
Reclassification adjustment for net realized gains included in net income
          (56 )
 
           
Net unrealized gains
    1,753       1,304  
Tax effect
    (395 )     (489 )
 
           
Other comprehensive income, net of tax
    1,358       815  
 
           
COMPREHENSIVE INCOME
  $ 3,674     $ 2,838  
 
           
See notes to interim condensed consolidated financial statements.

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CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

(Dollars in thousands)
                 
    Three Months Ended  
    March 31  
    2011     2010  
OPERATING ACTIVITIES
               
Net income
  $ 2,316     $ 2,023  
Reconciliation of net income to net cash provided by operations:
               
Provision for loan losses
    817       1,207  
Impairment of foreclosed assets
    10       77  
Depreciation
    647       598  
Amortization and impairment of originated mortgage servicing rights
    89       39  
Amortization of acquisition intangibles
    76       86  
Net amortization of available-for-sale securities
    362       203  
Gain on sale of available-for-sale securities
          (56 )
Net unrealized losses on trading securities
    19       1  
Net gain on sale of mortgage loans
    (129 )     (93 )
Net unrealized gains on borrowings measured at fair value
    (80 )     (56 )
Increase in cash value of corporate owned life insurance
    (142 )     (148 )
Realized gain on redemption of corporate owned life insurance
          (21 )
Share-based payment awards under equity compensation plan
    180       181  
Origination of loans held for sale
    (8,830 )     (11,311 )
Proceeds from loan sales
    9,889       13,203  
Net changes in operating assets and liabilities which provided (used) cash:
               
Trading securities
    385       3,951  
Accrued interest receivable
    (802 )     (506 )
Other assets
    (24 )     (399 )
Accrued interest payable and other liabilities
    (323 )     437  
 
           
Net cash provided by operating activities
    4,460       9,416  
 
           
 
               
INVESTING ACTIVITIES
               
Net change in certificates of deposit held in other financial institutions
    1,940       576  
Activity in available-for-sale securities
               
Maturities, calls, and sales
    15,597       20,051  
Purchases
    (45,442 )     (36,922 )
Loan principal originations and collections, net
    (4,315 )     (5,018 )
Proceeds from sales of foreclosed assets
    302       886  
Purchases of premises and equipment
    (239 )     (962 )
Proceeds from the redemption of corporate owned life insurance
          111  
 
           
Net cash used in investing activities
    (32,157 )     (21,278 )
 
           

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CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(UNAUDITED)

(Dollars in thousands)
                 
    Three Months Ended  
    March 31  
    2011     2010  
FINANCING ACTIVITIES
               
Acceptances and withdrawals of deposits, net
    45,908       16,884  
Repayments of borrowed funds
    (11,574 )     (7,338 )
Cash dividends paid on common stock
    (1,434 )     (1,354 )
Proceeds from issuance of common stock
    546       541  
Common stock repurchased
    (362 )     (382 )
Common stock purchased for deferred compensation obligations
    (164 )     (157 )
 
           
Net cash provided by financing activities
    32,920       8,194  
 
           
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    5,223       (3,668 )
Cash and cash equivalents at beginning of period
    18,109       22,706  
 
           
CASH AND CASH EQUIVALENTS AT END OF PERIOD
  $ 23,332     $ 19,038  
 
           
 
               
SUPPLEMENTAL CASH FLOWS INFORMATION:
               
Interest paid
  $ 4,025     $ 4,428  
 
               
SUPPLEMENTAL NONCASH INFORMATION:
               
Transfers of loans to foreclosed assets
  $ 833     $ 970  
Common stock issued for deferred compenstion obligations
    182       195  
Common stock repurchased from an associated grantor trust (Rabbi Trust)
    (215 )     (247 )
See notes to interim condensed consolidated financial statements.

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NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollars in thousands except per share amounts)
NOTE 1 — BASIS OF PRESENTATION
The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In management’s opinion, all adjustments considered necessary for a fair presentation have been included. Operating results for the three month period ended March 31, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011. For further information, refer to the consolidated financial statements and footnotes thereto included in the Corporation’s annual report for the year ended December 31, 2010.
The accounting policies are the same as those discussed in Note 1 to the Consolidated Financial Statements included in the Corporation’s annual report for the year ended December 31, 2010.
NOTE 2 — ACCOUNTING STANDARDS UPDATES
Recently Adopted Accounting Standards Updates
Accounting Standards Update (ASU) No. 2010-06: “Improving Disclosures about Fair Value Measurement”
In January 2010, ASU No. 2010-06 amended Accounting Standards Codification (ASC) Topic 820 “Fair Value Measurements and Disclosures” to add new disclosures for: (1) Significant transfers in and out of Level 1 and Level 2 fair value measurements and the reasons for the transfers and (2) Presenting separately information about purchases, sales, issuances and settlements for Level 3 fair value instruments (as opposed to reporting activity as net).
ASU No. 2010-06 also clarified existing disclosures by requiring reporting entities to provide fair value measurement disclosures for each class of assets and liabilities and to provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements.
The new authoritative guidance was effective for interim and annual periods beginning after December 15, 2009 except for the disclosures about purchases, sales, issuances and settlements in the rollforward of activity in Level 3 fair value measurements, which was effective for interim and annual periods beginning after December 15, 2010. The new guidance did not have a significant impact on the Corporation’s consolidated financial statements.
Pending Accounting Standards Updates
ASU No. 2011-01: “Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20.”
In January 2011, ASU No. 2011-01 amended ASC Topic 310, “Receivables” to temporarily delay the effective date of new disclosures related to troubled debt restructurings as required in ASU No. 2010-20, “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses”, which was effective for interim and annual periods ending after December 15, 2010. The effective date of the new disclosures about troubled debt restructurings has been delayed to coordinate with the issuance of the anticipated guidance for determining what constitutes a troubled debt restructuring. The new guidance, and related disclosures, related to troubled debt restructurings will be effective for interim and annual periods beginning on or after June 15, 2011.

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ASU No. 2011-02: “A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring.”
In April 2011, ASU No. 2011-02 amended ASC Topic 310, “Receivables” to clarify authoritative guidance as to what loan modifications constitute concessions, and would therefore be considered a troubled debt restructuring. ASU No. 2011-02 clarifies that:
    If a debtor does not otherwise have access to funds at a market rate for debt with similar risk characteristics as the modified debt, the modification would be considered to be at a below-market rate, which may indicate that the creditor has granted a concession.
 
    A modification that results in a temporary or permanent increase in the contractual interest rate can’t be presumed to be at a rate that is at or above a market rate and therefore could still be considered a concession.
 
    A creditor must consider whether a borrower’s default is “probable” on any of its debt in the foreseeable future when assessing financial difficulty.
 
    A modification that results in an insignificant delay in payments is not a concession.
In addition, ASU No. 2011-02 clarifies that a creditor is precluded from using the effective interest rate test in the debtor’s guidance on modification of payables (ASC Topic 470, “Debt”) when evaluating whether a modification constitutes a troubled debt restructuring. The new authoritative guidance is effective for interim and annual periods beginning on or after June 15, 2011 and is likely to increase the amount of loans that the Corporation classifies as troubled debt restructurings. The Corporation is currently in the process of evaluating the extent of the impact that this standard may have on the Corporation’s financial statements.
NOTE 3 — COMPUTATION OF EARNINGS PER SHARE
Basic earnings per share represents income available to common shareholders divided by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustments to income that would result from the assumed issuance. Potential common shares that may be issued by the Corporation relate solely to outstanding shares in the Isabella Bank Corporation and Related Companies Deferred Compensation Plan for Directors (the “Directors Plan”).
Earnings per common share have been computed based on the following:
                 
    Three Months Ended  
    March 31  
    2011     2010  
Average number of common shares outstanding for basic calculation
    7,557,293       7,540,735  
Average potential effect of shares in the Directors Plan (1)
    193,128       182,386  
 
           
Average number of common shares outstanding used to calculate diluted earnings per common share
    7,750,421       7,723,121  
 
           
Net income
  $ 2,316     $ 2,023  
 
           
Earnings per share
               
Basic
  $ 0.31     $ 0.27  
 
           
Diluted
  $ 0.30     $ 0.26  
 
           
 
(1)   Exclusive of shares held in the Rabbi Trust

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NOTE 4 — TRADING SECURITIES
Trading securities, at fair value, consist of the following investments at:
                 
    March 31     December 31  
    2011     2010  
States and political subdivisions
  $ 5,433     $ 5,837  
Included in the net trading losses of $19 during the first three months of 2011 were $17 of net unrealized trading losses on securities that relate to the Corporation’s trading portfolio as of March 31, 2011.
NOTE 5 — AVAILABLE-FOR-SALE SECURITIES
The amortized cost and fair value of available-for-sale securities, with gross unrealized gains and losses, are as follows at:
                                 
    March 31, 2011  
            Gross     Gross        
    Amortized     Unrealized     Unrealized     Fair  
    Cost     Gains     Losses     Value  
Government sponsored enterprises
  $ 5,394     $ 2     $ 18     $ 5,378  
States and political subdivisions
    165,927       4,339       591       169,675  
Auction rate money market preferred
    3,200             397       2,803  
Preferred stocks
    7,800       64       271       7,593  
Mortgage-backed
    110,466       1,480       921       111,025  
Collateralized mortgage obligations
    66,131       313       958       65,486  
 
                       
Total
  $ 358,918     $ 6,198     $ 3,156     $ 361,960  
 
                       
                                 
    December 31, 2010  
            Gross     Gross        
    Amortized     Unrealized     Unrealized     Fair  
    Cost     Gains     Losses     Value  
Government sponsored enterprises
  $ 5,394     $ 10     $     $ 5,404  
States and political subdivisions
    167,328       3,349       960       169,717  
Auction rate money market preferred
    3,200             335       2,865  
Preferred stocks
    7,800             864       6,936  
Mortgage-backed
    101,096       1,633       514       102,215  
Collateralized mortgage obligations
    44,617       103       1,133       43,587  
 
                       
Total
  $ 329,435     $ 5,095     $ 3,806     $ 330,724  
 
                       

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The amortized cost and fair value of available-for-sale securities by contractual maturity at March 31, 2011 are as follows:
                                                 
    Maturing     Securities        
            After One     After Five             With        
    Due in     Year But     Years But             Variable        
    One Year     Within     Within     After     Monthly        
    or Less     Five Years     Ten Years     Ten Years     Payments     Total  
Government sponsored enterprises
  $     $ 5,000     $ 394     $     $     $ 5,394  
States and political subdivisions
    8,974       33,373       86,531       37,049             165,927  
Auction rate money market preferred
                            3,200       3,200  
Preferred stocks
                            7,800       7,800  
Mortgage-backed
                            110,466       110,466  
Collateralized mortgage obligations
                            66,131       66,131  
 
                                   
Total amortized cost
  $ 8,974     $ 38,373     $ 86,925     $ 37,049     $ 187,597     $ 358,918  
 
                                   
 
                                               
Fair value
  $ 8,993     $ 39,504     $ 89,398     $ 47,554     $ 176,511     $ 361,960  
 
                                   
Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations.
Because of their variable monthly payments, auction rate money market preferreds, preferred stocks, mortgage-backed securities, and collateralized mortgage obligations are not reported by a specific maturity group.
A summary of the activity related to sales of available-for-sale securities is as follows during the three month period ended March 31, 2010:
         
Proceeds from sales of securities
  $ 3,632  
 
     
Gross realized gains
  $ 59  
Gross realized losses
    (3 )
 
     
Net realized gains
  $ 56  
 
     
Applicable income tax expense
  $ 19  
 
     
There were no sales of available-for-sale securities in the first three months of 2011. The cost basis used to determine the realized gains or losses of securities sold was the amortized cost of the individual investment security as of the trade date.

