10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2012

¨ 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: 000-49772

SOUTHERN MICHIGAN BANCORP, INC.

(Exact Name of Registrant as Specified in its Charter)

Michigan	38-2407501
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)
51 West Pearl Street Coldwater, Michigan	49036
(Address of Principal Executive Offices)	(Zip Code)

(517) 279-5500

(Registrant’s Telephone Number, Including Area Code)

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.    Yes  x    No  ¨

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

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):

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

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

The number of shares outstanding of the Registrant’s Common Stock, $2.50 par value, as of August 14, 2012, was 2,375,819 shares.

Forward-Looking Statements

This report contains forward-looking statements that are based on management’s beliefs, assumptions, current expectations, estimates and projections about the financial services industry, the economy, and Southern Michigan Bancorp, Inc. Forward-looking statements may be identified by words or phrases such as “outlook”, “plan”, or “strategy”; that an event or trend “may”, “should”, “will”, “is likely”, or is “probable” to occur or “continue”, has “begun” or “is scheduled” or “on track” or that the Company or its management “anticipates”, “believes”, “estimates”, “plans”, “forecasts”, “intends”, “predicts”, “projects”, or “expects” a particular result, or is “committed”, “confident”, “optimistic” or has an “opinion” that an event will occur, or other words or phrases such as “ongoing”, “future”, “judgment”, “signs”, “efforts”, “tend”, “exploring”, “appearing”, “until”, “near term”, “going forward”, “starting” and variations of such words and similar expressions. Such statements are based upon current beliefs and expectations and involve substantial risks and uncertainties, which could cause actual results to differ materially from those expressed or implied by such forward-looking statements. These statements include, among others, statements related to trends in our credit quality metrics, future capital levels, future charge-off levels, real estate valuation, future levels of non-performing assets and costs associated with administration and disposition of non-performing assets, the rate of asset dispositions, dividends, future growth and funding sources, future liquidity levels, the availability of sources of liquidity, future profitability levels, the effects on earnings of changes in interest rates and other revenue sources, the effects of new or changed accounting standards and the effects of existing or new laws or regulations (or interpretations thereof). All statements with references to future time periods are forward-looking. Management’s determination of the provision and allowance for loan losses, the appropriate carrying value of intangible assets (including goodwill and mortgage servicing rights), deferred tax assets and other real estate owned, and the fair value of investment securities (including whether any impairment on any investment security is temporary or other-than-temporary and the amount of any impairment) involves judgments that are inherently forward-looking. All of the information concerning interest rate sensitivity is forward-looking. Management’s assumptions regarding pension and other post retirement plans involve judgments that are inherently forward-looking. Our ability to sell other real estate at carrying value or at all, successfully implement new programs and initiatives, increase efficiencies, respond to declines in collateral values and credit quality, maintain our current level of deposits and other sources of funding, and improve profitability is not entirely within our control and is not assured. The future effect of changes in the real estate, financial and credit markets and the national and regional economy on the banking industry, generally, and Southern Michigan Bancorp, Inc., specifically, are also inherently uncertain. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions (“risk factors”) that are difficult to predict with regard to timing, extent, likelihood and degree of occurrence. Actual results and outcomes may materially differ from what may be expressed or forecasted in such forward-looking statements. We undertake no obligation to update or revise our forward-looking statements to reflect developments that occur or information obtained after the date of this report.

Risk factors include, but are not limited to, the risk factors described in “Item 1A—Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2011. These and other factors are representative of the risk factors that may emerge and could cause a difference between an ultimate actual outcome and a preceding forward-looking statement.

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Part I. Financial Information

Item 1. Financial Statements

SOUTHERN MICHIGAN BANCORP, INC.

UNAUDITED INTERIM FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(In thousands, except share data)

	June 30, 2012			December 31, 2011
ASSETS
Cash and cash equivalents	$	34,772		$	42,185
Federal funds sold		253			287
Securities available for sale		76,054			90,344
Loans held for sale		1,624			1,088
Loans, net of allowance for loan losses of $5,167 – 2012 ($5,412 – 2011)		344,041			327,392
Premises and equipment, net		12,392			12,546
Accrued interest receivable		1,826			2,148
Net cash surrender value of life insurance		10,480			10,312
Goodwill		13,422			13,422
Other intangible assets, net		1,504			1,666
Other assets		7,499			7,830
TOTAL ASSETS	$	503,867		$	509,220
LIABILITIES
Deposits:
Non-interest bearing	$	69,591		$	61,930
Interest bearing		347,956			358,581
Total deposits		417,547			420,511
Securities sold under agreements to repurchase and overnight borrowings		14,214			18,074
Accrued expenses and other liabilities		4,558			4,568
Other borrowings		7,448			7,751
Subordinated debentures		5,155			5,155
Common stock subject to repurchase obligation in Employee Stock Ownership Plan, shares outstanding – 119,594 in 2012 (115,170 shares in 2011)		1,644			1,296
Total liabilities		450,566			457,355
SHAREHOLDERS’ EQUITY
Preferred stock, 100,000 shares authorized; none issued or outstanding		—			—
Common stock, $2.50 par value:
Authorized – 4,000,000 shares Issued – 2,376,204 shares in 2012 (2,358,599 shares in 2011) Outstanding (other than ESOP shares) – 2,256,610 shares in 2012 (2,243,429 shares in 2011)		5,642			5,609
Additional paid-in capital		17,991			18,278
Retained earnings		29,223			27,576
Accumulated other comprehensive income, net		548			571
Unearned Employee Stock Ownership Plan shares		(103	)		(169	)
Total shareholders’ equity		53,301			51,865
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	503,867		$	509,220

See accompanying notes to interim consolidated financial statements.

3

SOUTHERN MICHIGAN BANCORP, INC.

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(In thousands, except per share data)

	Three Months Ended June 30,				Six Months Ended June 30,
	2012		2011		2012		2011
Interest income:
Loans, including fees	$	4,629	$	4,334	$	9,140	$	8,704
Securities:
Taxable		63		171		219		309
Tax-exempt		246		218		488		434
Other		31		47		57		98
Total interest income		4,969		4,770		9,904		9,545
Interest expense:
Deposits		587		803		1,248		1,647
Other		129		148		262		307
Total interest expense		716		951		1,510		1,954
Net interest income		4,253		3,819		8,394		7,591
Provision for loan losses		475		375		700		500
Net interest income after provision for loan losses		3,778		3,444		7,694		7,091
Non-interest income:
Service charges on deposit accounts		413		568		807		1,079
Trust fees		263		293		561		568
Net gains on security calls and sales		—		—		3		2
Net gains on loan sales		476		205		878		522
Earnings on life insurance assets		80		84		168		164
Brokerage income		49		46		103		94
ATM and debit card fee income		292		257		564		492
Other		127		124		281		237
Total non-interest income		1,700		1,577		3,365		3,158
Non-interest expense:
Salaries and employee benefits		2,267		2,294		4,688		4,741
Occupancy, net		277		336		560		709
Equipment		217		204		409		407
Printing, postage and supplies		105		102		244		243
Telecommunication expenses		61		98		157		197
Professional and outside services		280		199		536		420
FDIC assessments		100		110		200		275
Software maintenance		120		110		231		215
Amortization of other intangibles		81		84		162		169
Expenses relating to OREO property		74		86		202		131
ATM expenses		109		92		210		174
Other		451		344		825		669
Total non-interest expense		4,142		4,059		8,424		8,350
INCOME BEFORE INCOME TAXES		1,336		962		2,635		1,899
Federal income tax provision		309		200		606		389
NET INCOME	$	1,027	$	762	$	2,029	$	1,510
Basic Earnings Per Common Share	$	0.43	$	0.33	$	0.86	$	0.65
Diluted Earnings Per Common Share		0.43		0.33		0.86		0.65
Dividends Declared Per Common Share		0.09		0.05		0.16		0.10

See accompanying notes to interim consolidated financial statements.

4

SOUTHERN MICHIGAN BANCORP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(In thousands, except per share data)

	Three Months Ended June 30,				Six Months Ended June 30,
	2012		2011		2012			2011
NET INCOME	$	1,027	$	762	$	2,029		$	1,510
OTHER COMPREHENSIVE INCOME (LOSS)
Unrealized gain (loss) on available for sale securities		115		198		(33	)		770
Reclassification adjustments for net realized gains included in net income		—		—		(3	)		(2	)
		115		198		(36	)		768
Income tax effect		39		67		(13	)		261
Other comprehensive income (loss)		76		376		(23	)		507
TOTAL COMPREHENSIVE INCOME	$	1,103	$	1,138	$	2,006		$	2,017

See accompanying notes to interim consolidated financial statements.

5

SOUTHERN MICHIGAN BANCORP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(In thousands, except number of shares and per share data)

For the Six Months Ended June 30, 2012 and 2011

	Common Stock			Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss), Net			Unearned ESOP Shares			Total
Balance at January 1, 2011	$	5,583		$	18,033		$	24,692		$	(168	)	$	(297	)	$	47,843
Net income								1,510									1,510
Net change in other comprehensive
income items											507						507
Cash dividends declared – $.10 per share								(235	)								(235	)
Issuance of restricted stock (18,525 shares of common stock at $12.70 per share)		46			(46	)											—
Vesting of restricted stock					40												40
Forfeiture of restricted stock (643 shares)		(2	)		2												—
Change in common stock subject to
repurchase		(7	)		25												18
Reduction of ESOP obligation														32			32
Stock option expense					30												30
Balance at June 30, 2011	$	5,620		$	18,084		$	25,967		$	339		$	(265	)	$	49,745
Balance at January 1, 2012	$	5,609		$	18,278		$	27,576		$	571		$	(169	)	$	51,865
Net income								2,029									2,029
Net change in other comprehensive
income items											(23	)					(23	)
Cash dividends declared – $.16 per share								(382	)								(382	)
Vesting of restricted stock					78												78
Forfeiture of restricted stock (520 shares)		(2	)		2												—
Change in common stock subject to
repurchase		(10	)		(338	)											(348	)
Issuance of restricted stock (18,125 shares of common stock at $11.20)		45			(45	)											—
Reduction of ESOP obligation														66			66
Stock option expense					16												16
Balance at June 30, 2012	$	5,642		$	17,991		$	29,223		$	548		$	(103	)	$	53,301

See accompanying notes to interim consolidated financial statements.

6

SOUTHERN MICHIGAN BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(Dollars in thousands)

	Six Months Ended June 30,
	2012			2011
Operating Activities
Net income	$	2,029		$	1,510
Adjustments to reconcile net income to net cash from operating activities:
Provision for loan losses		700			500
Depreciation		473			448
Net amortization of investment securities		58			229
Loans originated for sale		(31,103	)		(16,608	)
Proceeds on loans sold		31,445			19,159
Net gains on loan sales		(878	)		(522	)
Stock option and restricted stock grant compensation expense		94			70
Net gains on security calls		(3	)		(2	)
Net loss on other real estate owned sales		93			105
Amortization of other intangible assets		162			169
Net (gain) loss on disposal of equipment		(11	)		7
Net change in obligation under ESOP		66			32
Net change in:
Accrued interest receivable		322			54
Cash surrender value of life insurance		(168	)		(164	)
Other assets		(246	)		905
Accrued expenses and other liabilities		(57	)		(399	)
Net cash from operating activities		2,976			5,493
Investing Activities
Activity in available for sale securities:
Proceeds from maturities and calls		26,345			17,490
Purchases		(12,146	)		(45,736	)
Net change in federal funds sold		34			(37	)
Loan originations and payments, net		(17,932	)		3,003
Proceeds on other real estate owned sales		1,080			422
Proceeds from sale of equipment		37			57
Additions to premises and equipment		(345	)		(310	)
Net cash from investing activities		(2,927	)		(25,111	)
Financing Activities
Net change in deposits		(2,964	)		(12,786	)
Net change in securities sold under agreements to repurchase and overnight borrowings		(3,860	)		144
Repayments of other borrowings		(303	)		(1,403	)
Cash dividends paid		(335	)		(235	)
Net cash from financing activities		(7,462	)		(14,280	)
Net change in cash and cash equivalents		(7,413	)		(33,898	)
Beginning cash and cash equivalents		42,185			78,833
Ending cash and cash equivalents	$	34,772		$	44,935
Cash paid for interest	$	1,529		$	1,970
Cash paid for income taxes		625			200
Transfers from loans to other real estate owned		583			108

See accompanying notes to interim consolidated financial statements.