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Information pertaining to available-for-sale securities with gross unrealized losses at March 31, 2011 and December 31, 2010 aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows:
                                         
    March 31, 2011  
    Less Than Twelve Months     Over Twelve Months        
    Gross             Gross             Total  
    Unrealized     Fair     Unrealized     Fair     Unrealized  
    Losses     Value     Losses     Value     Losses  
Government sponsored enterprises
  $ 18     $ 4,981     $     $     $ 18  
States and political subdivisions
    531       20,830       60       1,593       591  
Auction rate money market preferred
                397       2,803       397  
Preferred stocks
                271       3,529       271  
Mortgage-backed
    921       49,782                   921  
Collateralized mortgage obligations
    958       45,661                   958  
 
                             
Total
  $ 2,428     $ 121,254     $ 728     $ 7,925     $ 3,156  
 
                             
Number of securities in an unrealized loss position:
            74               5       79  
 
                                 
                                         
    December 31, 2010  
    Less Than Twelve Months     Over Twelve Months        
    Gross             Gross             Total  
    Unrealized     Fair     Unrealized     Fair     Unrealized  
    Losses     Value     Losses     Value     Losses  
States and political subdivisions
  $ 960     $ 29,409     $     $     $ 960  
Auction rate money market preferred
                335       2,865       335  
Preferred stocks
                864       2,936       864  
Mortgage-backed
    514       38,734                   514  
Collateralized mortgage obligations
    1,133       33,880                   1,133  
 
                             
Total
  $ 2,607     $ 102,023     $ 1,199     $ 5,801     $ 3,806  
 
                             
Number of securities in an unrealized loss position:
            82               4       86  
 
                                 
The Corporation invested $11,000 in auction rate money market preferred investment security instruments, which are classified as available-for-sale securities and reflected at estimated fair value. Due to credit market uncertainty, the trading for these securities has been limited. As a result of the limited trading of these securities, $7,800 converted to preferred stock with debt like characteristics in 2009.
Due to the limited trading activity of these securities, the fair values were estimated utilizing a discounted cash flow analysis as of March 31, 2011 and December 31, 2010. These analyses considered creditworthiness of the counterparty, the timing of expected future cash flows, current market rates, and the current volume of trading activity. Specific assumptions underlying management’s assumptions are continually evaluated and revised, when necessary, to reflect their ongoing relevance. Despite the limited trading of these securities, management has determined that any declines in the estimated fair values of these securities are the result of changes in interest rates and not risks related to the underlying credit quality of the issuer or specific security. Additionally, none of these securities are deemed to be below investment grade, management does not intend to sell the securities in an unrealized loss position, and it is more likely than not that the Corporation will not have to sell the securities before recovery of their cost basis. As a result, the Corporation has not recognized an other-than-temporary impairment loss related to these declines in fair value.

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As of March 31, 2011 and December 31, 2010, management conducted an analysis to determine whether all securities currently in an unrealized loss position, including auction rate money market preferred securities and preferred stocks, should be considered other-than-temporarily-impaired (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 that the issuer will be unable to pay the amount when due?
 
    Is it more likely than not that the Corporation will not have to sell the security before recovery of its cost basis?
 
    Has the duration of the investment been extended?
Based on the Corporation’s analysis using the above criteria, the fact that management has asserted that it does not have the intent to sell these securities in an unrealized loss position, and that it is more likely than not the Corporation will not have to sell the securities before recovery of their cost basis, management does not believe that the values of any such securities are other-than-temporarily impaired as of March 31, 2011 or December 31, 2010.
NOTE 6 — LOANS AND ALLOWANCE FOR LOAN LOSSES
A summary of the major classifications of loans is as follows as of:
                 
    March 31     December 31  
    2011     2010  
Mortgage loans on real estate
               
Residential 1-4 family
  $ 214,311     $ 207,749  
Commercial
    242,360       239,810  
Agricultural
    43,269       44,246  
Construction and land development
    11,287       12,250  
Second mortgages
    24,971       26,712  
Equity lines of credit
    37,676       37,318  
 
           
Total mortgage loans
    573,874       568,085  
 
               
Commercial and agricultural loans
               
Commercial
    108,096       109,042  
Agricultural production
    26,724       27,200  
 
           
Total commercial and agricultural loans
    134,820       136,242  
 
               
Consumer installment loans
    29,283       30,977  
 
           
 
               
Total loans
    737,977       735,304  
Less: allowance for loan losses
    12,381       12,373  
 
           
Net loans
  $ 725,596     $ 722,931  
 
           
The Corporation grants commercial, agricultural, consumer and residential loans to customers situated primarily in Isabella, Gratiot, Mecosta, Midland, Western Saginaw, Montcalm and Southern Clare counties in Michigan. The ability of the borrowers to honor their repayment obligations is often dependent upon the real estate, agricultural, light manufacturing, retail, gaming and tourism, higher education, and general economic conditions of this region. Substantially all of the consumer and residential mortgage loans are secured by various items of property, while commercial loans are secured primarily by real estate, business assets, and personal guarantees; a portion of loans are unsecured.

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Loans that management has 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 allowance for loans losses, 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 constant yield method.
The accrual of interest on mortgage and commercial 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. Credit card loans and other personal 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 non-accrual status or charged off, all interest accrued in the current calendar year, but not collected, is reversed against interest income while interest accrued in prior calendar years, but not collected is charged against the allowance for loan losses. The interest on these loans is accounted for on the cash-basis, until qualifying for return to accrual status. Loans are 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.
Commercial loans include loans for commercial real estate, farmland and agricultural production, state and political subdivisions, and commercial operating loans. The largest concentration of commercial loans is commercial real estate. Repayment of commercial 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. The Corporation minimizes its 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. All commercial real estate loans require loan to value limits of less than 80%. Depending upon the type of loan, past credit history, and current operating results, the Corporation may require the borrower to pledge accounts receivable, inventory, and fixed assets. Personal guarantees are generally required from the owners of closely held corporations, partnerships, and proprietorships. In addition, the Corporation requires annual financial statements, prepares cash flow analyses, and reviews credit reports as deemed necessary.
The Corporation offers adjustable rate mortgages, fixed rate balloon mortgages, 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 the Federal Home Loan Mortgage Association. Fixed rate residential mortgage loans with an amortization of 15 years or less may be held in the Corporation’s portfolio, held for future sale, or sold upon origination. Factors used in determining when to sell these mortgages include management’s judgment about the direction of interest rates, the Corporation’s need for fixed rate assets in the management of its interest rate sensitivity, and overall loan demand.
Construction and land development loans consist primarily of 1 to 4 family residential properties. These loans primarily have a 6 to 9 month maturity and are made using the same underwriting criteria as residential mortgages. Loan proceeds are disbursed in increments as construction progresses and inspections warrant. Construction loans are typically converted to permanent loans at the completion of construction.
Lending policies generally limit the maximum loan to value ratio on residential mortgages 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. All mortgage loan requests are reviewed by a mortgage loan committee or through a secondary market automated underwriting system; loans in excess of $400 require the approval of the Bank’s Internal Loan Committee, Board of Directors, or its loan committee.
Consumer loans granted include automobile loans, secured and unsecured personal loans, credit cards, student 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 ability to pay rather than collateral value. No consumer loans are sold to the secondary market.

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A summary of changes in the allowance for loan losses by loan segments follows:
                                                 
    Allowance for Credit Losses and Recorded Investment in Financing Receivables  
    For the Three Months Ended March 31, 2011  
                    Residential                    
    Commercial     Agricultural     Real Estate     Consumer     Unallocated     Total  
Allowance for loan losses
                                               
January 1, 2011
  $ 6,048     $ 1,033     $ 3,198     $ 605     $ 1,489     $ 12,373  
Loans charged off
    (655 )           (323 )     (145 )           (1,123 )
Recoveries
    137             74       103             314  
Provision for loan losses
    716       (257 )     473       59       (174 )     817  
 
                                   
March 31, 2011
  $ 6,246     $ 776     $ 3,422     $ 622     $ 1,315     $ 12,381  
 
                                   
 
                                               
Allowance for loan losses as of March 31, 2011
                                               
Individually evaluated for impairment
  $ 91     $ 396     $ 834     $     $     $ 1,321  
Collectively evaluated for impairment
    6,155       380       2,588       622       1,315       11,060  
 
                                   
Total
  $ 6,246     $ 776     $ 3,422     $ 622     $ 1,315     $ 12,381  
 
                                   
 
                                               
Loans as of March 31, 2011
                                               
Individually evaluated for impairment
  $ 6,476     $ 2,770     $ 5,402     $             $ 14,648  
Collectively evaluated for impairment
    343,980       67,223       282,843       29,283               723,329  
 
                                     
Total
  $ 350,456     $ 69,993     $ 288,245     $ 29,283             $ 737,977  
 
                                     
                                                 
    Allowance for Credit Losses and Recorded Investment in Financing Receivables  
    As of December 31, 2010  
Allowance for loan losses
                                               
Individually evaluated for impairment
  $ 490     $ 558     $ 732     $     $     $ 1,780  
Collectively evaluated for impairment
    5,558       475       2,466       605       1,489       10,593  
 
                                   
Total
  $ 6,048     $ 1,033     $ 3,198     $ 605     $ 1,489     $ 12,373  
 
                                   
 
                                               
Loans
                                               
Individually evaluated for impairment
  $ 4,890     $ 2,629     $ 4,866     $             $ 12,385  
Collectively evaluated for impairment
    343,962       68,817       279,163       30,977               722,919  
 
                                     
Total
  $ 348,852     $ 71,446     $ 284,029     $ 30,977             $ 735,304  
 
                                     

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Following is a summary of changes in the allowance for loan losses for the three months ended March 31, 2010:
         
January 1, 2010
  $ 12,979  
Loans charged off
    (1,603 )
Recoveries
    404  
Provision charged to income
    1,207  
       
March 31, 2010
  $ 12,987  
       
The allowance for loan losses 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 management believes the uncollectibility of the loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s 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 allowance for loan losses (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 its recorded investment. Historical loss allocations are calculated at the loan class and segment levels based on a migration analysis of the loan portfolio over the preceding three years. An unallocated component is maintained to cover uncertainties that management believes affect its 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.
The following table displays the credit quality indicators for commercial and agricultural credit exposures based on internally assigned credit ratings as of:
                                                 
    March 31, 2011  
    Commercial     Agricultural  
    Real Estate     Other     Total     Real Estate     Other     Total  
Rating
                                               
2 - High quality
  $ 11,781     $ 14,482     $ 26,263     $ 3,773     $ 1,032     $ 4,805  
3 - High satisfactory
    74,983       24,786       99,769       10,450       2,616       13,066  
4 - Low satisfactory
    120,738       61,048       181,786       22,682       14,932       37,614  
5 - Special mention
    20,244       6,728       26,972       3,730       3,622       7,352  
6 - Substandard
    11,542       994       12,536       2,634       4,522       7,156  
7 - Vulnerable
    404       7       411                    
8 - Doubtful
    2,668       51       2,719                    
 
                                               
 
                                   
Total
  $ 242,360     $ 108,096     $ 350,456     $ 43,269     $ 26,724     $ 69,993  
 
                                   

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    December 31, 2010  
    Commercial     Agricultural  
    Real Estate     Other     Total     Real Estate     Other     Total  
Rating
                                               
2 - High quality
  $ 10,995     $ 13,525     $ 24,520     $ 3,792     $ 1,134     $ 4,926  
3 - High satisfactory
    74,912       30,322       105,234       11,247       3,235       14,482  
4 - Low satisfactory
    119,912       57,403       177,315       22,384       14,862       37,246  
5 - Special mention
    19,560       6,507       26,067       4,169       3,356       7,525  
6 - Substandard
    10,234       1,104       11,338       2,654       4,613       7,267  
7 - Vulnerable
    3,339       54       3,393                    
8 - Doubtful
    858       127       985                    
 
                                               
 
                                   
Total
  $ 239,810     $ 109,042     $ 348,852     $ 44,246     $ 27,200     $ 71,446  
 
                                   
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.

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4.   LOW SATISFACTORY — Acceptable Risk
 
    Credit with bankable risks, although some signs of weaknesses are shown:
    Would include most start-up businesses.
 
    Occasional instances of trade slowness or repayment delinquency — may have been 10-30 days slow within the past year.
 
    Management abilities 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.
 
    Loan may need to be restructured to improve collateral position or reduce payments.
 
    Collateral / guaranty offers limited protection.
 
    Negative debt service coverage, however the credit is well collateralized and payments are current.
6.   SUBSTANDARD — Classified
 
    Credit where the borrower’s current net worth, paying capacity, and value of the collateral pledged is inadequate. There is a distinct possibility that the Corporation will implement collection procedures if the loan deficiencies are not corrected. In addition, the following characteristics may apply:
    Sustained losses have severely eroded the equity and cash flow.
 
    Deteriorating liquidity.
 
    Serious management problems or internal fraud.
 
    Original repayment terms liberalized.
 
    Likelihood of bankruptcy.
 
    Inability to access other funding sources.
 
    Reliance on secondary source of repayment.
 
    Litigation filed against borrower.
 
    Collateral provides little or no value.
 
    Requires excessive attention of the loan officer.
 
    Borrower is uncooperative with loan officer.

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7.   VULNERABLE — Classified
 
    Credit is considered “Substandard” and warrants placing on nonaccrual. Risk of loss is being evaluated and exit strategy options are under review. Other characteristics that may apply:
    Insufficient cash flow to service debt.
 
    Minimal or no payments being received.
 
    Limited options available to avoid the collection process.
 
    Transition status, expect action will take place to collect loan without immediate progress being made.
8.   DOUBTFUL — Workout
 
    Credit has all the weaknesses inherent in a “Substandard” loan with the added characteristic that collection and/or liquidation is pending. The possibility of a loss is extremely high, but its classification as a loss is deferred until liquidation procedures are completed, or reasonably estimable. Other characteristics that may apply:
    Normal operations are severely diminished or have ceased.
 
    Seriously impaired cash flow.
 
    Original repayment terms materially altered.
 
    Secondary source of repayment is inadequate.
 
    Survivability as a “going concern” is impossible.
 
    Collection process has begun.
 
    Bankruptcy petition has been filed.
 
    Judgments have been filed.
 
    Portion of the loan balance has been charged-off.
9.   LOSS — Charge off
 
    Credits are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification is for charged off loans but does not mean that the asset has absolutely no recovery or salvage value. These loans are further characterized by:
    Liquidation or reorganization under bankruptcy, with poor prospects of collection.
 
    Fraudulently overstated assets and/or earnings.
 
    Collateral has marginal or no value.
 
    Debtor cannot be located.
 
    Over 120 days delinquent.

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The Corporation’s primary credit quality indicators for residential real estate and consumer loans is the individual loan’s past due aging. The following tables summarize the Corporation’s past due and current loans as of:
                                                 
    March 31, 2011  
    Accruing Interest             Total              
    and Past Due:             Past Due              
    30-89     90 Days             and              
    Days     or More     Nonaccrual     Nonaccrual     Current     Total  
Commercial
                                               
Commercial real estate
  $ 1,739     $ 480     $ 3,108     $ 5,327     $ 237,033     $ 242,360  
Commercial other
    549             36       585       107,511       108,096  
 
                                   
Total commercial
    2,288       480       3,144       5,912       344,544       350,456  
 
                                   
Agricultural
                                               
Agricultural real estate
    98       114       190       402       42,867       43,269  
Agricultural other
    8                   8       26,716       26,724  
 
                                   
Total agricultural
    106       114       190       410       69,583       69,993  
 
                                   
Residential mortgage
                                               
Senior liens
    3,507       167       1,602       5,276       220,323       225,599  
Junior liens
    162             21       183       24,787       24,970  
Home equity lines of credit
    534                   534       37,142       37,676  
 
                                   
Total residential mortgage
    4,203       167       1,623       5,993       282,252       288,245  
 
                                   
Consumer
                                               
Secured
    198                   198       24,277       24,475  
Unsecured
    67                   67       4,741       4,808  
 
                                   
Total consumer
    265                   265       29,018       29,283  
 
                                   
Total
  $ 6,862     $ 761     $ 4,957     $ 12,580     $ 725,397     $ 737,977  
 
                                   
                                                 
    December 31, 2010  
    Accruing Interest             Total              
    and Past Due:             Past Due              
    30-89     90 Days             and              
    Days     or More     Nonaccrual     Nonaccrual     Current     Total  
Commercial
                                               
Commercial real estate
  $ 4,814     $ 125     $ 4,001     $ 8,940     $ 230,870     $ 239,810  
Commercial other
    381             139       520       108,522       109,042  
 
                                   
Total commercial
    5,195       125       4,140       9,460       339,392       348,852  
 
                                   
Agricultural
                                               
Agricultural real estate
    92                   92       44,154       44,246  
Agricultural other
    4       50             54       27,146       27,200  
 
                                   
Total agricultural
    96       50             146       71,300       71,446  
 
                                   
Residential mortgage
                                               
Senior liens
    5,265       310       1,421       6,996       213,003       219,999  
Junior liens
    476             49       525       26,187       26,712  
Home equity lines of credit
    598                   598       36,720       37,318  
 
                                   
Total residential mortgage
    6,339       310       1,470       8,119       275,910       284,029  
 
                                   
Consumer
                                               
Secured
    298                   298       24,781       25,079  
Unsecured
    10       1             11       5,887       5,898  
 
                                   
Total consumer
    308       1             309       30,668       30,977  
 
                                   
Total
  $ 11,938     $ 486     $ 5,610     $ 18,034     $ 717,270     $ 735,304  
 
                                   

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The following is a summary of information pertaining to impaired loans as of:
                                                 
    March 31, 2011     December 31, 2010  
            Unpaid                     Unpaid        
    Outstanding     Principal     Valuation     Outstanding     Principal     Valuation  
    Balance     Balance     Allowance     Balance     Balance     Allowance  
Impaired loans with a valuation allowance
                                               
Commercial real estate
  $ 1,171     $ 1,403     $ 91     $ 3,010     $ 4,110     $ 472  
Commercial other
                      18       18       18  
Agricultural other
    2,196       2,196       396       2,196       2,196       558  
Residential mortgage senior liens
    4,561       5,560       802       4,292       5,236       698  
Residential mortgage junior liens
    167       258       32       172       250       34  
 
                                   
Total impaired loans with a valuation allowance
  $ 8,095     $ 9,417     $ 1,321     $ 9,688     $ 11,810     $ 1,780  
 
                                   
 
                                               
Impaired loans without a valuation allowance
                                               
Commercial real estate
  $ 3,609     $ 5,689             $ 1,742     $ 2,669          
Commercial other
    1,793       1,834               169       269          
Agricultural real estate
    190       190                              
Residential mortgage senior liens
    673       773               401       501          
Residential mortgage junior liens
    1       7                              
Consumer secured
    45       82               48       85          
 
                                       
Total impaired loans without a valuation allowance
  $ 6,311     $ 8,575             $ 2,360     $ 3,524          
 
                                       
 
                                               
Impaired loans
                                               
Commercial
  $ 6,573     $ 8,926     $ 91     $ 4,939     $ 7,066     $ 490  
Agricultural
    2,386       2,386       396       2,196       2,196       558  
Residential mortgage
    5,402       6,598       834       4,865       5,987       732  
Consumer
    45       82             48       85        
 
                                   
Total impaired loans
  $ 14,406     $ 17,992     $ 1,321     $ 12,048     $ 15,334     $ 1,780  
 
                                   

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The following is a summary of information pertaining to impaired loans for the three months ended:
                 
    March 31, 2011  
    Average     Interest  
    Outstanding     Income  
    Balance     Recognized  
Impaired loans with a valuation allowance
               
Commercial real estate
  $ 2,091     $ 24  
Commercial other
    9        
Agricultural other
    2,196       33  
Residential mortgage senior liens
    4,427       36  
Residential mortgage junior liens
    170       1  
 
           
Total impaired loans with a valuation allowance
  $ 8,893     $ 94  
 
           
 
               
Impaired loans without a valuation allowance
               
Commercial real estate
  $ 2,676     $ 33  
Commercial other
    981       60  
Agricultural real estate
    95       (1 )
Residential mortgage senior liens
    537       6  
Residential mortgage junior liens
    1        
Consumer secured
    47       2  
 
           
Total impaired loans without a valuation allowance
  $ 4,337     $ 100  
 
           
 
               
Impaired loans
               
Commercial
  $ 5,757     $ 117  
Agricultural
    2,291       32  
Residential mortgage
    5,135       43  
Consumer
    47       2  
 
           
Total impaired loans
  $ 13,230     $ 194  
 
           
Total impaired loans March 31, 2010
  $ 12,839     $ 70  
 
           
Loans may be classified as impaired if they meet one or more of the following criteria:
  1.   There has been a chargeoff of its principal balance;
  2.   The loan has been classified as a troubled debt restructuring; or
  3.   The loan is in nonaccrual status.
Impairment is measured on a loan by loan basis for commercial and commercial real estate loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral, less cost to sell, if the loan is collateral dependent.
Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Corporation does not separately identify individual consumer loans for impairment allocations and related disclosures.
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 it’s earned according to the terms of the loan agreement.
No additional funds are committed to be advanced in connection with impaired loans, which include troubled debt restructurings.

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The following is a summary of troubled debt restructurings as of:
                 
    March 31     December 31  
    2011     2010  
Troubled debt restructurings
  $ 8,561     $ 5,763  
NOTE 7 — EQUITY SECURITIES WITHOUT READILY DETERMINABLE FAIR VALUES
Included in equity securities without readily determinable fair values are restricted securities, which are carried at cost, and investments in nonconsolidated entities accounted for under the equity method of accounting.
Equity securities without readily determinable fair values consist of the following as of:
                 
    March 31     December 31  
    2011     2010  
Federal Home Loan Bank Stock
  $ 7,596     $ 7,596  
Investment in Corporate Settlement Solutions
    6,655       6,793  
Federal Reserve Bank Stock
    1,879       1,879  
Investment in Valley Financial Corporation
    1,000       1,000  
Other
    293       296  
 
           
Total
  $ 17,423     $ 17,564  
 
           
NOTE 8 — BORROWED FUNDS
Borrowed funds consist of the following obligations as of:
                                 
    March 31, 2011     December 31, 2010  
    Amount     Rate     Amount     Rate  
Federal Home Loan Bank advances
  $ 122,343       3.56 %   $ 113,423       3.64 %
Securities sold under agreements to repurchase without stated maturity dates
    41,406       0.25 %     45,871       0.25 %
Securities sold under agreements to repurchase with stated maturity dates
    19,514       3.03 %     19,623       3.01 %
Federal funds purchased
                16,000       0.60 %
 
                       
Total
  $ 183,263       2.76 %   $ 194,917       2.53 %
 
                       
The Federal Home Loan Bank borrowings are collateralized by a blanket lien on all qualified 1-to-4 family mortgage loans and U.S. government and federal agency securities. Advances are also secured by FHLB stock owned by the Corporation. The Corporation had the ability to borrow up to an additional $128,711 based on the assets pledged as collateral as of March 31, 2011.
Securities sold under agreements to repurchase are classified as secured borrowings. Securities sold under agreements to repurchase without stated maturity dates generally mature within one to four days from the transaction date. Securities sold under agreements to repurchase are reflected at the amount of cash received in connection with the transaction. The securities underlying the agreements have a carrying value and a fair value of $83,496 and $86,381 at March 31, 2011 and December 31, 2010, respectively. Such securities remain under the control of the Corporation. The Corporation may be required to provide additional collateral based on the fair value of underlying securities.

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Securities sold under repurchase agreements without stated maturity dates and federal funds purchased generally mature within one to four days from the transaction date. The following table provides a summary of short term borrowings for the three month periods ended March 31:
                                                 
    2011     2010  
    Maximum     QTD     Weighted Average     Maximum     QTD     Weighted Average  
    Month-End     Average     Interest Rate     Month-End     Average     Interest Rate  
    Balance     Balance     During the Period     Balance     Balance     During the Period  
Securities sold under agreements to repurchase witout stated maturity dates
  $ 41,406     $ 41,036       0.25 %   $ 38,409     $ 36,566       0.30 %
Federal funds purchased
    3,600       1,206       0.50 %           336       0.50 %
The Corporation had pledged certificates of deposit held in other financial institutions, trading securities, available-for-sale securities, and 1-4 family mortgage loans in the following amounts at:
                 
    March 31     December 31  
    2011     2010  
Pledged to secure borrowed funds
  $ 299,488     $ 297,297  
Pledged to secure repurchase agreements
    83,496       86,381  
Pledged for public deposits and for other purposes necessary or required by law
    15,044       14,626  
 
           
Total
  $ 398,028     $ 398,304  
 
           
The Corporation had no investment securities that are restricted to be pledged for specific purposes.
NOTE 9 — OTHER NONINTEREST EXPENSES
A summary of expenses included in other noninterest expenses are as follows for the three month periods ended March 31:
                 
    2011     2010  
Marketing and community relations
  $ 223     $ 388  
Foreclosed asset and collection
    100       199  
Directors fees
    211       209  
Audit and SOX compliance fees
    156       245  
Education and travel
    105       114  
Printing and supplies
    100       96  
Postage and freight
    100       83  
Legal fees
    62       83  
Amortization of deposit premium
    76       86  
Consulting fees
    33       46  
All other
    330       311  
 
           
Total other
  $ 1,496     $ 1,860  
 
           

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NOTE 10 — FEDERAL INCOME TAXES
The reconciliation of the provision for federal income taxes and the amount computed at the federal statutory tax rate of 34% of income before federal income tax expense is as follows for the three month periods ended March 31:
                 