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SOUTHERN MICHIGAN BANCORP, INC.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE A – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation: The consolidated financial statements include the accounts of Southern Michigan Bancorp, Inc. (the Company) and its wholly-owned subsidiary, Southern Michigan Bank & Trust (SMB&T), after elimination of significant inter-company balances and transactions. SMB&T owns FNB Financial Services, which conducts a brokerage business and is consolidated into SMB&T’s financial statements. During 2004, the Company formed a special purpose trust, Southern Michigan Bancorp Capital Trust I, for the sole purpose of issuing trust preferred securities. Under accounting principles generally accepted in the United States of America, the trust is not consolidated into the financial statements of the Company.

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions for Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments considered necessary in order to make the financial statements not misleading have been included. Operating results for the six months ended June 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012.

The accompanying consolidated financial statements should be read in conjunction with the consolidated financial statements and related footnotes of the Company for December 31, 2011 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, filed with the Securities and Exchange Commission on March 30, 2012.

Loans: Loans are reported at the principal balance outstanding, net of unearned interest, deferred loan fees and costs, and an allowance for loan losses. Interest income is reported on the interest method and includes amortization of net deferred loan fees and costs over the loan term. Interest income is not reported when full loan repayment is in doubt, typically when payments are past due over 90 days, unless the loan is both well secured and in the process of collection. Past due status is based on the contractual terms of the loan. All interest accrued but not received for these loans is reversed against interest income. Payments received on such loans are reported as principal reductions until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest contractually due are brought current and future payments are reasonably assured.

Allowance for Loan Losses: The allowance for loan losses is a valuation allowance for probable incurred credit losses, increased by the provision for loan losses and decreased by charge-offs less recoveries. Estimating the risk of loss and the amount of loss on any loan is necessarily subjective. Accordingly, management estimates the allowance balance based on past loan loss experience, nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, information in regulatory examination reports, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged-off. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired.

Consumer loans are typically charged-off no later than 120 days past due. Real estate mortgage loans in the process of collection are charged-off on or before they become 365 days past due. Commercial loans are charged-off promptly upon the determination that all or a portion of any loan balance is uncollectible. In all cases, loans are placed on nonaccrual status or charged-off at an earlier date if collection of principal or interest is considered doubtful.

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Impaired Loans: Loan impairment is reported when full payment under the loan terms is not expected. Impairment is evaluated in total for smaller-balance loans of similar nature such as residential mortgage and consumer loans and on an individual loan basis for other loans. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s effective interest rate or at the fair value of collateral if repayment is expected solely from the collateral. Loans are evaluated for impairment when payments are delayed, typically 90 days or more, or when it is probable that all principal and interest amounts will not be collected according to the contractual terms of the loan. Loans for which the terms have been modified and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings and are classified as impaired. All nonaccrual loans have also been determined by the Company to meet the definition of an impaired loan.

Reclassifications

Certain 2011 items have been reclassified to conform to the 2012 presentation.

NOTE B – NEW ACCOUNTING PRONOUNCEMENTS

Adoption of New Accounting Standards:

In May 2011, the Financial Accounting Standards Board (FASB) issued ASU No. 2011-04 Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The amendments in ASU 2011-04 generally represent clarifications of Topic 820, but also include some instances where a particular principle or requirement for measuring fair value or disclosing information about fair value measurements has changed. ASU 2011-04 results in common principles and requirements for measuring fair value and for disclosing information about fair value measurements in accordance with U.S. GAAP and IFRSs. The amendments in ASU 2011-04 are to be applied prospectively. ASU 2011-04 was adopted effective January 1, 2012, but did not have any impact on the Company’s financial position or results of operations.

In June 2011, FASB issued ASU No. 2011-05 Amendments to Topic 220, Comprehensive Income. Under the amendments in ASU 2011-05, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. Either option requires the entity to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendments in ASU 2011-05 do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income.

The Company adopted ASU 2011-05 for the first quarter of 2012 and elected to present the components of other comprehensive income in a separate statement. The adoption of ASU 2011-05 did not have any impact on the Company’s financial condition or results of operations.

In September 2011, FASB issued ASU 2011-08, Intangibles – Goodwill and Other (Topic 350) Testing Goodwill for Impairment. The amendments in ASU 2011-08 gives the entity the option of first assessing qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after the assessment, the entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. The amendments in ASU 2011-08 are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The Company will consider the provisions of ASU 2011-08 when performing annual goodwill and other intangible asset impairment testing later in 2012.

In December 2011, FASB issued ASU 2011-11, Disclosures about Offsetting Assets and Liabilities, amending ASC Topic 210 requiring an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effects of those arrangements on its financial position. ASU 2011-11 is effective for annual and interim periods beginning on or after January 1, 2013. The Company has not yet determined what, if any, financial statement impact the adoption of ASU 2011-11 will have.

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NOTE C – EARNINGS PER SHARE

Basic earnings per common share is net income divided by the weighted average number of common shares outstanding during the period. ESOP shares are considered outstanding for this calculation unless unearned. Diluted earnings per common share includes the dilutive effect of additional potential common shares issuable under stock options. Earnings and dividends per common share are restated for all stock splits and stock dividends through the date of issue of the financial statements.

A reconciliation of the numerators and denominators of basic and diluted earnings per share for the three and six month periods ended June 30, 2012 and 2011 is as follows (dollars in thousands, except per share data):

	Three Months Ended June 30, 2012		Three Months Ended June 30, 2011		Six Months Ended June 30, 2012		Six Months Ended June 30, 2011
Basic earnings per share:
Net income	$	1,027	$	762	$	2,029	$	1,510
Weighted average common shares outstanding		2,376,334		2,344,838		2,373,912		2,342,964
Less unallocated ESOP shares		12,967		21,962		14,011		22,915
Weighted average common shares outstanding for basic earnings per share		2,363,367		2,322,876		2,359,901		2,320,049
Basic earnings per share	$	0.43	$	0.33	$	0.86	$	0.65
Diluted earnings per share:
Net income	$	1,027	$	762	$	2,029	$	1,510
Weighted average common shares outstanding for basic earnings per share		2,363,367		2,322,876		2,359,901		2,320,049
Add: Dilutive effect of assumed exercise of stock options		6,678		4,397		5,455		4,565
Weighted average common and dilutive potential common shares outstanding		2,370,045		2,327,273		2,365,356		2,324,614
Diluted earnings per share	$	0.43	$	0.33	$	0.86	$	0.65

Stock option awards that were anti-dilutive, and therefore not included in the computation of diluted earnings per share, were as follows: 191,586 and 191,886 as of June 30, 2012 and 2011, respectively.

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NOTE D – LOANS AND ALLOWANCE FOR LOAN LOSSES

Credit Risk Elements:

Construction loans are underwritten utilizing independent appraisals, sensitivity analysis of absorption, vacancy and lease rates and financial analysis of the developers and property owners. Construction loans are generally based upon estimates of costs and value associated with the complete project. Construction loans often involve the disbursement of funds with repayment substantially dependent on the success of the ultimate project. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, general economic conditions and the availability of long-term financing. The Bank typically requires guarantees on these loans. The Bank’s construction loans are secured primarily by properties located in its primary market area.

The Bank originates 1 – 4 family real estate and consumer loans utilizing credit reports to supplement the underwriting process. The Bank’s manual underwriting standards for 1 – 4 family loans are generally in accordance with FHLMC and loan policy manual underwriting guidelines. Properties securing 1 – 4 family real estate loans are appraised by fee appraisers, which are independent of the loan origination function and have been approved by management. The loan-to-value ratios normally do not exceed 80% without credit enhancements such as mortgage insurance. The Bank will lend up to 100% of the lesser of the appraised value or purchase price for conventional 1 – 4 family real estate loans, provided private mortgage insurance is obtained. The underwriting standards for consumer loans include a determination of the applicant’s payment history on other debts and an assessment of their ability to meet existing obligations and payments on the proposed loan. To monitor and manage loan risk, policies and procedures are developed and modified, as needed by management. This activity, coupled with smaller loan amounts that are spread across many individual borrowers, minimizes risk. Additionally, market conditions are reviewed by management on a regular basis. The Bank’s 1 – 4 family real estate loans are secured primarily by properties located in its primary market area.

Commercial and agricultural real estate loans are subject to underwriting standards and processes similar to commercial and agricultural operating loans, in addition to those unique to real estate loans. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial and agricultural real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Loan to value is generally 75% of the lower of the cost or value of the assets. Appraisals on properties securing these loans are generally performed by fee appraisers approved by the Commercial Loan Committee. Because payments on commercial and agricultural real estate loans are often dependent on the successful operation or management of the properties, repayment of such loans may be subject to adverse conditions in the real estate market or the economy. Management monitors and evaluates commercial and agricultural real estate loans based on collateral and risk rating criteria. The Bank typically requires guarantees on these loans. The Bank’s commercial and agricultural real estate loans are secured primarily by properties located in its primary market area.

Commercial and agricultural operating loans are underwritten based on the Bank’s examination of current and projected cash flows to determine the ability of the borrower to repay their obligations as agreed. This underwriting includes the evaluation of cash flows of the borrower, underlying collateral, if applicable, and the borrower’s ability to manage its business activities. The cash flows of borrowers and the collateral securing these loans may fluctuate in value after the initial evaluation. A first priority lien on the general assets of the business normally secures these types of loans. Loan to value limits vary and are dependent upon the nature and type of the underlying collateral and the financial strength of the borrower. Crop and hail insurance is required for most agricultural borrowers. Loans are generally guaranteed by the principal(s). The Bank’s commercial and agricultural operating lending is principally in its primary market area.

11

In evaluating the allowance for loan losses, loans are analyzed based on the department originating the loan (commercial, mortgage or consumer), which in some instances may be different than how the loans are categorized for regulatory reporting purposes. Consequently, loan groupings for impaired loans for purposes of calculating the allowance for loan losses by portfolio segment may differ from impaired loan groupings for regulatory reporting purposes.

The following is an analysis of the allowance for loan losses by portfolio segment and based on impairment method as of and for the six month periods ended June 30, 2012 and 2011 (in thousands):

	Commercial including Commercial Real Estate			Consumer			Real Estate Mortgage 1st Lien			Real Estate Mortgage Junior Lien			Total
June 30, 2012:
Balance at January 1	$	4,039		$	68		$	1,155		$	150		$	5,412
Provision for loan losses		439			6			252			3			700
Loans charged off		(809	)		(19	)		(224	)		(15	)		(1,067	)
Recoveries		92			14			8			8			122
Balance at June 30	$	3,761		$	69		$	1,191		$	146		$	5,167
Ending balance individually evaluated for impairment	$	341			—		$	256			—		$	597
Ending balance collectively evaluated for impairment		3,420			69			935			146			4,570
Total	$	3,761		$	69		$	1,191		$	146		$	5,167
June 30, 2011:
Balance at January 1	$	4,239		$	86		$	1,211		$	158		$	5,694
Provision for loan losses		175			31			149			145			500
Loans charged off		(523	)		(40	)		(241	)		(105	)		(909	)
Recoveries		101			5			8			3			117
Balance at June 30	$	3,992		$	82		$	1,127		$	201		$	5,402
Ending balance individually evaluated for impairment	$	817			—		$	232		$	13		$	1,062
Ending balance collectively evaluated for impairment	$	3,175		$	82		$	895		$	188		$	4,340
Total	$	3,992		$	82		$	1,127		$	201		$	5,402

Commercial loans also include demand deposit loan account charge-offs and recoveries amounting to $63,000 and $68,000, respectively, for the six months ended June 30, 2012 and $78,000 and $42,000, respectively, for the six months ended June 30, 2011.