    2011     2010  
Income taxes at 34% statutory rate
  $ 928     $ 784  
Effect of nontaxable income
               
Interest income on tax exempt municipal bonds
    (383 )     (352 )
Earnings on corporate owned life insurance
    (48 )     (57 )
Other
    (94 )     (97 )
 
           
Total effect of nontaxable income
    (525 )     (506 )
Effect of nondeductible expenses
    10       4  
 
           
Federal income tax expense
  $ 413     $ 282  
 
           
Included in other comprehensive income for the three month periods ended March 31, 2011 and 2010 are changes in unrealized holding gains of $595 and losses of $133, respectively, related to auction rate money market preferred stock securities 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.
NOTE 11 — DEFINED BENEFIT PENSION PLAN
The Corporation has a non contributory defined benefit pension plan, which was curtailed effective March 1, 2007. As a result of the curtailment, future salary increases are no longer considered and plan benefits are based on years of service and the employees’ five highest consecutive years of compensation out of the last ten years of service through March 1, 2007. The Corporation made no contributions to the pension plan during three month periods ended March 31, 2011 or 2010. The Corporation does not anticipate any contributions to the plan in 2011.
Following are the components of net periodic benefit cost for the three month periods ended March 31:
                 
    2011     2010  
Interest cost on projected benefit obligation
  $ 127     $ 133  
Expected return on plan assets
    (131 )     (123 )
Amortization of unrecognized actuarial net loss
    38       38  
 
           
Net periodic benefit cost
  $ 34     $ 48  
 
           

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NOTE 12 —FAIR VALUE
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, the Corporation uses present value techniques and other valuation methods to estimate the fair values of its 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 the Corporation’s consolidated balance sheets are as follows:
                                 
    March 31, 2011     December 31, 2010  
    Estimated     Carrying     Estimated     Carrying  
    Fair Value     Value     Fair Value     Value  
ASSETS
                               
Cash and demand deposits due from banks
  $ 23,332     $ 23,332     $ 18,109     $ 18,109  
Certicates of deposit held in other financial institutions
    13,956       13,868       15,908       15,808  
Mortgage loans available-for-sale
    252       252       1,182       1,182  
Net loans
    730,237       725,596       734,634       722,931  
Accrued interest receivable
    6,258       6,258       5,456       5,456  
Equity securities without readily determinable fair values
    17,423       17,423       17,564       17,564  
Originated mortgage servicing rights
    2,653       2,653       2,673       2,667  
 
                               
LIABILITIES
                               
Deposits with no stated maturities
    462,458       462,458       424,978       424,978  
Deposits with stated maturities
    459,013       460,789       454,332       452,361  
Borrowed funds
    177,768       172,920       190,180       184,494  
Accrued interest payable
    1,031       1,031       1,003       1,003  

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Financial Instruments Recorded at Fair Value
The table below presents the recorded amount of assets and liabilities measured at fair value on:
                                                 
    March 31, 2011     December 31, 2010  
Description   Total     Level 2     Level 3     Total     Level 2     Level 3  
Recurring items
                                               
Trading securities
                                               
States and political subdivisions
  $ 5,433     $ 5,433     $     $ 5,837     $ 5,837     $  
 
                                   
Total trading securities
    5,433       5,433             5,837       5,837        
 
                                   
Available-for-sale investment securities
                                               
Government sponsored enterprises
    5,378       5,378             5,404       5,404        
States and political subdivisions
    169,675       169,675             169,717       169,717        
Auction rate money market preferred
    2,803             2,803       2,865             2,865  
Preferred stock
    7,593             7,593       6,936             6,936  
Mortgage-backed
    111,025       111,025             102,215       102,215        
Collateralized mortgage obligations
    65,486       65,486             43,587       43,587        
 
                                   
Total available-for-sale investment securities
    361,960       351,564       10,396       330,724       320,923       9,801  
Borrowed funds
    10,343       10,343             10,423       10,423        
Nonrecurring items
                                               
Impaired loans
    14,406             14,406       12,048             12,048  
Originated mortgage servicing rights
    2,653       2,653             2,667       2,667        
Foreclosed assets
    2,588       2,588             2,067       2,067        
 
                                   
 
  $ 397,383     $ 372,581     $ 24,802     $ 363,766     $ 341,917     $ 21,849  
 
                                   
 
                                               
Percent of assets and liabilities measured at fair value
            93.76 %     6.24 %             93.99 %     6.01 %
 
                                       
As of March 31, 2011 and December 31, 2010, the Corporation had no assets or liabilities measured utilizing Level 1 valuation techniques.
Following is a description of the valuation methodologies and key inputs used to measure financial assets and liabilities recorded at fair value, as well as a description of the methods and significant assumptions used to estimate fair value disclosures for financial instruments not recorded at fair value in their entirety on a recurring basis. For financial assets and liabilities recorded at fair value, the description includes 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.
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.
Investment securities: Investment securities are recorded at fair value on a recurring basis. Level 2 fair value measurement is based upon quoted prices, if available. 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. Level 2 securities include bonds issued by government sponsored enterprises, states and political subdivisions, mortgage-backed securities, and collateralized mortgage obligations issued by government sponsored enterprises.
Securities classified as Level 3 include securities in less liquid markets and include auction rate money market preferred securities and preferred stocks. Due to the limited trading activity of these securities, the fair values were estimated utilizing a hybrid of market value and discounted cash flow analysis as of March 31, 2011 and a discounted cash flow analysis as of December 31, 2010. These

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analyses considered creditworthiness of the counterparty, the timing of expected future cash flows, the current volume of trading activity, and recent trade prices. The discount rates used were determined by using the interest rates of similarly rated financial institutions debt based on the weighted average of a range of terms for corporate bond interest rates, which were obtained from published sources. All securities have call dates within the next year. The Corporation calculated the present value assuming a 3 year nonamortizing balloon using weighted average discount rates between approximately 5.50% and 7.25% as of March 31, 2011.
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, the Corporation classifies loans subjected to nonrecurring fair value adjustments as Level 2.
Loans: For variable rate loans with no significant change in credit risk, fair values are based on carrying values. Fair values for fixed rate loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. The resulting amounts are adjusted to estimate the effect of changes in the credit quality of borrowers since the loans were originated.
The Corporation does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered 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, management measures 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.
The Corporation reviews 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. The Corporation uses this valuation to determine if any charge offs or specific reserves are necessary. The Corporation may obtain new valuations in certain circumstances, including when there has been significant deterioration in the condition of the collateral, if the foreclosure process has begun, or if the existing valuation is deemed to be outdated.
Impaired loans where an allowance is established based on the net realizable value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraisal value, the Corporation records the loan as nonrecurring Level 2. When a current appraised value is not available or management determines the fair value collateral is further impaired below the appraised value, the Corporation records the impaired loans as nonrecurring Level 3.
Accrued interest: The carrying amounts of accrued interest approximate fair value.
Goodwill and other intangible assets: Acquisition intangibles and goodwill are subject to impairment testing. A projected cash flow valuation method is used in the completion of impairment testing. This valuation method requires a significant degree of management judgment. In the event the projected undiscounted net operating cash flows are less than the carrying value, the asset is recorded at fair value as determined by the valuation model. If the testing resulted in impairment, the Corporation would classify goodwill and other acquisition intangibles subjected to nonrecurring fair value adjustments as Level 3. During 2011 and 2010, there were no impairments recorded on goodwill and other acquisition intangibles.
Equity securities without readily determinable fair values: The Corporation has investments in equity securities without readily determinable fair values as well as investments in joint ventures. The assets are individually reviewed for impairment on an annual basis, or more frequently if an indication of impairment exists, by comparing the carrying value to the estimated fair value. The lack of an independent source to validate fair value estimates, including the impact of future capital calls and transfer restrictions, is an inherent limitation in the valuation process. The Corporation classifies nonmarketable equity securities and its investments in joint ventures subjected to nonrecurring fair value adjustments as Level 3. During 2011 and 2010, there were no impairments recorded on equity securities without readily determinable fair values.

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Foreclosed assets: Upon transfer from the loan portfolio, foreclosed assets are adjusted to and subsequently carried at the lower of carrying value or fair value less costs to sell. Net realizable value is based upon independent market prices, appraised values of the collateral, or management’s estimation of the value of the collateral and as such, the Corporation classifies foreclosed assets as a nonrecurring Level 2. When management determines that the net realizable value of the collateral is further impaired below the appraised value but there is no observable market price, the Corporation records the foreclosed asset as nonrecurring Level 3.
Originated mortgage servicing rights: Originated mortgage servicing rights are 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, the Corporation classifies loan servicing rights subject to nonrecurring fair value adjustments as Level 2.
Deposits: 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). 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.
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 the Corporation’s other borrowed funds are estimated using discounted cash flow analyses based on the Corporation’s current incremental borrowing arrangements.
The Corporation has elected to measure a portion of borrowed funds at fair value. These borrowings are recorded at fair value on a recurring basis, with the fair value measurement estimated using discounted cash flow analysis based on the Corporation’s current incremental borrowings rates for similar types of borrowing arrangements. Changes in the fair value of these borrowings are included in noninterest income. As such, the Corporation classifies other borrowed funds as Level 2.
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. The Corporation does not charge fees for lending commitments; thus 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 the Corporation believes its 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.
The table below represents the activity in available-for-sale investment securities measured with Level 3 inputs on a recurring basis for the three month periods ended March 31:
                 
    2011     2010  
Level 3 inputs at beginning of period
  $ 9,801     $ 10,027  
Net unrealized gains (losses)
    595       (133 )
 
           
Level 3 inputs — March 31
  $ 10,396     $ 9,894  
 
           

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The changes in fair value of assets and liabilities recorded at fair value through earnings on a recurring basis and changes in assets and liabilities recorded at fair value on a nonrecurring basis, for which an impairment, or reduction of an impairment, was recognized in the three month periods ended March 31, 2011 and 2010, are summarized as follows:
                                                 
    2011     2010  
    Trading Gains     Other Gains             Trading Gains     Other Gains        
Description   and (Losses)     and (Losses)     Total     and (Losses)     and (Losses)     Total  
Recurring items
                                               
Trading securities
  $ (19 )   $     $ (19 )   $ (1 )   $     $ (1 )
Borrowed funds
          80       80             56       56  
Nonrecurring items
                                               
Foreclosed assets
          (10 )     (10 )           (77 )     (77 )
Originated mortgage servicing rights
          7       7             36       36  
 
                                   
Total
  $ (19 )   $ 77     $ 58     $ (1 )   $ 15     $ 14  
 
                                   
The activity in borrowings which the Corporation has elected to carry at fair value was as follows for the three month periods ended March 31:
                 
    2011     2010  
Borrowings carried at fair value — January 1
  $ 10,423     $ 17,804  
Net change in fair value
    (80 )     (56 )
 
           
Borrowings carried at fair value — March 31
  $ 10,343     $ 17,748  
 
           
Unpaid principal balance — March 31
  $ 10,000     $ 17,154  
 
           
NOTE 13 — OPERATING SEGMENTS
The Corporation’s reportable segments are based on legal entities that account for at least 10% of net operating results. Retail banking operations as of March 31, 2011 and 2010 and each of the three month periods then ended, represented 90% or more of the Corporation’s total assets and operating results. As such, no additional segment reporting is presented.

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Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations
ISABELLA BANK CORPORATION FINANCIAL REVIEW
(All dollars in thousands)
The following is management’s discussion and analysis of the financial condition and results of operations for Isabella Bank Corporation. This discussion and analysis is intended to provide a better understanding of the unaudited interim condensed consolidated financial statements and statistical data included elsewhere in this Form 10-Q. This analysis should be read in conjunction with the Corporation’s 2010 annual report and with the unaudited interim condensed consolidated financial statements and notes, beginning on page 3 of this report.
Executive Summary
Isabella Bank Corporation, as well as all other financial institutions in Michigan and across the entire country, continues to experience the negative impacts on its operations from the recent economic recession. This recession, which began in the fourth quarter of 2008, has resulted in historically high levels of loan delinquencies and nonaccrual loans, which have translated into increases in net loans charged off and foreclosed asset and collection expenses.
Despite the current economic downturn, the Corporation continues to be profitable, with net income of $2,316 for the three month period ended March 31, 2011. The Corporation’s nonperforming loans represented 0.77% of total loans as of March 31, 2011 which declined from 0.83% as of December 31, 2010. The ratio of nonperforming loans to total loans for all banks in the Corporation’s peer group was 3.57% as of December 31, 2010 (March 31, 2011 peer group ratios are not yet available). The Corporation’s interest margins also continue to be strong, as the net yield on interest earning assets (on a fully tax equivalent basis) was 3.92% for the three month period ended March 31, 2011.
Recent Legislation
The Health Care and Education Act of 2010 and the Patient Protection and Affordable Care Act could have a significant impact on the Corporation’s operating results in future periods. Aside from the potential increases in the Corporation’s health care costs, the implementation of the new rules and requirements is likely to require a substantial commitment from the Corporation’s management.
In 2010, the President signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). The Dodd-Frank Act makes 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. The Dodd-Frank Act includes the following provisions, among other things:
    Directs the Federal Reserve to issue rules which are expected to limit debit-card interchange fees for financial institutions with assets in excess of $10,000,000;
 
    Creates a new Consumer Financial Protection Bureau that will have rulemaking and enforcement authority for a wide range of consumer protection laws affecting financial institutions;
 
    Increases leverage and risk-based capital requirements, FDIC premiums and examination fees;
 
    Provides for new disclosure, “say-on-pay,” and other rules relating to executive compensation and corporate governance for public companies, including public financial institutions;
 
    Permanently increases the federal deposit insurance coverage limit to $250;
 
    Provides for mortgage reform addressing a customer’s ability to repay, restricts variable-rate lending, and makes more loans subject to disclosure requirements and other restrictions; and
 
    Creates a financial stability oversight council that will recommend to the Federal Reserve increasingly strict rules for capital, leverage, liquidity, risk management and other requirements as companies grow in size and complexity.
Uncertainty remains as to the ultimate impact of the Dodd-Frank Act on the financial services industry as a whole and on the Corporation. 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 the Corporation, its customers and the financial services industry as a whole. The Dodd-Frank Act will likely result in increases in the Corporation’s expenses, decreases to its revenues, and changes in the activities in which the Corporation engages, which could have a material adverse impact on the Corporation’s financial performance and results of operations that cannot be foreseen. Management anticipates that the impact will be substantial.

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CRITICAL ACCOUNTING POLICIES
A summary of the Corporation’s significant accounting policies is set forth in Note 1 of the Consolidated Financial Statements included in the Corporation’s Annual Report for the year ended December 31, 2010. Of these significant accounting policies, the Corporation considers its policies regarding the allowance for loan losses, acquisition intangibles, and the determination of the fair value of investment securities to be its most critical accounting policies.
The allowance for loan losses requires management’s most subjective and complex judgment. Changes in economic conditions can have a significant impact on the allowance for loan losses and, therefore, the provision for loan losses and results of operations. The Corporation has developed appropriate policies and procedures for assessing the adequacy of the allowance for loan losses, recognizing that this process requires a number of assumptions and estimates with respect to its loan portfolio. The Corporation’s 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 management at the time of the issuance of the consolidated financial statements. For additional discussion concerning the Corporation’s allowance for loan losses and related matters, see the detailed discussion to follow under the heading “Allowance for Loan Losses”.
United States generally accepted accounting principles require that the Corporation determine the fair value of the assets and liabilities of an acquired entity, and record their fair value on the date of acquisition. The Corporation employs 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 management believes it has the appropriate expertise to determine the fair value, management may choose to use its own calculations of the value. In other cases, where the value is not easily determined, the Corporation consults 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 value of its balance sheet, including identifiable intangibles, is recorded as goodwill. This goodwill is not amortized, but is tested for impairment on at least an annual basis.
The Corporation currently has both available-for-sale and trading investment securities that are carried at fair value. Changes in the fair value of available-for-sale 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. Management evaluates securities for indications of losses that are considered other-than-temporary, if any, on a regular basis. The market values for available-for-sale and trading investment securities are typically obtained from outside sources and applied to individual securities within the portfolio.
The Corporation invested $11,000 in auction rate money market preferred investment security instruments, which are classified as available-for-sale securities and reflected at estimated fair value. Due to credit market uncertainty, the trading for these securities has been limited. As a result of the limited trading of these securities, $7,800 converted to preferred stock with debt like characteristics in 2009.
Due to the limited trading activity of these securities, the fair values were estimated utilizing a hybrid of market value and discounted cash flow analysis as of March 31, 2011 and a discounted cash flow analysis as of December 31, 2010. These analyses considered creditworthiness of the counterparty, the timing of expected future cash flows, the current volume of trading activity, and recent trade prices. The discount rates used were determined by using the interest rates of similarly rated financial institutions debt based on the weighted average of a range of terms for corporate bond interest rates, which were obtained from published sources. All securities have call dates within the next year. The Corporation calculated the present value assuming a 3 year nonamortizing balloon using weighted average discount rates between approximately 5.50% and 7.25% as of March 31, 2011.
As of March 31, 2011, the Corporation held an auction rate money market preferred security and preferred stocks which declined in fair value as a result of the securities’ interest rates, as they are currently lower than the offering rates of securities with similar characteristics. Despite the limited trading of these securities, management has determined that any declines in the fair value of these securities are the result of changes in interest rates and not risks related to the underlying credit quality of the security. Additionally, none of these securities are deemed to be below investment grade, and management does not intend to sell the securities in an unrealized loss position, and it is more likely than not that the Corporation will not have to sell the securities before recovery of their cost basis. As a result, the Corporation has not recognized an other-than-temporary impairment related to these declines in fair value.

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RESULTS OF OPERATIONS
Selected Financial Data
The following table outlines the results of operations for the three month periods ended March 31, 2011 and 2010.
                 
    2011     2010  
INCOME STATEMENT DATA
               
Net interest income
  $ 10,185     $ 9,699  
Provision for loan losses
    817       1,207  
Net income
    2,316       2,023  
PER SHARE DATA
               
Earnings per share
               
Basic
  $ 0.31     $ 0.27  
Diluted
    0.30       0.26  
Cash dividends per common share
    0.19       0.18  
Book value (at end of period)
    19.52       18.89  
RATIOS
               
Average primary capital to average assets
    12.63 %     13.42 %
Net income to average assets (annualized)
    0.74       0.71  
Net income to average equity (annualized)
    6.34       5.68  
Net income to average tangible equity (annualized)
    9.56       8.66  
Net Interest Income
Net interest income equals interest income less interest expense and is the primary source of income for the Corporation. Interest income includes loan fees of $566 and $403 for the three month periods ended March 31, 2011 and 2010, respectively. For analytical purposes, net interest income is adjusted to a “taxable equivalent” basis by adding the income tax savings from interest on tax exempt loans and securities, thus making year to year comparisons more meaningful.
(Continued on page 36)

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AVERAGE BALANCES, INTEREST RATE, AND NET INTEREST INCOME
The following schedules present the daily average amount outstanding for each major category of interest earning assets, nonearning assets, interest bearing liabilities, and noninterest bearing liabilities. This schedule also presents an analysis of interest income and interest expense for the periods indicated. All interest income is reported on a fully taxable equivalent (FTE) basis using a 34% tax rate. Non accruing loans, for the purpose of the following computations, are included in the average loan amounts outstanding. Federal Reserve and Federal Home Loan Bank restricted equity holdings are included in other.
The following table displays the results for the three month periods ended March 31:
                                                 
    2011     2010  
            Tax     Average             Tax     Average  
    Average     Equivalent     Yield /     Average     Equivalent     Yield /  
    Balance     Interest     Rate     Balance     Interest     Rate  
INTEREST EARNING ASSETS
                                               
Loans
  $ 734,630     $ 11,361       6.19 %   $ 724,194     $ 11,517       6.36 %
Taxable investment securities
    201,508       1,513       3.00 %     142,075       1,279       3.60 %
Nontaxable investment securities
    134,514       1,927       5.73 %     118,767       1,756       5.91 %
Trading account securities
    5,527       77       5.57 %     11,022       141       5.12 %
Other
    43,279       134       1.24 %     33,739       104       1.23 %
 
                                   
Total earning assets
    1,119,458       15,012       5.36 %     1,029,797       14,797       5.75 %
 
                                               
NON EARNING ASSETS
                                               
Allowance for loan losses
    (12,585 )                     (13,395 )                
Cash and demand deposits due from banks
    20,512                       16,110                  
Premises and equipment
    24,510                       24,323                  
Accrued income and other assets
    92,607                       90,423                  
 
                                           
Total assets
  $ 1,244,502                     $ 1,147,258                  
 
                                           
 
                                               
INTEREST BEARING LIABILITIES
                                               
Interest bearing demand deposits
  $ 151,228       46       0.12 %   $ 133,839       35       0.10 %
Savings deposits
    190,147       124       0.26 %     165,901       89       0.21 %
Time deposits
    457,374       2,615       2.29 %     417,030       2,759       2.65 %
Borrowed funds
    182,943       1,268       2.77 %     186,079       1,517       3.26 %
 
                                   
Total interest bearing liabilities
    981,692       4,053       1.65 %     902,849       4,400       1.95 %
NONINTEREST BEARING LIABILITIES
                                               
Demand deposits
    107,402                       93,560                  
Other
    9,260                       8,444                  
Shareholders’ equity
    146,148                       142,405                  
 
                                           
Total liabilities and shareholders’ equity
  $ 1,244,502                     $ 1,147,258                  
 
                                           
Net interest income (FTE)
          $ 10,959                     $ 10,397          
 
                                           
Net yield on interest earning assets (FTE)
                    3.92 %                     4.04 %
 
                                           

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VOLUME AND RATE VARIANCE ANALYSIS
The following table sets forth the effect of volume and rate changes on interest income and expense for the periods indicated. For the purpose of this table, changes in interest due to volume and rate were determined as follows:
     Volume Variance — change in volume multiplied by the previous year’s rate.
     Rate Variance — change in the fully taxable equivalent (FTE) rate multiplied by the prior year’s volume.
The change in interest due to both volume and rate has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each.
                         
    Three Months Ended  
    March 31, 2011 Compared to  
    March 31, 2010  
    Increase (Decrease) Due to  
    Volume     Rate     Net  
CHANGES IN INTEREST INCOME
                       
Loans
  $ 164     $ (320 )   $ (156 )
Taxable investment securities
    471       (237 )     234  
Nontaxable investment securities
    227       (56 )     171  
Trading account securities
    (76 )     12       (64 )
Other
    30             30  
 
                 
Total changes in interest income
    816       (601 )     215  
 
                       
CHANGES IN INTEREST EXPENSE
                       
Interest bearing demand deposits
    5       6       11  
Savings deposits
    14       21       35  
Time deposits
    252       (396 )     (144 )
Borrowed funds
    (25 )     (224 )     (249 )
 
                 
Total changes in interest expense
    246       (593 )     (347 )
 
                 
Net change in interest margin (FTE)
  $ 570     $ (8 )   $ 562  
 
                 
Despite the declines in interest rates over the last year (for both interest earning assets and interest bearing liabilities), the Corporation has been able to maintain adequate interest margins.
The Corporation anticipates that net interest margin yield will decline slightly during the remainder 2011 due to the following factors:
    Based on the current economic conditions, management does not anticipate any changes in the target Fed Funds rate in the reasonably foreseeable future. As such, the Corporation does not anticipate significant, if any, changes in market rates. However, there is the potential for declines in rates earned on interest earning assets. Most of the potential declines would arise out of the Corporation’s investment portfolio, as securities, which are either called or matured during 2011, will likely be reinvested at significantly lower rates of return.
 
    Average loans to assets were 59.0% in the first three months of 2011 as compared to 63.1% in 2010. The decline represents a shift of assets from higher yielding loans into investments, which negatively impacts net interest margin yield.
 
    The interest rates on many types of loans including home equity lines of credit and investment securities with acceptable credit and interest rate risks are currently priced at or below the Corporation’s quarter to date net yield on interest earning assets of 3.92%. In order to earn additional net interest income, the Corporation is continuing to extend loans and purchase investments that will increase net income but decrease net interest margin yield.