12

The following is a summary of the recorded investment in loans, by portfolio segment and based on impairment method, as of June 30, 2012 and December 31, 2011 (in thousands):

	Commercial including Commercial Real Estate		Consumer		Real Estate Mortgage 1st Lien		Real Estate Mortgage Junior  Lien		Total
June 30, 2012:
Ending balance individually evaluated for impairment	$	7,220	$	35	$	3,314	$	137	$	10,706
Ending balance collectively evaluated for impairment		254,504		7,892		63,576		12,439		338,502
Total loans	$	261,783	$	7,927	$	66,922	$	12,576	$	349,208
December 31, 2011:
Ending balance individually evaluated for impairment	$	6,440	$	29	$	3,326	$	86	$	9,881
Ending balance collectively evaluated for impairment		237,263		7,800		64,927		12,933		322,923
Total loans	$	243,703	$	7,829	$	68,253	$	13,019	$	332,804

The following tables present loans individually evaluated for impairment by class of loans as of June 30, 2012 and December 31, 2011 (in thousands):

	Unpaid Principal Balance		Allowance for Loan Losses Allocated
June 30, 2012:
With no related allowance recorded:
Commercial	$	924	$	—
Real estate – commercial		4,135		—
Real estate – construction		107		—
Consumer		35		—
Real estate mortgage		2,219		—
With an allowance recorded:
Commercial		78		50
Real estate – commercial		817		39
Real estate – construction		—		—
Consumer		—		—
Real estate mortgage		2,391		508
Total	$	10,706	$	597

13

	Unpaid Principal Balance		Allowance for Loan Losses Allocated
December 31, 2011:
With no related allowance recorded:
Commercial	$	135	$	—
Real estate – commercial		2,649		—
Real estate – construction		232		—
Consumer		29		—
Real estate mortgage		2,485		—
With an allowance recorded:
Commercial		744		26
Real estate – commercial		1,403		490
Real estate – construction		—		—
Consumer		—		—
Real estate mortgage		2,204		468
Total	$	9,881	$	984

The following table presents the aging of the recorded investment in past due and nonaccrual loans as of June 30, 2012 and December 31, 2011 by class of loans (in thousands):

	Loans Past Due Accruing Interest
	30-59 Days		60-89 Days		Over 90 Days		Total		Loans on Non- Accrual		Loans Not Past Due or Non- Accrual		Total
June 30, 2012:
Commercial	$	160	$	—	$	—	$	160	$	487	$	78,720	$	79,367
Real estate – commercial		1,032		95		—		1,127		2,863		154,357		158,347
Real estate – construction		161		—		—		161		107		14,627		14,895
Consumer		18		2		8		28		35		8,240		8,303
Real estate mortgage		826		10		—		836		2,805		84,655		88,296
Total	$	2,197	$	107	$	8	$	2,312	$	6,297	$	340,599	$	349,208
December 31, 2011:
Commercial	$	182	$	120	$	6	$	308	$	413	$	69,335	$	70,056
Real estate – commercial		538		144		—		682		2,982		147,165		150,829
Real estate – construction		—		—		—		—		231		12,248		12,479
Consumer		22		4		—		26		29		8,112		8,167
Real estate mortgage		1,476		780		—		2,256		2,048		86,969		91,273
Total	$	2,218	$	1,048	$	6	$	3,272	$	5,703	$	323,829	$	332,804

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Modifications:

The Company’s loan portfolio also includes certain loans that have been modified in a Troubled Debt Restructuring (TDR), where economic concessions have been granted to borrowers who have experienced or are expected to experience financial difficulties. These concessions typically result from the Company’s loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions. Certain TDRs are classified as nonperforming at the time of restructure and may only be returned to performing status after considering the borrower’s sustained repayment performance for a reasonable period, generally six months.

When the Company modifies a loan, management evaluates any possible concession based on the present value of expected future cash flows, discounted at the contractual interest rate of the original loan agreement, except when the sole source of repayment for the loan is the liquidation of the collateral. In these cases, management uses the current fair value of the collateral, less selling costs. If management determines that the value of the modified loan is less than the recorded investment in the loan (net of previous charge-offs and deferred loan fees or costs), impairment is recognized through an allowance estimate or a charge-off to the allowance.

The following table summarizes the number and volume of TDRs the Company has recorded in its loan portfolio as of June 30, 2012 and the amount of specific reserves in the allowance for loan losses relating to the TDRs (in thousands):

	Number of Loans		Amount		Specific Reserves Allocated
June 30, 2012
Commercial		5	$	695	$	—
Real estate – commercial		6		2,120		12
Real estate – construction		—		—		—
Real estate – mortgage		17		1,599		161
Consumer		—		—		—
Total		28	$	4,414	$	173

The following summarizes the number and volume of loans the Company classified as TDRs during the first six months of 2012 (in thousands):

	Number of Loans Added		Amount		Specific Reserves Allocated
June 30, 2012
Commercial		—	$	—	$	—
Real estate – commercial		1		515		—
Real estate – construction		—		—		—
Real estate – mortgage		—		—		—
Consumer		—		—		—
Total		1	$	515	$	—

Credit Quality Indicators:

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt, such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis includes all loans from the commercial loan department. This analysis is performed at least annually. The Company uses the following definitions for risk ratings:

Special Mention: Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the Company’s credit position at some future date.

15

Substandard: Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

Doubtful: Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans.

As of June 30, 2012 and December 31, 2011, based on the most recent analysis performed, the risk category of loans by class of loans was as follows (in thousands):

	Pass		Special Mention		Substandard		Doubtful		Not Risk Rated		Total
June 30, 2012
Commercial	$	69,117	$	4,962	$	5,288	$	—	$	—	$	79,367
Real estate—commercial		137,813		11,505		8,676		—		353		158,347
Real estate—construction		8,535		1,668		1,118		—		3,574		14,895
Real estate—mortgage		6,827		2,370		3,014		—		76,085		88,296
Consumer		—		—		—		—		8,303		8,303
Total	$	222,292	$	20,505	$	18,096	$	—	$	88,315	$	349,208
December 31, 2011
Commercial	$	59,492	$	5,855	$	4,709	$	—	$	—	$	70,056
Real estate—commercial		128,405		14,681		7,437		—		306		150,829
Real estate—construction		5,547		2,542		520		—		3,870		12,479
Real estate—mortgage		7,399		3,177		2,743		—		77,954		91,273
Consumer		—		—		—		—		8,167		8,167
Total	$	200,843	$	26,255	$	15,409	$	—	$	90,297	$	332,804

NOTE E – STOCK OPTIONS

Shareholders of the Company approved a stock option plan in April 2000 and a stock incentive plan in June 2005. The plans authorized the Company to issue up to 115,500 and 157,500 shares, respectively. In May 2008, shareholders of the Company ratified amendments to the Stock Incentive Plan of 2005, which among other things increased the authorized shares for issuance from 157,500 to 300,000. On March 20, 2010, the April 2000 stock option plan terminated. As of June 30, 2012, there were 56,760 shares available for future issuance under the 2005 plan.

A summary of stock option activity is as follows for the six months ended June 30, 2012:

	Shares			Weighted Average Price
Outstanding at beginning of year		221,026		$	21.06
Granted		7,875			11.20
Exercised		—			—
Forfeited		(800	)		11.38
Outstanding at June 30, 2012		228,101		$	20.76
Options exercisable at June 30, 2012		212,151		$	21.42

16

The fair value of each option award is estimated on the date of grant using a Black-Scholes option valuation model that uses the weighted average assumptions noted in the following table. The expected volatility and life assumptions are based on historical experience. The interest rate is based on the U.S. Treasury yield curve and the dividend assumption is based on the Company’s history and expected dividend payouts. Following are the assumptions used in calculating the fair value of the options issued during the six months ended June 30, 2012:

Dividend yield		2.93	%
Expected life		8 years
Expected volatility		22.84	%
Risk-free interest rate		0.26	%
Weighted average fair value of options granted during 2012	$	1.59

The Company recorded compensation expense of $16,000 and $30,000, respectively, related to stock options during the six month periods ended June 30, 2012 and 2011.

Restricted Stock – Shares of restricted stock may also be granted under the Stock Incentive Plan of 2005. Compensation expense is recognized over the vesting period of the shares based on the market value of the shares on the grant date. All shares of restricted stock issued and outstanding vest 20% per year over five years. Compensation expense related to the award of shares of restricted stock was $78,000 and $40,000, respectively, during the six months ended June 30, 2012 and 2011. As of June 30, 2012, there was $496,000 of total unrecognized compensation expense related to non-vested shares of restricted stock granted under the plan, which is expected to be recognized over a weighted average period of 3.6 years.

A summary of restricted stock activity is as follows for the six months ended June 30, 2012:

	Shares			Weighted Average Grant Date Fair Value
Nonvested at January 1, 2012		41,309		$	11.33
Granted		18,125			11.20
Vested		(10,735	)		11.75
Forfeited		(520	)		11.52
Nonvested at June 30, 2012		48,179		$	11.19

NOTE F – FAIR VALUE INFORMATION

The following methods and assumptions were used by the Company in estimating fair values for financial instruments:

Cash and cash equivalents and federal funds sold: The carrying amount reported in the balance sheet approximates fair value.

Securities available for sale: Fair values for securities available for sale are based on quoted market prices, where available. For all other securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information, and the securities’ terms and conditions, among other things.

Loans and loans held for sale, net: For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. The fair values for other loans are estimated using discounted cash flows analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. The allowance for loan losses is considered to be a reasonable estimate of discount for credit quality concerns.

Accrued interest receivable: The carrying amount reported in the balance sheet approximates fair value.

17

Off-balance-sheet financial instruments: The estimated fair value of off-balance-sheet financial instruments is based on current fees or costs that would be charged to enter or terminate the arrangements. The estimated fair value is not considered to be significant for this presentation.

Deposits: The fair values disclosed for demand deposits (e.g., interest and non-interest checking, passbook savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). 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 expected monthly maturities on time deposits.

Securities sold under agreements to repurchase and overnight borrowings: The carrying amount reported in the balance sheet approximates fair value.

Other borrowings: The fair value of other borrowings is estimated using discounted cash flows analysis based on the current incremental borrowing rate for similar types of borrowing arrangements.

Subordinated debentures: The carrying amount reported in the balance sheet approximates fair value of the variable-rate subordinated debentures.

Accrued interest payable: The carrying amount reported in the balance sheet approximates fair value.

While these estimates of fair value are based on management’s judgment of appropriate factors, there is no assurance that if the Company had disposed of such items at June 30, 2012 or December 31, 2011, the estimated fair values would have been realized. Market values may differ depending on various circumstances not taken into consideration in this methodology. The estimated fair values at June 30, 2012 and December 31, 2011, should not be considered to apply at subsequent dates.

In addition, other assets and liabilities that are not defined as financial instruments are not included in the following disclosures, such as property and equipment. Also, non-financial instruments typically not recognized in financial statements may have value but are not included in the following disclosures. These include, among other items, the estimated earnings power of core deposit accounts, trained work force, customer goodwill and similar items.

The estimated fair values of the Company’s financial instruments are as follows (in thousands):

	June 30, 2012						December 31, 2011
	Carrying Amount			Fair Value			Carrying Amount			Fair Value
Financial assets:
Cash and cash equivalents	$	34,772		$	34,772		$	42,185		$	42,185
Federal funds sold		253			253			287			287
Securities available for sale		76,054			76,054			90,344			90,344
Loans held for sale		1,624			1,624			1,088			1,088
Loans, net of allowance for loan losses		344,041			348,520			327,392			333,283
Accrued interest receivable		1,826			1,826			2,148			2,148
Financial liabilities:
Deposits	$	(417,547	)	$	(419,093	)	$	(420,511	)	$	(422,493	)
Securities sold under agreements to repurchase and overnight borrowings		(14,214	)		(14,214	)		(18,074	)		(18,074	)
Other borrowings		(7,448	)		(7,491	)		(7,751	)		(7,860	)
Subordinated debentures		(5,155	)		(5,155	)		(5,155	)		(5,155	)
Accrued interest payable		(112	)		(112	)		(131	)		(131	)

The preceding table does not include net cash surrender value of life insurance and dividends payable, which are also considered financial instruments. The estimated fair value of such items is considered to be their carrying amount.

The Company also has unrecognized financial instruments, which include commitments to extend credit and standby letters of credit. The estimated fair value of such instruments is considered to be their contract amount.

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NOTE G – FAIR VALUE MEASUREMENTS

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability is not adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact, and (iv) willing to transact.

Fair value must be determined using valuation techniques that are consistent with the market approach, the income approach, or the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement cost). Valuation techniques should be consistently applied. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. A fair value hierarchy for valuation inputs has been established that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

Level 1 Inputs – Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

Level 2 Inputs – Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds, credit risks, etc.), or inputs that are derived principally from or corroborated by market data by correlation or other means.