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    While the Corporation’s liability sensitive balance sheet has allowed it to benefit from decreases in interest rates, it also makes the Corporation sensitive to increases in deposit and borrowing rates. As part of the Corporation’s goal to minimize the potential negative impacts of possible increases in future interest rates, management is actively working to lengthen the terms of its interest bearing liabilities. This lengthening has increased the Corporation’s cost of funding, reducing net interest income in the short term.
Allowance for Loan Losses
The viability of any financial institution is ultimately determined by its management of credit risk. Loans outstanding represent the Corporation’s single largest concentration of risk. The allowance for loan losses is management’s estimation of probable losses inherent in the existing loan portfolio. Factors used to evaluate the loan portfolio, and thus to determine the current charge to expense, include recent loan loss history, financial condition of borrowers, amount of nonperforming and impaired loans, overall economic conditions and other factors. The following table summarizes the Corporation’s charge off and recovery activity for the three month periods ended March 31:
                         
    2011     2010     Variance  
Allowance for loan losses — January 1
  $ 12,373     $ 12,979     $ (606 )
Loans charged off
                       
Commercial and agricultural
    (655 )     (506 )     (149 )
Real estate mortgage
    (323 )     (983 )     660  
Consumer
    (145 )     (114 )     (31 )
 
                 
Total loans charged off
    (1,123 )     (1,603 )     480  
Recoveries
                       
Commercial and agricultural
    137       158       (21 )
Real estate mortgage
    74       152       (78 )
Consumer
    103       94       9  
 
                 
Total recoveries
    314       404       (90 )
 
                 
Provision for loan losses
    817       1,207       (390 )
 
                 
Allowance for loan losses — March 31
  $ 12,381     $ 12,987     $ (606 )
 
                 
 
                       
Net loans charged off
  $ 809     $ 1,199     $ (390 )
Year to date average loans outstanding
    734,630       724,194       10,436  
 
                 
Net loans charged off to average loans outstanding
    0.11 %     0.17 %     -0.06 %
 
                 
 
                       
Total amount of loans outstanding
  $ 737,977     $ 726,165     $ 11,812  
 
                 
Allowance for loan losses as a % of loans
    1.68 %     1.79 %     -0.11 %
 
                 
Increases in the inventory of unsold homes have led to significant declines in residential real estate values in the Corporation’s market areas. This increased inventory is partially the result of the inability of potential home buyers to obtain financing due to the tightening of loan underwriting criteria by many financial institutions, brokers and government sponsored agencies. While the Corporation has maintained traditional lending standards, the decline in real estate values has had an adverse impact on customers who are experiencing financial difficulties. Historically, customers who experienced difficulties were able to sell their properties for more than the loan balance owed. The steep decline in real estate values has diminished homeowner equity and led borrowers who are experiencing financial difficulties to default on their mortgage loans.
The Corporation originates and sells fixed rate residential real estate mortgages to the Federal Home Loan Mortgage Corporation (Freddie Mac). The Corporation has not originated loans for either trading or its own portfolio that would be classified as subprime, nor has it originated adjustable rate mortgages or financed loans for more than 80% of market value unless insured by private third party insurance.
As shown in the preceding table, when comparing the first three months of 2011 to the same period in 2010, net loans charged off decreased by $390. This improvement allowed the Corporation to reduce its provision for loan losses in 2011 as compared to 2010. While there have been marked improvements in the level of net loans charged off and nonperforming assets, which has contributed to the Corporation’s ability to reduce its provision for loan losses, the overall local, regional and national economies have yet to show consistent improvement.

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The Corporation allocates the allowance throughout its loan portfolio based on management’s assessment of the underlying risks associated with each loan segment. Management’s assessments include allocations based on specific impairment allocations, historical loss histories, internally assigned credit ratings, and past due and nonaccrual balances. A portion of the allowance for loan losses is not allocated to any one loan segment, but is instead a reflection of other qualitative risks within the Corporation’s loan portfolio.
For further discussion on the allocation of the allowance for loan losses, see “Note 6 — Loans and Allowance for Loan Losses” to the Corporation’s interim condensed consolidated financial statements.
Loans Past Due and Loans in Nonaccrual Status
Increases in past due and nonaccrual loans can have a significant impact on the allowance for loan losses. To determine the potential impact, and corresponding estimated losses, management analyzes its historical loss trends on loans past due 30-89 days, 90 days or more, and nonaccrual loans.
The following tables summarize the Corporation’s past due and nonaccrual loans as of:
                                 
    March 31, 2011  
    Accruing Loans Past Due             Total  
            Greater             Past Due  
            Than             and  
    30-89 Days     90 Days     Nonaccrual     Nonaccrual  
Commercial and agricultural
  $ 2,395     $ 594     $ 3,334     $ 6,323  
Residential mortgage
    4,203       167       1,623       5,993  
Consumer installment
    265                   265  
 
                               
 
                       
 
  $ 6,863     $ 761     $ 4,957     $ 12,581  
 
                       
 
                               
                                 
    December 31, 2010  
    Accruing Loans Past Due             Total  
            Greater             Past Due  
            Than             and  
    30-89 Days     90 Days     Nonaccrual     Nonaccrual  
Commercial and agricultural
  $ 5,291     $ 175     $ 4,140     $ 9,606  
Residential mortgage
    6,339       310       1,470       8,119  
Consumer installment
    308       1             309  
 
                               
 
                       
 
  $ 11,938     $ 486     $ 5,610     $ 18,034  
 
                       

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Troubled Debt Restructurings
The following table summarizes the Corporation’s troubled debt restructurings as of:
                                                         
            March 31                     December 31                
    2011     2010        
    Accruing                     Accruing                     Total  
    Interest     Nonaccrual     Total     Interest     Nonaccrual     Total     Change  
Current
  $ 7,849     $ 459     $ 8,308     $ 4,798     $ 499     $ 5,297     $ 3,011  
Past due 30-89 days
    177             177       277       26       303       (126 )
Past due 90 days or more
          76       76             163       163       (87 )
 
                                         
Total troubled debt restructurings
  $ 8,026     $ 535     $ 8,561     $ 5,075     $ 688     $ 5,763     $ 2,798  
 
                                         
Since December 31, 2008 the Corporation has taken aggressive actions to avoid foreclosures on borrowers who are willing to work with the Corporation in modifying their loans, thus making them more affordable. These loan modifications have allowed borrowers to develop a payment structure that will allow them to continue making payments in lieu of foreclosure. Troubled debt restructurings that have been placed in nonaccrual status may be placed back on accrual status after six months of continuous performance.
To be classified as a troubled debt restructuring, the concessions granted to a customer who is experiencing financial difficulty must meet one of the following criteria:
  1.   Reduction of the stated interest rate related to the sole purpose of providing payment relief for the remaining original life of the debt.
 
  2.   Extension of the amortization period beyond typical lending guidelines.
 
  3.   Forbearance of principal.
 
  4.   Forbearance of accrued interest.
The following table displays the results of the Corporation’s efforts related to troubled debt restructurings modified since December 31, 2008:
                                                 
    Successful     Unsuccessful     Total  
    Number of     Amount of     Number of     Amount of     Number of     Amount of  
    Loans     Loans     Loans     Loans     Loans     Loans  
Reduction in interest rate
    2     $ 275     1     $ 132       3     $ 407  
Extension of amortization
    32       7,152       3       114       35       7,266  
Reduction in interest rate and extension of amortization
    34       6,001       1       93       35       6,094  
 
                                   
 
    68     $ 13,428       5     $ 339       73     $ 13,767  
 
                                   
Since December 31, 2008 the Corporation has not restructured any loans as a result of a forbearance of principal or accrued interest. As shown the preceding table, the Corporation has been successful in its efforts to modify loans to prevent foreclosures.

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Nonperforming Assets
The following table summarizes the Corporation’s nonperforming assets as of:
                         
    March 31     December 31        
    2011     2010     Change  
Nonaccrual loans
  $ 4,957     $ 5,610     $ (653 )
Accruing loans past due 90 days or more
    761       486       275  
 
                 
Total nonperforming loans
    5,718       6,096       (378 )
Other real estate owned (OREO)
    2,575       2,039       536  
Repossessed assets
    13       28       (15 )
 
                 
Total nonperforming assets
  $ 8,306     $ 8,163     $ 143  
 
                 
 
                       
Nonperforming loans as a % of total loans
    0.77 %     0.83 %     -0.05 %
 
                 
Nonperforming assets as a % of total assets
    0.66 %     0.67 %     -0.01%  
 
                 
Loans are placed in nonaccrual status when the foreclosure process has begun, generally after a loan is 90 days past due, unless they are well secured and in the process of collection. Upon transferring the loans to nonaccrual status, an evaluation to determine the net realizable value of the underlying collateral is performed. This evaluation is used to help determine if any charge downs are necessary. Loans may be placed back on accrual status after six months of continued performance.
The following table summarizes the Corporation’s nonaccrual loan balances by type as of:
                         
    March 31     December 31        
    2011     2010     Change  
Commercial and agricultural
  $ 3,334     $ 4,140     $ (806 )
Residential mortgage
    1,623       1,470       153  
 
                 
 
  $ 4,957     $ 5,610     $ (653 )
 
                 
Included in nonaccrual commercial and agricultural loans was one credit with a balance of $2,329 as of March 31, 2011 and $2,679 as of December 31, 2010. This credit is secured by undeveloped commercial real estate for which there has been a specific allocation established in the amount of $345 as of December 31, 2010. As of March 31, 2011, there was no specific allocation established for this credit as it was charged down to reflect the current market value of the real estate. There were no other individually significant credits included in nonaccrual loans as of March 31, 2011 and December 31, 2010.
Included in the nonaccrual loan balances above were credits currently classified as restructured loans as of:
                         
    March 31     December 31        
    2011     2010     Change  
Commercial and agricultural
  $     $ 115     $ (115 )
Residential mortgage
    535       573       (38 )
 
                 
 
  $ 535     $ 688     $ (153 )
 
                 
The Corporation has devoted 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. To management’s knowledge, there are no other loans which cause management to have serious doubts as to the ability of a borrower to comply with their loan repayment terms. A continued decline in real estate values may require further write downs of loans in foreclosure and other real estate owned and could potentially have an adverse impact on the Corporation’s financial performance.
Based on management’s analysis, the allowance for loan losses is considered appropriate as of March 31, 2011. Management will continue to closely monitor its overall credit quality during 2011 to ensure that the allowance for loan losses remains appropriate.

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NONINTEREST INCOME AND EXPENSES
Noninterest Income
Noninterest income consists of service charges and fee income, gains from the sale of mortgage loans, gains and losses on trading securities and borrowings measured at fair value, gains from the sale of investment securities, and other. Significant account balances are highlighted in the accompanying tables with additional descriptions of significant fluctuations:
                                 
    Three Months Ended March 31  
                    Change  
    2011     2010     $     %  
Service charges and fees
                               
NSF and overdraft fees
  $ 571     $ 710     $ (139 )     -19.6 %
ATM and debit card fees
    403       345       58       16.8 %
Trust fees
    221       194       27       13.9 %
Freddie Mac servicing fee
    182       188       (6 )     -3.2 %
Service charges on deposit accounts
    75       80       (5 )     -6.3 %
Net originated mortgage servicing rights (loss) income
    (14 )     75       (89 )     N/M  
All other
    38       36       2       5.6 %
 
                       
Total service charges and fees
    1,476       1,628       (152 )     -9.3 %
Gain on sale of mortgage loans
    129       93       36       38.7 %
Net loss on trading securities
    (19 )     (1 )     (18 )     N/M  
Net gain on borrowings measured at fair value
    80       56       24       42.9 %
Gain on sale of available-for-sale investment securities
          56       (56 )     -100.0 %
Other
                               
Earnings on corporate owned life insurance policies
    142       169       (27 )     -16.0 %
Brokerage and advisory fees
    139       143       (4 )     -2.8 %
All other
    1       23       (22 )     -95.7 %
 
                       
Total other
    282       335       (53 )     -15.8 %
 
                       
Total noninterest income
  $ 1,948     $ 2,167     $ (219 )     -10.1 %
 
                       

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Significant changes in noninterest income are detailed below:
    Management continuously analyzes various fees related to deposit accounts including service charges and NSF and overdraft fees. Based on these analyses, the Corporation makes any necessary adjustments to ensure that its fee structure is within the range of its competitors, while at the same time making sure that the fees remain fair to deposit customers. NSF and overdraft fees have been steadily declining over the past two years, with the decline accelerating in the third quarter of 2010 as a result of new regulatory guidance issued by the Federal Reserve Bank being implemented related to NSF and overdraft fees. The Corporation anticipates that NSF and overdraft fees will approximate current levels for the remainder of 2011.
 
    The increases in ATM and debit card fees are primarily the result of the increased usage of debit cards by customers. As management does not anticipate any significant changes to the ATM and debit card fee structures, income is expected to continue to increase as the usage of debit cards increases.
 
    Fluctuations in the gains and losses related to trading securities and borrowings carried at fair value are caused by interest rate variances. Management does not anticipate any significant fluctuations in net trading activities for the remainder of the year as significant interest rate changes are not expected.
 
    The Corporation is continuously analyzing its available-for-sale investment portfolio to take advantage of selling opportunities that would generate gains. Currently, management does not anticipate any significant sales throughout the remainder of 2011.
 
    The fluctuations in all other income are spread throughout various categories, none of which are individually significant.

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Noninterest Expenses
Noninterest expenses include compensation and benefits, occupancy, furniture and equipment, FDIC insurance premiums, and other expenses. Significant account balances are highlighted in the accompanying tables with additional descriptions of significant fluctuations:
                                 
    Three Months Ended March 31  
                    Change  
    2011     2010     $     %  
Compensation and benefits
                               
Leased employee salaries
  $ 3,556     $ 3,377     $ 179       5.3 %
Leased employee benefits
    1,443       1,213       230       19.0 %
All other
    6       5       1       20.0 %
 
                       
Total compensation and benefits
    5,005       4,595       410       8.9 %
 
                       
Occupancy
                               
Depreciation
    148       145       3       2.1 %
Outside services
    162       124       38       30.6 %
Property taxes
    128       114       14       12.3 %
Utilities
    127       123       4       3.3 %
Building repairs
    60       39       21       53.8 %
All other
    21       17       4       23.5 %
 
                       
Total occupancy
    646       562       84       14.9 %
 
                       
Furniture and equipment
                               
Depreciation
    499       453       46       10.2 %
Computer / service contracts
    460       429       31       7.2 %
ATM and debit card fees
    139       142       (3 )     -2.1 %
All other
    8       7       1       14.3 %
 
                       
Total furniture and equipment
    1,106       1,031       75       7.3 %
 
                       
FDIC insurance premiums
    334       306       28       9.2 %
 
                       
Other
                               
Marketing and community relations
    223       388       (165 )     -42.5 %
Foreclosed asset and collection
    100       199       (99 )     -49.7 %
Directors fees
    211       209       2       1.0 %
Audit and SOX compliance fees
    156       245       (89 )     -36.3 %
Education and travel
    105       114       (9 )     -7.9 %
Printing and supplies
    100       96       4       4.2 %
Postage and freight
    100       83       17       20.5 %
Legal fees
    62       83       (21 )     -25.3 %
Amortization of deposit premium
    76       86       (10 )     -11.6 %
Consulting fees
    33       46       (13 )     -28.3 %
All other
    330       311       19       6.1 %
 
                       
Total other
    1,496       1,860       (364 )     -19.6 %
 
                       
Total noninterest expenses
  $ 8,587     $ 8,354     $ 233       2.8 %
 
                       

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Significant changes in noninterest expenses are detailed below:
    Leased employee salaries have increased due to annual merit increases and the continued growth of the Corporation.
 
    Leased employee benefits returned to more normal levels when the first three months of 2011 is compared to the same period in 2010. Expenses during the first quarter of 2010 were abnormally low due to reduced health care related expenses, which tend to fluctuate from period to period. The Corporation expects leased employee benefits to remain at current levels for the remainder of 2011.
 
    Marketing and community relations returned to normal levels in the first three months of 2011 when compared to the same period in 2010 as a result of nonrecurring charitable contributions made in the first quarter of 2010. The Corporation anticipates marketing and community relations to approximate current levels throughout the remainder of 2011.
 
    While foreclosed asset and collection expenses have declined from 2010, they continue to be at historically high levels. Management anticipates that these expenses will approximate current levels throughout the remainder of 2011.
 
    The decline in Audit and Sox compliance fees is primarily due to the timing of performance of recurring audit procedures. Management does not anticipate any significant changes for the remainder of 2011.
 
    The Corporation’s legal expenses can fluctuate from period to period based on the volume of foreclosures as well as expenses related to the Corporation’s ongoing operations. At this time, the Corporation is not aware of any significant legal matters for 2011.
 
    The fluctuations in all other expenses are spread throughout various categories, none of which are individually significant.

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ANALYSIS OF CHANGES IN FINANCIAL CONDITION
                                 
    March 31     December 31%           Change  
    2011     2010     $ Change     (unannualized)  
ASSETS
                               
Cash and cash equivalents
  $ 23,332     $ 18,109     $ 5,223       28.84 %
Certificates of deposit held in other financial institutions
    13,868       15,808       (1,940 )     -12.27 %
Trading securities
    5,433       5,837       (404 )     -6.92 %
Available-for-sale securities
    361,960       330,724       31,236       9.44 %
Mortgage loans available-for-sale
    252       1,182       (930 )     -78.68 %
Loans
    737,977       735,304       2,673       0.36 %
Allowance for loan losses
    (12,381 )     (12,373 )     (8 )     0.06 %
Premises and equipment
    24,219       24,627       (408 )     -1.66 %
Goodwill and other intangible assets
    47,015       47,091       (76 )     -0.16 %
Equity securities without readily determinable fair values
    17,423       17,564       (141 )     -0.80 %
Other assets
    43,083       41,937       1,146       2.73 %
 
                       
TOTAL ASSETS
  $ 1,262,181     $ 1,225,810     $ 36,371       2.97 %
 
                       
 
                               
LIABILITIES AND SHAREHOLDERS’ EQUITY
                               
Liabilities
                               
Deposits
  $ 923,247     $ 877,339     $ 45,908       5.23 %
Borrowed funds
    183,263       194,917       (11,654 )     -5.98 %
Accrued interest payable and other liabilities
    8,070       8,393       (323 )     -3.85 %
 
                       
Total liabilities
    1,114,580       1,080,649       33,931       3.14 %
Shareholders’ equity
    147,601       145,161       2,440       1.68 %
 
                       
TOTAL LIABILITIES AND
                               
SHAREHOLDERS’ EQUITY
  $ 1,262,181     $ 1,225,810     $ 36,371       2.97 %
 
                       
As shown above, the Corporation has had significant deposit growth since year end. However, as loans have remained essentially unchanged, the Corporation increased cash and cash equivalents (which includes interest bearing balances due from banks) and available-for-sale investment securities. As deposits are anticipated to continue to grow throughout the remainder of 2011, the Corporation’s holdings of available-for-sale investment securities are expected to increase as well.
The following table outlines the changes in the loan portfolio:
                                 
    March 31     December 31%           Change  
    2011     2010     $ Change     (unannualized)  
Commercial
  $ 350,456     $ 348,852     $ 1,604       0.46 %
Agricultural
    69,993       71,446       (1,453 )     -2.03 %
Residential real estate mortgage
    288,245       284,029       4,216       1.48 %
Installment
    29,283       30,977       (1,694 )     -5.47 %
 
                       
 
  $ 737,977     $ 735,304     $ 2,673       0.36 %
 
                       

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\

The following table outlines the changes in the deposit portfolio:
                                 
    March 31     December 31%             Change  
    2011     2010     $ Change     (unannualized)  
Noninterest bearing demand deposits
  $ 108,720     $ 104,902     $ 3,818       3.64 %
Interest bearing demand deposits
    152,784       142,259       10,525       7.40 %
Savings deposits
    200,954       177,817       23,137       13.01 %
Certificates of deposit
    393,200       386,435       6,765       1.75 %
Brokered certificates of deposit
    52,147       53,748       (1,601 )     -2.98 %
Internet certificates of deposit
    15,442       12,178       3,264       26.80 %
 
                       
Total
  $ 923,247     $ 877,339     $ 45,908       5.23%  
 
                       
As shown in the preceding table, the growth in deposits since December 31, 2010 has primarily been in the savings category. This growth was the result of focused marketing efforts to increase deposit market share in the communities served. Management anticipates that deposits will continue to grow in 2011.
Borrowed funds consist of the following obligations as of:
                                 
    March 31, 2011     December 31, 2010  
    Amount     Rate     Amount     Rate  
Federal Home Loan Bank advances
  $ 122,343       3.56 %   $ 113,423       3.64 %
Securities sold under agreements to repurchase without stated maturity dates
    41,406       0.25 %     45,871       0.25 %
Securities sold under agreements to repurchase with stated maturity dates
    19,514       3.03 %     19,623       3.01 %
Federal funds purchased
                16,000       0.60 %
 
                       
Total
  $ 183,263       2.76 %   $ 194,917       2.53 %
 
                       
Capital
The capital of the Corporation consists solely of common stock, retained earnings, and accumulated other comprehensive income. The Corporation offers dividend reinvestment and employee and director stock purchase plans. Under the provisions of these plans, the Corporation issued 30,531 shares or $728 of common stock during the first three months of 2011, as compared to 29,147 shares or $736 of common stock during the same period in 2010. The Corporation also offers a deferred compensation plan for its directors, which allows participants to purchase stock units, in lieu of cash payments. Pursuant to this plan, the Corporation increased shareholders’ equity by $180 and $181 during the three month periods ended March 31, 2011 and 2010, respectively.
The Board of Directors has approved a common stock repurchase plan to enable the Corporation to repurchase its common stock. During the first three months of 2011 and 2010, pursuant to this plan, the Corporation repurchased 31,739 shares of common stock at an average price of $18.18 and 34,165 shares of common stock at an average price of $18.41, respectively. As of March 31, 2011, the Corporation was authorized to repurchase up to an additional 7,698 shares of common stock.
Accumulated other comprehensive income increased $1,358 for the three month period ended March 31, 2011, net of tax. The increase is a result of unrealized gains on available-for-sale investment securities. Management has reviewed the credit quality of its investment portfolio and believes that there are no losses that are other-than-temporary.
There are no significant regulatory constraints placed on the Corporation’s capital. The Federal Reserve Board’s current recommended minimum primary capital to assets requirement is 6.0%. The Corporation’s primary capital to adjusted average assets, which consists of shareholders’ equity plus the allowance for loan losses less acquisition intangibles, was 8.23% as of March 31, 2011.
There are no commitments for significant capital expenditures for the remainder of 2011.

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The Federal Reserve Board 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 the Corporation’s values as of:
                         
    March 31     December 31        
    2011     2010     Required  
Equity Capital
    12.53 %     12.44 %     4.00 %
Secondary Capital
    1.25 %     1.25 %     4.00 %
 
                 
Total Capital
    13.78 %     13.69 %     8.00 %
 
                 
Isabella Bank Corporation’s 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 Federal Reserve and FDIC also prescribe minimum capital requirements for the Bank. At March 31, 2011, the Bank exceeded these minimum capital requirements. Recently passed legislation may increase the required level of capital for banks. This increase in capital levels may have an adverse impact on the Corporation’s ability to grow and pay dividends.
Liquidity
The primary sources of the Corporation’s liquidity are cash and demand deposits due from banks, certificates of deposit held in other financial institutions, trading securities, and available-for-sale securities, excluding money market preferred securities and preferred stocks due to their illiquidity. These categories totaled $394,197 or 31.2% of assets as of March 31, 2011 as compared to $360,677 or 29.4% as of December 31, 2010. Liquidity is important for financial institutions because of their need to meet loan funding commitments, depositor withdrawal requests, and various other commitments including expansion of operations, investment opportunities, and payment of cash dividends. Liquidity varies on a daily basis as a result of customer activity.
Historically, the primary source of funds for the Corporation has been deposits. The Corporation emphasizes interest bearing time deposits as part of its funding strategy. The Corporation also seeks noninterest bearing deposits, or checking accounts, which reduce the Corporation’s cost of funds in an effort to expand the customer base.
In addition to these primary sources of liquidity, the Corporation has the ability to borrow in the federal funds market at the Federal Reserve Bank, the Federal Home Loan Bank, as well as other correspondent banks. The Corporation’s liquidity is considered adequate by the management of the Corporation.
The following table summarizes the Corporation’s sources and uses of cash for the three month periods ended March 31:
                         
    2011     2010     $ Variance  
Net cash provided by operating activities
  $ 4,460     $ 9,416     $ (4,956 )
Net cash used in investing activities
    (32,157 )     (21,278 )     (10,879 )
Net cash provided by financing activities
    32,920       8,194       24,726  
 
                 
Increase (Decrease) in cash and cash equivalents
    5,223       (3,668 )     8,891  
Cash and cash equivalents January 1
    18,109       22,706       (4,597 )
 
                 
Cash and cash equivalents March 31
  $ 23,332     $ 19,038     $ 4,294  
 
                 
The increase in cash and cash equivalents has resulted in an increase in interest bearing balances due from banks, which is primarily comprised of balances held at the Federal Reserve Bank.

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FINANCIAL INSTRUMENTS WITH OFF BALANCE SHEET ARRANGEMENTS
The Corporation is 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 its customers. These financial instruments, which include commitments to extend credit and standby letters of credit, involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the consolidated balance sheets. The contract or notional amounts of these instruments reflect the extent of involvement the Corporation has in a particular class of financial instrument.
                 