Level 3 Inputs – Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.

A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, follows. These valuation methodologies were applied to all of the Company’s financial and nonfinancial assets and liabilities carried at fair value.

In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality, the company’s creditworthiness, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time. The Company’s valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes the Company’s valuation methodologies 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 estimate of fair value at the reporting date.

19

Securities Available for Sale. Securities classified as available for sale are reported at fair value utilizing Level 1, Level 2 and Level 3 inputs. Unadjusted quoted prices in active markets for identical assets are utilized to determine fair value at the measurement date for Level 1 securities. For all other securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information, and the bond’s terms and conditions, among other things. When there are unobservable inputs, such securities are classified as Level 3.

Securities available for sale classified as Level 3 inputs represent non-publicly traded municipal issues with limited trading activity from entities within the Company’s market area. The fair value of these investments is determined using Level 3 valuation techniques, as there is no market available to price these investments. The method used for determining the fair value for these investments includes a comparison to the fair value of other investment securities valued with Level 2 inputs with similar characteristics (credit, time to maturity, call structure, etc.) and the interest yield curve for comparable debt investments.

Impaired Loans. The Company does not record impaired loans at fair value on a recurring basis. However, periodically, a loan is considered impaired and is reported at the fair value of the underlying collateral, less estimated costs to sell, if repayment is expected solely from the collateral. Impaired loans measured at fair value typically consist of loans on nonaccrual status and loans with a portion of the allowance for loan losses allocated specific to the loan. Some loans may be included in both categories whereas other loans may only be included in one category. Collateral values are estimated using Level 2 and 3 inputs, including recent appraisals, based on customized discounting criteria. Due to the significance of the Level 3 inputs, impaired loans have been classified as Level 3.

Other Real Estate Owned (OREO). The Company values OREO at the fair value of the underlying collateral less expected selling costs. Collateral values are estimated primarily using appraisals and reflect a market value approach.

The following table summarizes financial and nonfinancial assets (there were no financial or nonfinancial liabilities) measured at fair value as of June 30, 2012 and December 31, 2011, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value (in thousands):

	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
June 30, 2012
Recurring:
Securities available for sale:
Federal agencies	$	24,223	$	—	$	—	$	24,223
U.S. government sponsored entities and agencies		10,925		—		—		10,925
States and political subdivisions		—		32,532		1,956		34,488
Collateralized mortgage obligations		—		5,956		—		5,956
Mortgage-backed securities		—		462		—		462
Total available for sale	$	35,148	$	38,950	$	1,956	$	76,054
Nonrecurring:
Impaired loans	$	—	$	—	$	10,109	$	10,109
Other real estate owned	$	—	$	—	$	987	$	987

Impaired loans are reported net of a $597,000 allowance for loan losses.

20

	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
December 31, 2011
Recurring:
Securities available for sale:
Federal agencies	$	28,435	$	—	$	—	$	28,435
U.S. government sponsored entities and agencies		22,956		—		—		22,956
States and political subdivisions		—		31,213		2,232		33,445
Asset-backed securities		2,476		—		—		2,476
Mortgage-backed securities		—		3,032		—		3,032
Total available for sale	$	53,867	$	34,245	$	2,232	$	90,344
Nonrecurring:
Impaired loans	$	—	$	—	$	8,897	$	8,897
Other real estate owned	$	—	$	—	$	1,530	$	1,530

Impaired loans are reported net of a $984,000 allowance for loan losses.

The following is a summary of activity of securities available for sale which are measured at fair value on a recurring basis using significant unobservable (Level 3) inputs during the six month period ended June 30, 2012 (in thousands):

Balance at January 1, 2012	$	2,232
Net maturities and calls		(240	)
Transfers into Level 3		—
Purchases		—
Net unrealized losses included in other comprehensive income (loss)		(36	)
Balance at June 30, 2012		1,956

NOTE H – SUBSEQUENT EVENTS

Management evaluated subsequent events through the date the financial statements were issued. Events or transactions occurring after June 30, 2012, but prior to when the financial statements were issued, that provided additional evidence about conditions that existed at June 30, 2012, have been recognized in the financial statements for the six month period ended June 30, 2012. Events or transactions that provided evidence about conditions that did not exist at June 30, 2012, but arose before the financial statements were issued, have not been recognized in the financial statements for the six month period ended June 30, 2012.

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

The following discussion provides information about the consolidated financial condition and results of operations of the Company and its subsidiary, Southern Michigan Bank & Trust (SMB&T), as of June 30, 2012 and December 31, 2011, and for the three and six month periods ended June 30, 2012 and 2011. You should review the discussion in conjunction with the Company’s consolidated financial statements and related notes.

Executive Summary

Net income for the three and six month periods ended June 30, 2012 was $1,027,000 and $2,029,000, respectively, compared to $762,000 and $1,510,000, respectively, for the same periods in 2011. Earnings per share were $0.43 and $0.86, respectively, for the three and six month periods ended June 30, 2012 compared to $0.33 and $0.65, respectively, for the same periods in 2011. Return on average assets was 0.78% for the first six months of 2012 compared to 0.61% for the first six months of 2011. Return on average shareholders’ equity was 7.66% for the first six months of 2012 compared to 6.17% for the same period in 2011.

Total consolidated assets at June 30, 2012 were $503.9 million compared to $509.2 million at December 31, 2011. Loans, net of allowance for loan losses increased to $344.0 million at June 30, 2012 compared to $327.4 million at December 31, 2011. Conversely, cash and cash equivalents decreased $7.4 million and available-for-sale securities decreased $14.3 million during the same six month period. These decreases were used primarily to fund the aforementioned loan growth. Total deposits at June 30, 2012 were $417.5 million compared to $420.5 million at December 31, 2011. Total shareholders’ equity was $53.3 million at June 30, 2012 compared to $51.9 million at December 31, 2011.

Results of Operations

Net Interest Income

The Company derives the greatest portion of its income from net interest income. Net interest margin for the six month period ended June 30, 2012 was 3.74% compared to 3.53% for the same period of 2011, an increase of 21 basis points. Average loan balances for the first six months of 2012 increased $29.2 million compared to the same period of 2011, while the average balance in the lower yielding federal funds sold and other decreased $13.0 million. Comparing the first six months of 2012 to the first six months of 2011, loan volume was up, resulting in higher interest income, while asset yields were down. This reduction in asset yields was offset as the Company was able to lower its cost of funds by 26 basis points during the six month period ended June 30, 2012 compared to the same period of 2011.

The following tables provide information regarding interest income and expense for the six-month periods ended June 30, 2012 and 2011, respectively. Table 1 shows the year-to-date daily average balances for interest earning assets and interest bearing liabilities, interest earned or paid, and the annualized effective rate. Table 2 shows the effect on interest income and expense of changes in volume and interest rates on a tax equivalent basis.

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Table 1 – Average Balances and Tax Equivalent Interest Rates

(Dollars in Thousands):

	June 30, 2012								June 30, 2011
	Average Balance			Interest		Yield/ Rate			Average Balance			Interest		Yield/ Rate
ASSETS
Interest earning assets:
Loans(1)(2)(3)	$	337,275		$	9,172		5.44	%	$	308,030		$	8,711		5.66	%
Federal funds sold and other(6)		42,669			57		.27			55,639			98		.35
Taxable investment securities(4)		52,549			219		.83			55,170			309		1.12
Tax-exempt investment securities(1)		31,239			736		4.71			24,555			657		5.35
Total interest earning assets		463,732			10,184		4.39			443,394			9,775		4.41
Non-interest earning assets:
Cash and due from banks		10,998								11,472
Other assets(5)		47,525								48,337
Less allowance for loan losses		(5,220	)							(5,538	)
Total assets	$	517,035							$	497,665
Interest bearing liabilities:
Demand deposits	$	191,808			255		.27	%	$	165,873			239		.29	%
Savings deposits		54,771			12		.04			50,519			23		.09
Time deposits		114,382			981		1.72			133,377			1,385		2.08
Securities sold under agreements to repurchase and federal funds purchased		16,617			18		.22			16,262			25		.31
Other borrowings		7,619			161		4.23			9,337			206		4.41
Subordinated debentures		5,155			83		3.22			5,155			76		2.95
Total interest bearing liabilities		390,352			1,510		.77			380,523			1,954		1.03
Non-interest bearing liabilities:
Demand deposits		68,386								63,212
Other		3,867								3,594
Common stock subject to repurchase obligation		1,470								1,390
Shareholders’ equity		52,960								48,946
Total liabilities and shareholders’ equity	$	517,035							$	497,665
Net interest income				$	8,674							$	7,821
Interest rate spread							3.62	%							3.38	%
Net yield on interest earning assets							3.74	%							3.53	%

(1) Includes tax equivalent adjustment of interest (assuming a 34% tax rate) for securities and loans of $248,000 and $32,000, respectively, for 2012 and $223,000 and $7,000, respectively, for 2011.

(2) Average balance includes average non-accrual loan balances of $5,958,000 in 2012 and $5,919,000 in 2011.

(3) Interest income includes loan fees of $131,000 in 2012 and $106,000 in 2011.

(4) Average balance includes average unrealized gain of $1,376,000 in 2012 and $349,000 in 2011 on available for sale securities.

(5) Includes $14,925,000 in 2012 and $15,352,000 in 2011 relating to goodwill and other intangible assets.

(6) Includes $41,829,000 in 2012 and $52,363,000 in 2011 of federal reserve deposit accounts.

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Table 2 – Changes in Tax-Equivalent Net Interest Income

(Dollars in Thousands)

	Six Months Ended June 30 2012 Over 2011 Increase (Decrease) Due To									Six Months Ended June 30 2011 Over 2010 Increase (Decrease) Due To
	Rate			Volume			Net			Rate			Volume			Net
Interest income on:
Loans	$	(343	)	$	804		$	461		$	(204	)	$	(544	)	$	(748	)
Taxable securities		(76	)		(14	)		(90	)		(190	)		176			(14	)
Tax-exempt securities		(85	)		164			79			(32	)		80			48
Federal funds sold		(21	)		(20	)		(41	)		3			38			41
Total interest earning assets	$	(525	)	$	934		$	409		$	(423	)	$	(250	)	$	(673	)
Interest expense on:
Demand deposits	$	(19	)	$	35		$	16		$	(51	)	$	34		$	(17	)
Savings deposits		(13	)		2			(11	)		(21	)		3			(18	)
Time deposits		(222	)		(182	)		(404	)		(240	)		(13	)		(253	)
Securities sold under agreements to repurchase and federal funds purchased		(8	)		1			(7	)		3			1			4
Other borrowings		(8	)		(37	)		(45	)		53			(93	)		(40	)
Subordinated debentures		7			—			7			—			—			—
Total interest bearing liabilities	$	(263	)	$	(181	)	$	(444	)	$	(256	)	$	(68	)	$	(324	)
Net interest income	$	(262	)	$	1,115		$	853		$	(167	)	$	(182	)	$	(349	)

Tax equivalent net interest income increased $853,000, or 10.9%, in the first six months of 2012 compared to the same period in 2011. This was a result of a $1,115,000 net increase due to volume changes comparing the first six months of 2012 with the first six months of 2011 on a tax equivalent basis and a $262,000 net decrease due to rate changes for the comparable periods.

The presentation of net interest income on a tax equivalent basis is not in accordance with generally accepted accounting principles (“GAAP”), but is customary in the banking industry. This non-GAAP measure ensures comparability of net interest income arising from both taxable and tax-exempt loans and investment securities. The adjustments to determine net interest income on a tax equivalent basis were $280,000 and $230,000, respectively, for the six months ended June 30, 2012 and 2011. These adjustments were computed using a 34% federal income tax rate.

Provision for Loan Losses

The provision for loan losses is based on an analysis of additions to the allowance for loan losses believed to be appropriate. The provision is charged to income to bring the allowance for loan losses to a level believed adequate by management to absorb probable incurred losses in the loan portfolio. Some factors considered by management in determining the level at which the allowance is maintained include specific credit reviews, historical loan loss experience, current economic conditions and trends, results of examinations by regulatory agencies and the volume, growth and composition of the loan portfolio. The provision is adjusted quarterly, if necessary, to reflect changes in the factors above, and actual charge-off experience and any known losses.

The provision for loan losses for the three and six month periods ended June 30, 2012 was $475,000 and $700,000, respectively, compared to a provision for loan losses in the three and six month periods of 2011 of $375,000 and $500,000, respectively.

The allowance for loan losses was 1.48% of total loans at June 30, 2012 compared to 1.63% at December 31, 2011 and 1.77% at June 30, 2011.

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Charge-offs and recoveries for respective loan categories for the six months ended June 30, 2012 and 2011 were as follows (in thousands):

	June 30, 2012				June 30, 2011
	Charge-offs		Recoveries		Charge-offs		Recoveries
Commercial	$	746	$	24	$	446	$	59
Residential real estate		239		17		346		12
Consumer		82		81		117		46
Total	$	1,067	$	122	$	909	$	117

Net charge-offs in the first six months of 2012 were $945,000, or 0.54%, of loans on an annualized basis. Net charge-offs in the first six months of 2011 were $792,000, or 0.52%, of loans on an annualized basis.

The Company had specific allowance reserves on impaired loans of $597,000 as of June 30, 2012 compared to $984,000 as of December 31, 2011 and $1,062,000 at June 30, 2011. Specific allowance reserves have been allocated where the fair values of loans were considered to be less than their carrying values. The Company obtains valuations on collateral dependent loans when the loan is considered by management to be impaired and uses the valuation amounts in the determination of fair value. Management believes the specific reserves allocated to impaired loans as of June 30, 2012 were reasonable based on the circumstances surrounding each particular borrower.

Non-interest income

Non-interest income for the three month periods ended June 30, 2012 and 2011 was $1,700,000 and $1,577,000, respectively. Non-interest income for the six month periods ended June 30, 2012 and 2011 was $3,365,000 and $3,158,000, respectively, an increase of 6.6%.

Service charges on deposit accounts decreased $155,000, or 27.3%, in the second quarter of 2012 compared to the second quarter of 2011 and decreased $272,000 over the first six months of 2012 compared to the same period of 2011. The Company continues to experience lower volume of non-sufficient fund items as a result of changes made to its overdraft protection program in July 2010 and June 2011 to comply with regulatory guidance that became effective in August 2010 and July 2011, respectively. These changes have resulted in lower fee income.

Net gains on loan sales increased $271,000, or 132.2%, in the second quarter of 2012 compared to the second quarter of 2011 and increased $356,000, or 68.2%, over the first six months of 2012 compared to the same period of 2011. Fixed rate long term residential mortgages are generally sold in the secondary market, while adjustable rate mortgage loans are retained in the loan portfolio. Continued favorable mortgage rates contributed to the increase in net gains on loan sales.

ATM and debit card fee income increased $35,000, or 13.6%, in the second quarter of 2012 compared to the second quarter of 2011 and increased $72,000, or 14.6%, for the first six month of 2012 compared to the first six months of 2011. Increases are primarily due to increased volumes of approved transactions.

Non-interest expense

Non-interest expense for the three month period ended June 30, 2012 was $4,142,000 compared to $4,059,000 for the same period in 2011, an increase of $83,000, or 2.0%. Non-interest expense for the six month periods ended June 30, 2012 and 2011 was $8,424,000 and $8,350,000, respectively.

Occupancy costs decreased $59,000, or 17.6%, and $149,000, or 21.0%, respectively in the second quarter and first six months of 2012 as compared to the same periods of 2011. The Bank closed two branches in the second quarter of 2011 reducing occupancy costs.

25

Telecommunication expenses decreased $37,000, or 37.8% and $40,000, or 20.3%, respectively for the three and six month periods ended June 30, 2012 compared to the same periods of 2011. Branch closings in 2011, renegotiated circuit contracts and changes made based on recommendations from a telephone audit have all resulted in reduced telecommunication expense.

Professional and outside services increased $81,000, or 40.7% and $116,000, or 27.6%, respectively for the three and six month periods ended June 30, 2012 compared to the same periods of 2011. Legal fees relating to both collection of loans and new loans have increased year over year. SMB&T also incurred professional fees for software upgrades and a new loan documentation package during the first half of 2012.

FDIC assessment expense decreased $75,000 for the six month period ended June 30, 2012 compared to the same period in 2011 due to changes in the assessment formula which were effective April 1, 2011.

Expenses relating to OREO property increased $71,000, or 20.7% for the first six months of 2012 compared to the same period in 2011. OREO expenses include costs to carry OREO, such as property taxes, insurance and maintenance costs, fair value write-downs after the property is transferred to OREO and net gains/losses from the disposition of OREO. During the first half of 2012, costs to bring certain OREO properties up to salable standards and a few large property tax bills were incurred.

Federal income taxes

The Company had an income tax provision of $606,000 for the six months ended June 30, 2012 compared to $389,000 for the comparable period of 2011. The effective tax rate for the six month period ended June 30, 2012 was 23.0% compared to 20.5% for the comparable 2011 period. Tax-exempt income continues to have a positive impact on the Company’s tax provision and effective tax rate. The benefit offsetting lower coupon rates on municipal instruments is the nontaxable feature of the income earned on such investments. This resulted in a lower effective tax rate and reduced the federal income tax provision.

Financial Condition

Assets

Total assets at June 30, 2012 were $503.9 million, a decrease of $5.4 million compared to December 31, 2011. Securities available-for-sale totaled $76.1 million at June 30, 2012, a decrease of $14.3 million, or 15.8%, compared to December 31, 2011. Cash and cash equivalents decreased $7.4 million, or 17.6%, at June 30, 2012 compared to December 31, 2011. Gross loans totaled $349.2 million at June 30, 2012, an increase of $16.4 million, or 4.9%, as compared to December 31, 2011. Maturities of securities and cash decreases were used in the first six months of 2012 to fund loan growth.

Nonperforming assets

Nonperforming assets include non-accrual loans, loans modified under troubled debt restructurings, accruing loans past due 90 days or more, and other real estate owned, which includes real estate acquired through foreclosure and in lieu of foreclosure.

A loan generally is classified as nonaccrual when full collectability of principal or interest is doubtful or a loan becomes 90 days past due as to principal or interest, unless management determines that the estimated net realizable value of the collateral is sufficient to cover the principal balance and accrued interest. When interest accruals are discontinued, unpaid interest is reversed. Nonperforming loans are returned to performing status when the loan is brought current and has performed in accordance with contract terms for a period of time.

In the course of working with borrowers, the Company may choose to restructure the contractual terms of certain loans. The Company attempts to work-out an alternative payment schedule with the borrower in order to optimize collectability of the loan. Any loans that are modified are reviewed by the Company to identify if a troubled debt restructuring (“TDR”) has occurred, which is when, for economic or legal reasons related to a borrower’s financial difficulties, the Company grants a concession to the borrower that it would not otherwise consider. Terms may be modified to fit the ability of the borrower to repay in line with its current financial status and the restructuring of the loan may include the transfer of assets from the borrower to satisfy the debt, a modification of loan terms, or a combination of the two.

26

The following table sets forth the aggregate amount of nonperforming assets in each of the following categories:

(Dollars in thousands)

	6/30/12			12/31/11			6/30/11
Nonaccrual loans:
Commercial and commercial real estate	$	4,230		$	3,626		$	3,971
Real estate mortgage		2,032			2,048			1,943
Consumer		35			29			39
		6,297			5,703			5,953
Loans contractually past due 90 days or more and still on accrual:
Commercial and commercial real estate		—			6			370
Real estate mortgage		—			—			212
Consumer		7			—			—
		7			6			582
Accruing loans modified under troubled debt restructurings:
Commercial and commercial real estate		2,381			1,933			1,959
Real estate mortgage		1,419			1,607			1,143
Consumer		—			—			—
		3,800			3,540			3,102
Total nonperforming loans		10,104			9,249			9,637
Other real estate		987			1,530			863
Total nonperforming assets	$	11,091		$	10,779		$	10,500
Nonperforming loans to total loans		2.89	%		2.78	%		3.15	%
Nonperforming assets to total assets		2.20	%		2.12	%		2.18	%

The balance of TDR loans included in nonaccrual loans was $614,000 at June 30, 2012, $694,000 at December 31, 2011 and $1,628,000 at June 30, 2011.

Nonperforming loans are subject to continuous monitoring by management and estimated losses are specifically allocated for in the allowance for loan losses where appropriate. At June 30, 2012, December 31, 2011 and June 30, 2011, the Company had loans of $10.7 million, $9.9 million and $10.2 million, respectively, which were considered impaired.

In management’s evaluation of the loan portfolio risks, any significant future increases in nonperforming loans is dependent to a large extent on the economic environment. In a deteriorating or uncertain economy, management applies more conservative assumptions when assessing the future prospects of borrowers and when estimating collateral values.

Liabilities

Deposits totaled $417.5 million at June 30, 2012, a decrease of $3.0 million, or 0.7%, from December 31, 2011. The majority of deposits are derived from core client sources, relating to long term relationships with local individuals, businesses and public clients. A small amount of brokered deposits are maintained, but are not used to support growth. A brokered deposit totaling $1.3 million matured and was paid off during June 2012.

Securities sold under agreements to repurchase decreased $3.9 million, or 21.4%, as of June 30, 2012 compared to December 31, 2011. The decrease represents fluctuations in customer balances.

27

Shareholders’ equity

Total shareholders’ equity amounted to $53.3 million at June 30, 2012, an increase of $1.4 million from December 31, 2011. The increase was primarily attributable to net income for the first six months of 2012, less dividends to shareholders.

The following table summarizes the Company’s consolidated regulatory capital ratios, as well as SMB&T’s, as of June 30, 2012 and December 31, 2011:

	June 30, 2012			December 31, 2011			Minimum Required for Capital Adequacy Purposes			Minimum Required To Be Well Capitalized Under Prompt Corrective Action Regulations
Total risk-based capital ratio
Consolidated		13.7	%		13.7	%		8.0	%		N/A
SMBT		13.6			13.7			8.0			10.0	%
Tier 1 capital ratio
Consolidated		12.5			12.4			4.0			N/A
SMBT		12.3			12.4			4.0			6.0
Leverage ratio
Consolidated		9.0			8.6			4.0			N/A
SMBT		8.9			8.6			4.0			5.0

At June 30, 2012, SMB&T was categorized as well capitalized under applicable regulatory guidelines.

Liquidity

Liquidity management involves the ability to meet the cash flow requirements of customers who may be either depositors wanting to withdraw funds or borrowers needing assurance that sufficient funds will be available to meet their credit needs. SMB&T maintains certain levels of liquid assets (the most liquid of which are cash and cash equivalents, federal funds sold and investment securities) in order to meet these demands. Maturing loans and investment securities are the principal sources of asset liquidity. Liquidity is monitored and closely managed by the Asset/Liability Management Committee (ALCO), whose members are comprised of senior management.

SMB&T maintains correspondent accounts with other banks for various purposes. At times, SMB&T is a participant in the federal funds market, either as a borrower or a seller. SMB&T has a $3 million federal funds line available from a correspondent bank. In addition, SMB&T has the ability to borrow $27.9 million from the Federal Home Loan Bank based on collateral pledged, and also has the ability to borrow at the discount window of the Federal Reserve Bank as an additional short term funding source.

The Company’s balances in federal funds sold and short term interest bearing balances with banks aggregated $24.5 million at June 30, 2012, compared to $29.9 million at December 31, 2011 and $34.9 million at June 30, 2011. The Company continues to maintain high levels of liquidity, with investments, federal funds and cash equivalents held to improve the liquidity of the balance sheet during this period of economic uncertainty. The Company expects to maintain higher than normal levels of liquidity until economic conditions improve and more attractive investment opportunities emerge.

The Company’s principal source of funds to pay cash dividends is the earnings and dividends paid by SMB&T. The payment of dividends by SMB&T is subject to legal and regulatory restrictions. At June 30, 2012, using the most restrictive of these restrictions, the aggregate cash dividends that SMB&T could pay the Company without prior regulatory approval was approximately $8.3 million.

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Impact of Inflation and Changing Prices

The majority of assets and liabilities of a financial institution are monetary in nature and therefore differ greatly from most commercial and industrial companies that have significant investments in fixed assets or inventories. However, inflation does have an important impact on the growth of total assets in the banking industry and the resulting need to increase equity capital at higher than normal rates in order to maintain an appropriate equity-to-assets ratio. Another significant effect of inflation is on other expenses, which tend to rise during periods of general inflation.