    Contract Amount  
    March 31     December 31  
    2011     2010  
Unfunded commitments under lines of credit
  $ 104,082     $ 110,201  
Commercial and standby letters of credit
    4,711       4,881  
Commitments to grant loans
    19,459       13,382  
Unfunded commitments under commercial lines of credit, revolving credit home equity lines of credit, and overdraft protection agreements are commitments for possible future extensions of credit to existing customers. These commitments may expire without being drawn upon and may not be drawn upon to the total extent to which the Corporation is committed. A majority of such commitments are at fixed rates of interest; a portion is unsecured.
Commercial and standby letters of credit are conditional commitments issued by the Corporation 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. The Corporation evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Corporation upon the extension of credit, is based on management’s credit evaluation of the borrower. While the Corporation considers 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 extend credit 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 commitments may expire without being drawn upon. Therefore, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if it is deemed necessary by the Corporation, is based on management’s credit evaluation of the customer.
The Corporation’s 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 is represented by the contractual notional amount of those instruments. The Corporation uses the same credit policies in deciding to make these commitments as it does for extending loans to customers. No significant losses are anticipated as a result of these commitments.
Forward Looking Statements
This report contains certain forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Corporation intends such forward looking statements to be covered by the safe harbor provisions for forward looking statements contained in the Private Securities Litigation Reform Act of 1995, and is including this statement for purposes of these safe harbor provisions. Forward looking statements, which are based on certain assumptions and describe future plans, strategies and expectations of the Corporation, are generally identifiable by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project,” or similar expressions. The Corporation’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations and future prospects of the Corporation and its subsidiaries 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 and the Federal Reserve Board, the quality or composition of the loan or investment portfolios, demand for loan products, fluctuation in the value of collateral securing our loan portfolio, deposit flows, competition, demand for financial services in the Corporation’s 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 the Corporation and its business, including additional factors that could materially affect the Corporation’s financial results, is included in the Corporation’s filings with the Securities and Exchange Commission.

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Item 3 — Quantitative and Qualitative Disclosures about Market Risk
The Corporation’s primary market risks are interest rate risk and liquidity risk. The Corporation has no significant foreign exchange risk and does not utilize interest rate swaps or derivatives, except for interest rate locks and forward loan commitments, in the management of its interest rate risk. Any changes in foreign exchange rates or commodity prices would have an insignificant impact on the Corporation’s interest income and cash flows. The Corporation does have a significant amount of loans extended to borrowers in agricultural production. The cash flow of such borrowers and ability to service debt is largely dependent on commodity prices. The Corporation mitigates these risks by using conservative price and production yields when calculating a borrower’s available cash flow to service their debt.
Interest rate risk (“IRR”) is the exposure of the Corporation’s net interest income, its primary source of 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 the Corporation’s earnings and capital.
The Federal Reserve Board, the Corporation’s primary Federal regulator, has adopted a policy requiring the Board of Directors and senior management to effectively manage the various risks that can have a material impact on the safety and soundness of the Corporation. The risks include credit, interest rate, liquidity, operational, and reputational. The Corporation has 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 the Board of Directors.
The Corporation uses several techniques to manage IRR. The first method is gap analysis. Gap analysis measures the cash flows and/or the earliest repricing of the Corporation’s interest bearing assets and liabilities. This analysis is useful for measuring trends in the repricing characteristics of the balance sheet. Significant assumptions are required in this process because of the imbedded repricing options contained in assets and liabilities. A substantial portion of the Corporation’s assets are invested in loans and investment securities with issuer call options. Residential real estate and other consumer loans have imbedded options that allow the borrower to repay the balance prior to maturity without penalty, while commercial and agricultural loans have prepayment penalties. The amount of prepayments is dependent upon many factors, including the interest rate of a given loan in comparison to the current interest rate for residential mortgages, 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 the Corporation’s cash flows from these assets. A significant portion of the Corporation’s securities are callable or subject to prepayment. The call option is more likely to be exercised in a period of decreasing interest rates. Investment securities, other than those that are callable, do not have any significant imbedded options. Savings and checking deposits 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 second technique used in the management of IRR is to combine the projected cash flows and repricing characteristics generated by the gap analysis and the interest rates associated with those cash flows to project future interest income. By changing the amount and timing of the cash flows and the repricing interest rates of those cash flows, the Corporation can project the effect of changing interest rates on its interest income. Based on the projections prepared for the year ending December 31, 2011, the Corporation’s net interest income would decrease during a period of increasing interest rates.
The following tables provide information about the Corporation’s assets and liabilities that are sensitive to changes in interest rates as of March 31, 2011 and December 31, 2010. The Corporation has no interest rate swaps, futures contracts, or other derivative financial options. 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.

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    March 31, 2011     Fair Value  
(dollars in thousands)   2012     2013     2014     2015     2016     Thereafter     Total     03/31/11  
     
Rate sensitive assets
                                                               
Other interest bearing assets
  $ 13,454     $ 4,345     $ 1,060     $     $     $     $ 18,859     $ 18,947  
Average interest rates
    0.86 %     1.77 %     1.98 %                       1.13 %        
Trading securities
  $ 1,818     $ 2,066     $ 1,028     $ 521     $     $     $ 5,433     $ 5,433  
Average interest rates
    3.52 %     2.52 %     2.49 %     2.54 %                 2.85 %        
Fixed interest rate securities
  $ 68,144     $ 40,075     $ 35,716     $ 33,653     $ 28,525     $ 155,847     $ 361,960     $ 361,960  
Average interest rates
    3.50 %     3.34 %     3.35 %     3.39 %     3.40 %     3.22 %     3.33 %        
Fixed interest rate loans
  $ 112,374     $ 121,528     $ 135,246     $ 72,049     $ 70,019     $ 75,374     $ 586,590     $ 591,231  
Average interest rates
    7.33 %     6.50 %     6.06 %     6.38 %     5.84 %     5.74 %     6.37 %        
Variable interest rate loans
  $ 66,097     $ 19,981     $ 21,408     $ 17,067     $ 15,677     $ 11,157     $ 151,387     $ 151,387  
Average interest rates
    4.60 %     4.48 %     4.09 %     3.82 %     3.72 %     5.12 %     4.37 %        
 
                                                               
Rate sensitive liabilities
                                                               
Borrowed funds
  $ 62,482     $ 28,146     $ 20,102     $ 17,533     $ 35,000     $ 20,000     $ 183,263     $ 188,111  
Average interest rates
    0.83 %     3.91 %     2.36 %     3.44 %     4.22 %     2.56 %     2.56 %        
Savings and NOW accounts
  $ 92,162     $ 82,813     $ 56,591     $ 37,990     $ 25,797     $ 58,385     $ 353,738     $ 353,738  
Average interest rates
    0.22 %     0.22 %     0.21 %     0.19 %     0.18 %     0.16 %     0.20 %        
Fixed interest rate time deposits
  $ 228,055     $ 106,179     $ 44,673     $ 33,678     $ 41,376     $ 4,874     $ 458,835     $ 457,059  
Average interest rates
    1.71 %     2.72 %     3.22 %     2.83 %     2.90 %     2.13 %     2.28 %        
Variable interest rate time deposits
  $ 1,135     $ 819     $     $     $     $     $ 1,954     $ 1,954  
Average interest rates
    1.16 %     0.96 %                             1.08 %        
                                                                 
    December 31, 2010     Fair Value  
    2011     2012     2013     2014     2015     Thereafter     Total     12/31/10  
     
Rate sensitive assets
                                                               
Other interest bearing assets
  $ 10,550     $ 5,429     $ 960     $     $     $     $ 16,939     $ 17,039  
Average interest rates
    0.96 %     1.82 %     2.16 %                       1.30 %        
Trading securities
  $ 1,918     $ 2,366     $ 1,031     $ 522     $     $     $ 5,837     $ 5,837  
Average interest rates
    3.46 %     2.31 %     2.42 %     2.47 %                 2.72 %        
Fixed interest rate securities
  $ 64,652     $ 42,984     $ 32,871     $ 29,395     $ 24,438     $ 136,384     $ 330,724     $ 330,724  
Average interest rates
    3.68 %     3.42 %     3.30 %     3.33 %     3.28 %     3.13 %     3.32 %        
Fixed interest rate loans
  $ 128,277     $ 121,434     $ 140,019     $ 67,423     $ 68,569     $ 66,010     $ 591,732     $ 603,435  
Average interest rates
    6.80 %     6.63 %     6.26 %     6.47 %     6.08 %     5.83 %     6.41 %        
Variable interest rate loans
  $ 59,536     $ 17,306     $ 22,523     $ 15,118     $ 18,830     $ 10,259     $ 143,572     $ 143,572  
Average interest rates
    4.94 %     4.76 %     4.27 %     3.78 %     3.69 %     5.21 %     4.55 %        
 
                                                               
Rate sensitive liabilities
                                                               
Borrowed funds
  $ 74,151     $ 33,013     $ 15,127     $ 37,087     $ 25,539     $ 10,000     $ 194,917     $ 200,603  
Average interest rates
    0.62 %     3.46 %     2.55 %     3.11 %     4.60 %     2.35 %     2.33 %        
Savings and NOW accounts
  $ 74,278     $ 73,818     $ 53,174     $ 35,872     $ 24,520     $ 58,414     $ 320,076     $ 320,076  
Average interest rates
    0.21 %     0.21 %     0.20 %     0.19 %     0.18 %     0.15 %     0.19 %        
Fixed interest rate time deposits
  $ 215,648     $ 113,338     $ 44,269     $ 31,414     $ 39,474     $ 6,278     $ 450,421     $ 452,392  
Average interest rates
    1.79 %     2.67 %     3.35 %     2.86 %     2.97 %     3.26 %     2.36 %        
Variable interest rate time deposits
  $ 1,279     $ 661     $     $     $     $     $ 1,940     $ 1,940  
Average interest rates
    1.21 %     1.06 %                             1.16 %        

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Item 4 — Controls and Procedures
DISCLOSURE CONTROLS AND PROCEDURES
The Corporation’s management carried out an evaluation, under the supervision and with the participation of the Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of the Corporation’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15(d)-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) as of March 31, 2011, pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Principal Executive Officer and Principal Financial Officer concluded that the Corporation’s disclosure controls and procedures as of March 31, 2011, were effective to ensure that information required to be disclosed by the Corporation in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
During the most recent fiscal quarter, no change occurred in the Corporation’s internal control over financial reporting that materially affected, or is likely to materially effect, the Corporation’s internal control over financial reporting.

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PART II — OTHER INFORMATION
Item 1 — Legal Proceedings
The Corporation is not involved in any material legal proceedings. The Corporation is involved in ordinary, routine litigation incidental to its business; however, no such routine proceedings are expected to result in any material adverse effect on operations, earnings, or financial condition.
Item 1A — Risk Factors
There have been no material changes to the risk factors disclosed in Item 1A in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2010.
Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds
(A)   None
 
(B)   None
 
(C)   Repurchases of Common Stock
The Board of Directors has adopted a common stock repurchase plan. On June 23, 2010, the Board of Directors amended the plan to allow for the repurchase of an additional 100,000 shares of the Corporation’s common stock. These authorizations do not have expiration dates. As shares are repurchased under this plan, they are retired and revert back to the status of authorized, but unissued shares.
The following table provides information for the three month period ended March 31, 2011, with respect to this plan:
                                 
                    Total Number of        
                    Shares Purchased     Maximum Number of  
    Shares Repurchased     as Part of Publicly     Shares That May Yet Be  
            Average Price     Announced Plan     Purchased Under the  
    Number     Per Share     or Program     Plans or Programs  
 
Balance, December 31, 2011
                            39,437  
January 1 - 31, 2011
    7,702     $ 17.92       7,702       31,735  
February 1 - 28, 2011
    17,355       18.27       17,355       14,380  
March 1 - 31, 2011
    6,682       18.26       6,682       7,698  
     
Balance, March 31, 2011
    31,739     $ 18.18       31,739       7,698  
     
Item 6 — Exhibits
     (a) Exhibits
     
31(a)
  Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Principal Executive Officer
 
   
31(b)
  Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Principal Financial Officer
 
   
32
  Section 1350 Certification of Principal Executive Officer and Principal Financial Officer

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
         
  Isabella Bank Corporation
 
 
Date: May 2, 2011  /s/ Richard J. Barz    
  Richard J. Barz   
  Chief Executive Officer
(Principal Executive Officer) 
 
 
     
Date: May 2, 2011  /s/ Dennis P. Angner    
  Dennis P. Angner   
  President, Chief Financial Officer
(Principal Financial Officer, Principal Accounting Officer) 
 

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