Item 4. Controls and Procedures

An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 15d – 15(e) under the Exchange Act) as of June 30, 2012. Based on and as of the time of that evaluation, the Company’s management, including the Chief Executive Officer and Chief Financial Officer, concluded that as of the end of the period covered by this report the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms and is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

There was no change in the Company’s internal control over financial reporting that occurred during the six months ended June 30, 2012 that has materially affected, or that is reasonably likely to materially affect, the Company’s internal control over financial reporting.

29

Part II. Other Information

Item 6. Exhibits

Exhibits. The following exhibits are filed as part of this report on Form 10-Q:

Exhibit Number	Document
3.1	Articles of Incorporation of Southern Michigan Bancorp, Inc., as amended. Previously filed with the Commission on July 13, 2007 in Southern Michigan Bancorp Inc.’s Form S-4 Registration Statement, Exhibit 3.1. Here incorporated by reference.
3.2	Amended and Restated Bylaws of Southern Michigan Bancorp, Inc., as amended. Previously filed with the Commission on July 13, 2007 in Southern Michigan Bancorp Inc.’s Form S-4 Registration Statement, Exhibit 3.2. Here incorporated by reference.
4.1	Articles of Incorporation of Southern Michigan Bancorp, Inc., as amended. Exhibit 3.1 is here incorporated by reference.
4.2	Amended and Restated Bylaws of Southern Michigan Bancorp, Inc., as amended. Exhibit 3.2 is here incorporated by reference.
4.3	Long-Term Debt. The registrant has outstanding long-term debt which at the time of this report does not exceed 10% of the registrant’s total consolidated assets. The registrant agrees to furnish copies of the agreements defining the rights of holders of such long-term debt to the Securities and Exchange Commission upon request.
31.1	Certification of Chairman of the Board and Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Senior Vice President, Chief Financial Officer, Secretary and Treasurer under Section 302 of the Sarbanes-Oxley Act of 2002.
32	Certification pursuant to 18 U.S.C. § 1350.
101.INS	XBRL Instance Document (1)
101.SCH	XBRL Taxonomy Extension Schema Document (1)
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document (1)
101.LAB	XBRL Taxonomy Extension Label Linkbase Document (1)
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document (1)
101.DEF	XBRL Taxonomy Extension Definitions Linkbase Document (1)
	(1)    As provided in Rule 406T of Regulation S-T, this information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934

30

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.

	SOUTHERN MICHIGAN BANCORP, INC.
Date: August 14, 2012	By:	/S/    John H. Castle
		John H. Castle Chairman of the Board and Chief Executive Officer (Principal Executive Officer)
Date: August 14, 2012	By:	/s/    Danice L. Chartrand
		Danice L. Chartrand Senior Vice President, Chief Financial Officer, Secretary and Treasurer (Principal Financial and Accounting Officer)

31

EX-31.1

Exhibit 31.1

Certification

I, John H. Castle, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Southern Michigan Bancorp, Inc. for the fiscal quarter ended June 30, 2012;

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

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

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

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

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 14, 2012

  /s/    John H. Castle

John H. Castle

Chairman of the Board and Chief Executive Officer

Southern Michigan Bancorp, Inc.

EX-31.2

Exhibit 31.2

Certification

I, Danice L. Chartrand, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Southern Michigan Bancorp, Inc. for the fiscal quarter ended June 30, 2012;

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

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

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

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

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 14, 2012

  /s/    Danice L. Chartrand

Danice L. Chartrand

Senior Vice President, Chief Financial

Officer, Secretary and Treasurer

Southern Michigan Bancorp, Inc.

EX-32

Exhibit 32

Certification

Pursuant to 18 U.S.C. § 1350, each of the undersigned hereby certifies in his or her capacity as an officer of Southern Michigan Bancorp, Inc. (the “Company”) that the Quarterly Report of the Company on Form 10-Q for the quarter ended June 30, 2012 fully complies with the requirements of Section 15(d) of the Securities Exchange Act of 1934, as amended, and that the information contained in such report fairly presents, in all material respects, the financial condition of the Company at the end of such period and the results of operations of the Company for such period.

Dated: August 14, 2012	/s/    John H. Castle
	John H. Castle Chairman of the Board and Chief Executive Officer
Dated: August 14, 2012	/s/    Danice L. Chartrand
	Danice L. Chartrand Senior Vice President, Chief Financial Officer, Secretary and Treasurer

A signed original of this written statement required by Section 906 has been provided to Southern Michigan Bancorp, Inc. and will be retained by Southern Michigan Bancorp, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

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Fair Value Measurements (Details 1) (Fair Value, Measurements, Recurring [Member], Fair Value, Inputs, Level 3 [Member], USD $) In Thousands, unless otherwise specified	6 Months Ended
	Jun. 30, 2012
Fair Value, Measurements, Recurring [Member] | Fair Value, Inputs, Level 3 [Member]
Summary of Activity of Securities Available for Sale Which Are Measured at Fair Value on a Recurring Basis Using Significant Unobservable (Level 3) Inputs
Balance Beginning	$ 2,232
Net maturities and calls	(240)
Transfers into Level 3
Purchases
Net unrealized losses included in other comprehensive income (loss)	(36)
Balance Ending	$ 1,956

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Stock Options (Details) (USD $)	6 Months Ended
	Jun. 30, 2012
Summary of Stock Option Activity
Shares Outstanding at beginning of year	221,026
Shares Granted	7,875
Shares Exercised
Shares Forfeited	(800)
Shares Outstanding, Ending Balance	228,101
Shares Options exercisable at June 30, 2012	212,151
Weighted Average Price Outstanding at beginning of year	$ 21.06
Weighted Average Price Granted	$ 11.20
Weighted Average Price Exercised
Weighted Average Price Forfeited	$ 11.38
Weighted Average Price Ending Balance	$ 20.76
Weighted Average Price exercisable at June 30, 2012	$ 21.42

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Loans and Allowance for Loan Losses (Details) (USD $) In Thousands, unless otherwise specified	6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011
Analysis of the Allowance for Loan Losses by Portfolio Segment and Based on Impairment
Balance at January 1	$ 5,412	$ 5,694
Provision for loan losses	700	500
Loans charged off	(1,067)	(909)
Recoveries	122	117
Balance at June 30	5,167	5,402
Ending balance individually evaluated for impairment	597	1,062
Ending balance collectively evaluated for impairment	4,570	4,340
Commercial including Commercial Real Estate [Member]
Analysis of the Allowance for Loan Losses by Portfolio Segment and Based on Impairment
Balance at January 1	4,039	4,239
Provision for loan losses	439	175
Loans charged off	(809)	(523)
Recoveries	92	101
Balance at June 30	3,761	3,992
Ending balance individually evaluated for impairment	341	817
Ending balance collectively evaluated for impairment	3,420	3,175
Consumer [Member]
Analysis of the Allowance for Loan Losses by Portfolio Segment and Based on Impairment
Balance at January 1	68	86
Provision for loan losses	6	31
Loans charged off	(19)	(40)
Recoveries	14	5
Balance at June 30	69	82
Ending balance individually evaluated for impairment
Ending balance collectively evaluated for impairment	69	82
Real Estate Mortgage 1st Lien [Member]
Analysis of the Allowance for Loan Losses by Portfolio Segment and Based on Impairment
Balance at January 1	1,155	1,211
Provision for loan losses	252	149
Loans charged off	(224)	(241)
Recoveries	8	8
Balance at June 30	1,191	1,127
Ending balance individually evaluated for impairment	256	232
Ending balance collectively evaluated for impairment	935	895
Real Estate Mortgage Junior Lien [Member]
Analysis of the Allowance for Loan Losses by Portfolio Segment and Based on Impairment
Balance at January 1	150	158
Provision for loan losses	3	145
Loans charged off	(15)	(105)
Recoveries	8	3
Balance at June 30	146	201
Ending balance individually evaluated for impairment		13
Ending balance collectively evaluated for impairment	$ 146	$ 188

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Fair Value Information (Details) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2012	Dec. 31, 2011
Carrying Amount [Member]
Financial assets:
Cash and cash equivalents	$ 34,772	$ 42,185
Federal funds sold	253	287
Securities available for sale	76,054	90,344
Loans held for sale	1,624	1,088
Loans, net of allowance for loan losses	344,041	327,392
Accrued interest receivable	1,826	2,148
Financial liabilities:
Deposits	(417,547)	(420,511)
Securities sold under agreements to repurchase and overnight borrowings	(14,214)	(18,074)
Other borrowings	(7,448)	(7,751)
Subordinated debentures	(5,155)	(5,155)
Accrued interest payable	(112)	(131)
Fair Value [Member]
Financial assets:
Cash and cash equivalents	34,772	42,185
Federal funds sold	253	287
Securities available for sale	76,054	90,344
Loans held for sale	1,624	1,088
Loans, net of allowance for loan losses	348,520	333,283
Accrued interest receivable	1,826	2,148
Financial liabilities:
Deposits	(419,093)	(422,493)
Securities sold under agreements to repurchase and overnight borrowings	(14,214)	(18,074)
Other borrowings	(7,491)	(7,860)
Subordinated debentures	(5,155)	(5,155)
Accrued interest payable	$ (112)	$ (131)

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Summary of Significant Accounting Policies

6 Months Ended

Jun. 30, 2012

Summary of Significant Accounting Policies and New Accounting Pronouncements [Abstract]

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NOTE A – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation: The consolidated financial statements include the accounts of Southern Michigan Bancorp, Inc. (the Company) and its wholly-owned subsidiary, Southern Michigan Bank & Trust (SMB&T), after elimination of significant inter-company balances and transactions. SMB&T owns FNB Financial Services, which conducts a brokerage business and is consolidated into SMB&T’s financial statements. During 2004, the Company formed a special purpose trust, Southern Michigan Bancorp Capital Trust I, for the sole purpose of issuing trust preferred securities. Under accounting principles generally accepted in the United States of America, the trust is not consolidated into the financial statements of the Company.

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions for Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments considered necessary in order to make the financial statements not misleading have been included. Operating results for the six months ended June 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012.

The accompanying consolidated financial statements should be read in conjunction with the consolidated financial statements and related footnotes of the Company for December 31, 2011 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, filed with the Securities and Exchange Commission on March 30, 2012.

Loans: Loans are reported at the principal balance outstanding, net of unearned interest, deferred loan fees and costs, and an allowance for loan losses. Interest income is reported on the interest method and includes amortization of net deferred loan fees and costs over the loan term. Interest income is not reported when full loan repayment is in doubt, typically when payments are past due over 90 days, unless the loan is both well secured and in the process of collection. Past due status is based on the contractual terms of the loan. All interest accrued but not received for these loans is reversed against interest income. Payments received on such loans are reported as principal reductions until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest contractually due are brought current and future payments are reasonably assured.

Allowance for Loan Losses: The allowance for loan losses is a valuation allowance for probable incurred credit losses, increased by the provision for loan losses and decreased by charge-offs less recoveries. Estimating the risk of loss and the amount of loss on any loan is necessarily subjective. Accordingly, management estimates the allowance balance based on past loan loss experience, nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, information in regulatory examination reports, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged-off. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired.

Consumer loans are typically charged-off no later than 120 days past due. Real estate mortgage loans in the process of collection are charged-off on or before they become 365 days past due. Commercial loans are charged-off promptly upon the determination that all or a portion of any loan balance is uncollectible. In all cases, loans are placed on nonaccrual status or charged-off at an earlier date if collection of principal or interest is considered doubtful.

Impaired Loans: Loan impairment is reported when full payment under the loan terms is not expected. Impairment is evaluated in total for smaller-balance loans of similar nature such as residential mortgage and consumer loans and on an individual loan basis for other loans. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s effective interest rate or at the fair value of collateral if repayment is expected solely from the collateral. Loans are evaluated for impairment when payments are delayed, typically 90 days or more, or when it is probable that all principal and interest amounts will not be collected according to the contractual terms of the loan. Loans for which the terms have been modified and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings and are classified as impaired. All nonaccrual loans have also been determined by the Company to meet the definition of an impaired loan.

Reclassifications

Certain 2011 items have been reclassified to conform to the 2012 presentation.

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Loans and Allowance for Loan Losses (Details 4) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2012 Loan
Summary of the Number and Volume of TDRs, Recorded in Loan Portfolio
Number of Loans	28
Amount	$ 4,414
Specific Reserves Allocated	173
Commercial [Member]
Summary of the Number and Volume of TDRs, Recorded in Loan Portfolio
Number of Loans	5
Amount	695
Specific Reserves Allocated
Real estate - commercial [Member]
Summary of the Number and Volume of TDRs, Recorded in Loan Portfolio
Number of Loans	6
Amount	2,120
Specific Reserves Allocated	12
Real estate - construction [Member]
Summary of the Number and Volume of TDRs, Recorded in Loan Portfolio
Number of Loans
Amount
Specific Reserves Allocated
Real estate mortgage [Member]
Summary of the Number and Volume of TDRs, Recorded in Loan Portfolio
Number of Loans	17
Amount	1,599
Specific Reserves Allocated	161
Consumer [Member]
Summary of the Number and Volume of TDRs, Recorded in Loan Portfolio
Number of Loans
Amount
Specific Reserves Allocated

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Loans and Allowance for Loan Losses (Details 3) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2012	Dec. 31, 2011
Summary of the Aging of the Recorded Investment in Past Due and Nonaccrual Loans
Loans Past Due Accruing Interest, 30-59 Days	$ 2,197	$ 2,218
Loans Past Due Accruing Interest, 60-89 Days	107	1,048
Loans Past Due Accruing Interest, Over 90 Days	8	6
Loans Past Due Accruing Interest, Total	2,312	3,272
Loans on Non- Accrual	6,297	5,703
Loans Not Past Due or Non- Accrual	340,599	323,829
Total	349,208	332,804
Commercial [Member]
Summary of the Aging of the Recorded Investment in Past Due and Nonaccrual Loans
Loans Past Due Accruing Interest, 30-59 Days	160	182
Loans Past Due Accruing Interest, 60-89 Days		120
Loans Past Due Accruing Interest, Over 90 Days		6
Loans Past Due Accruing Interest, Total	160	308
Loans on Non- Accrual	487	413
Loans Not Past Due or Non- Accrual	78,720	69,335
Total	79,367	70,056
Real estate - commercial [Member]
Summary of the Aging of the Recorded Investment in Past Due and Nonaccrual Loans
Loans Past Due Accruing Interest, 30-59 Days	1,032	538
Loans Past Due Accruing Interest, 60-89 Days	95	144
Loans Past Due Accruing Interest, Over 90 Days
Loans Past Due Accruing Interest, Total	1,127	682
Loans on Non- Accrual	2,863	2,982
Loans Not Past Due or Non- Accrual	154,357	147,165
Total	158,347	150,829
Real estate - construction [Member]
Summary of the Aging of the Recorded Investment in Past Due and Nonaccrual Loans
Loans Past Due Accruing Interest, 30-59 Days	161
Loans Past Due Accruing Interest, 60-89 Days
Loans Past Due Accruing Interest, Over 90 Days
Loans Past Due Accruing Interest, Total	161
Loans on Non- Accrual	107	231
Loans Not Past Due or Non- Accrual	14,627	12,248
Total	14,895	12,479
Consumer [Member]
Summary of the Aging of the Recorded Investment in Past Due and Nonaccrual Loans
Loans Past Due Accruing Interest, 30-59 Days	18	22
Loans Past Due Accruing Interest, 60-89 Days	2	4
Loans Past Due Accruing Interest, Over 90 Days	8
Loans Past Due Accruing Interest, Total	28	26
Loans on Non- Accrual	35	29
Loans Not Past Due or Non- Accrual	8,240	8,112
Total	8,303	8,167
Real estate mortgage [Member]
Summary of the Aging of the Recorded Investment in Past Due and Nonaccrual Loans
Loans Past Due Accruing Interest, 30-59 Days	826	1,476
Loans Past Due Accruing Interest, 60-89 Days	10	780
Loans Past Due Accruing Interest, Over 90 Days
Loans Past Due Accruing Interest, Total	836	2,256
Loans on Non- Accrual	2,805	2,048
Loans Not Past Due or Non- Accrual	84,655	86,969
Total	$ 88,296	$ 91,273

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Loans and Allowance For Loan Losses (Details 5) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2012 Loan
Summary of the Number and Volume of Loans classified as TDRs
Number of Loans Added	1
Amount	$ 515
Specific Reserves Allocated
Commercial [Member]
Summary of the Number and Volume of Loans classified as TDRs
Number of Loans Added
Amount
Specific Reserves Allocated
Real estate - commercial [Member]
Summary of the Number and Volume of Loans classified as TDRs
Number of Loans Added	1
Amount	515
Specific Reserves Allocated
Real estate - construction [Member]
Summary of the Number and Volume of Loans classified as TDRs
Number of Loans Added
Amount
Specific Reserves Allocated
Real estate mortgage [Member]
Summary of the Number and Volume of Loans classified as TDRs
Number of Loans Added
Amount
Specific Reserves Allocated
Consumer [Member]
Summary of the Number and Volume of Loans classified as TDRs
Number of Loans Added
Amount
Specific Reserves Allocated

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Loans and Allowance for Loan Losses (Details 6) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2012	Dec. 31, 2011
Summary of the Risk Category of Loans by Class of Loans
Total loans	$ 349,208	$ 332,804
Pass [Member]
Summary of the Risk Category of Loans by Class of Loans
Total loans	222,292	200,843
Special Mention [Member]
Summary of the Risk Category of Loans by Class of Loans
Total loans	20,505	26,255
Substandard [Member]
Summary of the Risk Category of Loans by Class of Loans
Total loans	18,096	15,409
Doubtful [Member]
Summary of the Risk Category of Loans by Class of Loans
Total loans
Not Risk Rated [Member]
Summary of the Risk Category of Loans by Class of Loans
Total loans	88,315	90,297
Commercial [Member]
Summary of the Risk Category of Loans by Class of Loans
Total loans	79,367	70,056
Commercial [Member] | Pass [Member]
Summary of the Risk Category of Loans by Class of Loans
Total loans	69,117	59,492
Commercial [Member] | Special Mention [Member]
Summary of the Risk Category of Loans by Class of Loans
Total loans	4,962	5,855
Commercial [Member] | Substandard [Member]
Summary of the Risk Category of Loans by Class of Loans
Total loans	5,288	4,709
Commercial [Member] | Doubtful [Member]
Summary of the Risk Category of Loans by Class of Loans
Total loans
Commercial [Member] | Not Risk Rated [Member]
Summary of the Risk Category of Loans by Class of Loans
Total loans
Real estate - commercial [Member]
Summary of the Risk Category of Loans by Class of Loans
Total loans	158,347	150,829
Real estate - commercial [Member] | Pass [Member]
Summary of the Risk Category of Loans by Class of Loans
Total loans	137,813	128,405
Real estate - commercial [Member] | Special Mention [Member]
Summary of the Risk Category of Loans by Class of Loans
Total loans	11,505	14,681
Real estate - commercial [Member] | Substandard [Member]
Summary of the Risk Category of Loans by Class of Loans
Total loans	8,676	7,437
Real estate - commercial [Member] | Doubtful [Member]
Summary of the Risk Category of Loans by Class of Loans
Total loans
Real estate - commercial [Member] | Not Risk Rated [Member]
Summary of the Risk Category of Loans by Class of Loans
Total loans	353	306
Real estate - construction [Member]
Summary of the Risk Category of Loans by Class of Loans
Total loans	14,895	12,479
Real estate - construction [Member] | Pass [Member]
Summary of the Risk Category of Loans by Class of Loans
Total loans	8,535	5,547
Real estate - construction [Member] | Special Mention [Member]
Summary of the Risk Category of Loans by Class of Loans
Total loans	1,668	2,542
Real estate - construction [Member] | Substandard [Member]
Summary of the Risk Category of Loans by Class of Loans
Total loans	1,118	520
Real estate - construction [Member] | Doubtful [Member]
Summary of the Risk Category of Loans by Class of Loans
Total loans
Real estate - construction [Member] | Not Risk Rated [Member]
Summary of the Risk Category of Loans by Class of Loans
Total loans	3,574	3,870
Real estate mortgage [Member]
Summary of the Risk Category of Loans by Class of Loans
Total loans	88,296	91,273
Real estate mortgage [Member] | Pass [Member]
Summary of the Risk Category of Loans by Class of Loans
Total loans	6,827	7,399
Real estate mortgage [Member] | Special Mention [Member]
Summary of the Risk Category of Loans by Class of Loans
Total loans	2,370	3,177
Real estate mortgage [Member] | Substandard [Member]
Summary of the Risk Category of Loans by Class of Loans
Total loans	3,014	2,743
Real estate mortgage [Member] | Doubtful [Member]
Summary of the Risk Category of Loans by Class of Loans
Total loans
Real estate mortgage [Member] | Not Risk Rated [Member]
Summary of the Risk Category of Loans by Class of Loans
Total loans	76,085	77,954
Consumer [Member]
Summary of the Risk Category of Loans by Class of Loans
Total loans	8,303	8,167
Consumer [Member] | Pass [Member]
Summary of the Risk Category of Loans by Class of Loans
Total loans
Consumer [Member] | Special Mention [Member]
Summary of the Risk Category of Loans by Class of Loans
Total loans
Consumer [Member] | Substandard [Member]
Summary of the Risk Category of Loans by Class of Loans
Total loans
Consumer [Member] | Doubtful [Member]
Summary of the Risk Category of Loans by Class of Loans
Total loans
Consumer [Member] | Not Risk Rated [Member]
Summary of the Risk Category of Loans by Class of Loans
Total loans	$ 8,303	$ 8,167

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Consolidated Statements of Cash Flows (Unaudited) (USD $) In Thousands, unless otherwise specified	6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011
Operating Activities
Net income	$ 2,029	$ 1,510
Adjustments to reconcile net income to net cash from operating activities:
Provision for loan losses	700	500
Depreciation	473	448
Net amortization of investment securities	58	229
Loans originated for sale	(31,103)	(16,608)
Proceeds on loans sold	31,445	19,159
Net gains on loan sales	(878)	(522)
Stock option and restricted stock grant compensation expense	94	70
Net gains on security calls	(3)	(2)
Net loss on other real estate owned sales	93	105
Amortization of other intangible assets	162	169
Net (gain) loss on disposal of equipment	(11)	7
Net change in obligation under ESOP	66	32
Net change in:
Accrued interest receivable	322	54
Cash surrender value of life insurance	(168)	(164)
Other assets	(246)	905
Accrued expenses and other liabilities	(57)	(399)
Net cash from operating activities	2,976	5,493
Activity in available for sale securities:
Proceeds from maturities and calls	26,345	17,490
Purchases	(12,146)	(45,736)
Net change in federal funds sold	34	(37)
Loan originations and payments, net	(17,932)	3,003
Proceeds on other real estate owned sales	1,080	422
Proceeds from sale of equipment	37	57
Additions to premises and equipment	(345)	(310)
Net cash from investing activities	(2,927)	(25,111)
Financing Activities
Net change in deposits	(2,964)	(12,786)
Net change in securities sold under agreements to repurchase and overnight borrowings	(3,860)	144
Repayments of other borrowings	(303)	(1,403)
Cash dividends paid	(335)	(235)
Net cash from financing activities	(7,462)	(14,280)
Net change in cash and cash equivalents	(7,413)	(33,898)
Beginning cash and cash equivalents	42,185	78,833
Ending cash and cash equivalents	34,772	44,935
Cash paid for interest	1,529	1,970
Cash paid for income taxes	625	200
Transfers from loans to other real estate owned	$ 583	$ 108

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Loans and Allowance for Loan Losses (Details Textual) (USD $) In Thousands, unless otherwise specified	6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011
Loans and Allowance for Loan Losses (Textual) [Abstract]
Demand deposit loan account charge-offs	$ (1,067)	$ (909)
Demand deposit loan account recoveries	122	117
Commercial Loan [Member]
Loans and Allowance for Loan Losses (Textual) [Abstract]
Demand deposit loan account charge-offs	63,000	78,000
Demand deposit loan account recoveries	$ 68,000	$ 42,000

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Fair Value Measurements (Details Textual) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2012	Dec. 31, 2011
Fair Value Measurements (Textual) [Abstract]
Impaired loans, allowance for loan losses	$ 597	$ 984

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Consolidated Balance Sheets (Unaudited) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2012	Dec. 31, 2011
ASSETS
Cash and cash equivalents	$ 34,772	$ 42,185
Federal funds sold	253	287
Securities available for sale	76,054	90,344
Loans held for sale	1,624	1,088
Loans, net of allowance for loan losses of $5,167 - 2012 ($5,412 - 2011)	344,041	327,392
Premises and equipment, net	12,392	12,546
Accrued interest receivable	1,826	2,148
Net cash surrender value of life insurance	10,480	10,312
Goodwill	13,422	13,422
Other intangible assets, net	1,504	1,666
Other assets	7,499	7,830
TOTAL ASSETS	503,867	509,220
Deposits:
Non-interest bearing	69,591	61,930
Interest bearing	347,956	358,581
Total deposits	417,547	420,511
Securities sold under agreements to repurchase and overnight borrowings	14,214	18,074
Accrued expenses and other liabilities	4,558	4,568
Other borrowings	7,448	7,751
Subordinated debentures	5,155	5,155
Common stock subject to repurchase obligation in Employee Stock Ownership Plan, shares outstanding - 119,594 in 2012(115,170 shares in 2011)	1,644	1,296
Total liabilities	450,566	457,355
SHAREHOLDERS' EQUITY
Preferred stock, 100,000 shares authorized; none issued or outstanding
Common stock, $2.50 par value: Authorized 4,000,000 shares Issued - 2,376,204 shares in 2012 (2,358,599 shares in 2011) Outstanding (other than ESOP shares) - 2,256,610 shares in 2012 (2,243,429 shares in 2011)	5,642	5,609
Additional paid-in capital	17,991	18,278
Retained earnings	29,223	27,576
Accumulated other comprehensive income, net	548	571
Unearned Employee Stock Ownership Plan shares	(103)	(169)
Total shareholders' equity	53,301	51,865
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$ 503,867	$ 509,220

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Consolidated Statements of Changes in Shareholders' Equity (USD $) In Thousands	Total	Common Stock	Additional Paid-In Capital	Retained Earnings	Accumulated Other Comprehensive Income (Loss), Net	Unearned ESOP Shares
Beginning balance at Dec. 31, 2010	$ 47,843	$ 5,583	$ 18,033	$ 24,692	$ (168)	$ (297)
Net income	1,510			1,510
Net change in other comprehensive income items	507				507
Cash dividends declared per share	(235)			(235)
Issuance of restricted stock (18,525 shares of common stock at $12.70 per share)		46	(46)
Vesting of restricted stock	40		40
Forfeiture of restricted stock		(2)	2
Change in common stock subject to repurchase	18	(7)	25
Reduction of ESOP obligation	32					32
Stock option expense	30		30
Ending balance at Jun. 30, 2011	49,745	5,620	18,084	25,967	339	(265)
Beginning balance at Dec. 31, 2011	51,865	5,609	18,278	27,576	571	(169)
Net income	2,029			2,029
Net change in other comprehensive income items	(23)				(23)
Cash dividends declared per share	(382)			(382)
Vesting of restricted stock	78		78
Forfeiture of restricted stock		(2)	2
Change in common stock subject to repurchase	(348)	(10)	(338)
Issuance of restricted stock (18,125 shares of common stock at $11.20)		45	(45)
Reduction of ESOP obligation	66					66
Stock option expense	16		16
Ending balance at Jun. 30, 2012	$ 53,301	$ 5,642	$ 17,991	$ 29,223	$ 548	$ (103)

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Stock Options (Details 2) (USD $)	6 Months Ended
	Jun. 30, 2012
Summary of Restricted Stock Activity
Shares Nonvested Beginning Balance	41,309
Shares Granted	18,125
Shares Vested	(10,735)
Shares Forfeited	(520)
Shares Nonvested Ending Balance	48,179
Weighted Average Grant Date Fair Value Nonvested Beginning Balance	$ 11.33
Weighted Average Grant Date Fair Value Granted	$ 11.20
Weighted Average Grant Date Fair Value Vested	$ 11.75
Weighted Average Grant Date Fair Value Forfeited	$ 11.52
Weighted Average Grant Date Fair Value Nonvested Ending Balance	$ 11.19

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Fair Value Measurements (Tables)

6 Months Ended

Jun. 30, 2012

Fair Value Measurements [Abstract]

Summary of Financial and Nonfinancial Assets Measured at Fair Value

	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
June 30, 2012
Recurring:
Securities available for sale:
Federal agencies	$	24,223	$	—	$	—	$	24,223
U.S. government sponsored entities and agencies		10,925		—		—		10,925
States and political subdivisions		—		32,532		1,956		34,488
Collateralized mortgage obligations		—		5,956		—		5,956
Mortgage-backed securities		—		462		—		462
Total available for sale	$	35,148	$	38,950	$	1,956	$	76,054
Nonrecurring:
Impaired loans	$	—	$	—	$	10,109	$	10,109
Other real estate owned	$	—	$	—	$	987	$	987

	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
December 31, 2011
Recurring:
Securities available for sale:
Federal agencies	$	28,435	$	—	$	—	$	28,435
U.S. government sponsored entities and agencies		22,956		—		—		22,956
States and political subdivisions		—		31,213		2,232		33,445
Asset-backed securities		2,476		—		—		2,476
Mortgage-backed securities		—		3,032		—		3,032
Total available for sale	$	53,867	$	34,245	$	2,232	$	90,344
Nonrecurring:
Impaired loans	$	—	$	—	$	8,897	$	8,897
Other real estate owned	$	—	$	—	$	1,530	$	1,530

Summary of Activity of Securities Available for Sale Which Are Measured at Fair Value on a Recurring Basis Using Significant Unobservable (Level 3) Inputs

Balance at January 1, 2012	$	2,232
Net maturities and calls		(240	)
Transfers into Level 3		—
Purchases		—
Net unrealized losses included in other comprehensive income (loss)		(36	)
Balance at June 30, 2012		1,956

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Stock Options (Details Textual) (USD $) In Thousands, except Share data, unless otherwise specified	6 Months Ended						6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Apr. 30, 2000 Stock Option Plan [Member]	Jun. 30, 2012 Stock Incentive Plan [Member]	May 31, 2008 Stock Incentive Plan [Member]	Jun. 30, 2005 Stock Incentive Plan [Member]	Jun. 30, 2012 Restricted Stock [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Number of shares authorized under stock plan			115,500		300,000	157,500
Shares available for future issuance under stock plan				56,760
Percentage of Share Vesting Per Year							20.00%
Share based compensation vesting period							5 years
Stock Options (Textual) [Abstract]
Stock options compensation expense	$ 16,000	$ 30,000
Restricted stock compensation expense	78,000	40,000
Total unrecognized compensation expense related to non-vested shares of restricted stock granted	$ 496,000
Weighted average period over which unrecognized compensation is expected to be recognized	3 years 7 months 6 days

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Earnings Per Share (Details Textual) (Stock Options [Member])	6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011
Stock Options [Member]
Earnings Per Share (Textual) [Abstract]
Anti-dilutive securities excluded from computation of earnings per share	191,586	191,886

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Consolidated Statements of Changes in Shareholders' Equity (Parenthetical) (USD $)	6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011
Dividends Declared Per Common Share	$ 0.16	$ 0.10
Forfeiture of restricted stock, shares	520	643
Common Stock
Issuance of restricted stock, shares	18,125	18,525
Restricted common stock, per share issue price	$ 11.20	$ 12.70
Retained Earnings
Dividends Declared Per Common Share	$ 0.16	$ 0.10

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Consolidated Balance Sheets (Unaudited) (Parenthetical) (USD $) In Thousands, except Share data, unless otherwise specified	Jun. 30, 2012	Dec. 31, 2011
Consolidated Balance Sheets [Abstract]
Allowance for loan losses	$ 5,167	$ 5,412
Temporary equity, shares outstanding	119,594	115,170
Preferred stock, shares authorized	100,000	100,000
Preferred stock, shares issued
Preferred stock, shares outstanding
Common stock, par value	$ 2.50	$ 2.50
Common stock, shares authorized	4,000,000	4,000,000
Common stock, shares issued	2,376,204	2,358,599
Common stock, shares outstanding	2,256,610	2,243,429

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Summary of Significant Accounting Policies (Policies)

6 Months Ended

Jun. 30, 2012

Summary of Significant Accounting Policies and New Accounting Pronouncements [Abstract]

Principles of Consolidation

Principles of Consolidation: The consolidated financial statements include the accounts of Southern Michigan Bancorp, Inc. (the Company) and its wholly-owned subsidiary, Southern Michigan Bank & Trust (SMB&T), after elimination of significant inter-company balances and transactions. SMB&T owns FNB Financial Services, which conducts a brokerage business and is consolidated into SMB&T’s financial statements. During 2004, the Company formed a special purpose trust, Southern Michigan Bancorp Capital Trust I, for the sole purpose of issuing trust preferred securities. Under accounting principles generally accepted in the United States of America, the trust is not consolidated into the financial statements of the Company.

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions for Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments considered necessary in order to make the financial statements not misleading have been included. Operating results for the six months ended June 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012.

The accompanying consolidated financial statements should be read in conjunction with the consolidated financial statements and related footnotes of the Company for December 31, 2011 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, filed with the Securities and Exchange Commission on March 30, 2012.

Loans

Loans: Loans are reported at the principal balance outstanding, net of unearned interest, deferred loan fees and costs, and an allowance for loan losses. Interest income is reported on the interest method and includes amortization of net deferred loan fees and costs over the loan term. Interest income is not reported when full loan repayment is in doubt, typically when payments are past due over 90 days, unless the loan is both well secured and in the process of collection. Past due status is based on the contractual terms of the loan. All interest accrued but not received for these loans is reversed against interest income. Payments received on such loans are reported as principal reductions until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest contractually due are brought current and future payments are reasonably assured.

Allowance for Loan Losses

Allowance for Loan Losses: The allowance for loan losses is a valuation allowance for probable incurred credit losses, increased by the provision for loan losses and decreased by charge-offs less recoveries. Estimating the risk of loss and the amount of loss on any loan is necessarily subjective. Accordingly, management estimates the allowance balance based on past loan loss experience, nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, information in regulatory examination reports, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged-off. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired.

Consumer loans are typically charged-off no later than 120 days past due. Real estate mortgage loans in the process of collection are charged-off on or before they become 365 days past due. Commercial loans are charged-off promptly upon the determination that all or a portion of any loan balance is uncollectible. In all cases, loans are placed on nonaccrual status or charged-off at an earlier date if collection of principal or interest is considered doubtful.

Impaired Loans

Impaired Loans: Loan impairment is reported when full payment under the loan terms is not expected. Impairment is evaluated in total for smaller-balance loans of similar nature such as residential mortgage and consumer loans and on an individual loan basis for other loans. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s effective interest rate or at the fair value of collateral if repayment is expected solely from the collateral. Loans are evaluated for impairment when payments are delayed, typically 90 days or more, or when it is probable that all principal and interest amounts will not be collected according to the contractual terms of the loan. Loans for which the terms have been modified and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings and are classified as impaired. All nonaccrual loans have also been determined by the Company to meet the definition of an impaired loan.

Reclassifications

Reclassifications

Certain 2011 items have been reclassified to conform to the 2012 presentation.

Adoption of New Accounting Standards

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Document and Entity Information	6 Months Ended
	Jun. 30, 2012	Aug. 14, 2012
Document and Entity Information [Abstract]
Entity Registrant Name	SOUTHERN MICHIGAN BANCORP INC
Entity Central Index Key	0000703699
Document Type	10-Q
Document Period End Date	Jun. 30, 2012
Amendment Flag	false
Document Fiscal Year Focus	2012
Document Fiscal Period Focus	Q2
Current Fiscal Year End Date	--12-31
Entity Filer Category	Smaller Reporting Company
Entity Common Stock, Shares Outstanding		2,375,819

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Earnings Per Share (Tables)

6 Months Ended

Jun. 30, 2012

Earnings Per Share [Abstract]

Summary of Reconciliation of the Numerators and Denominators of Basic and Diluted Earnings Per Share

	Three Months Ended June 30, 2012		Three Months Ended June 30, 2011		Six Months Ended June 30, 2012		Six Months Ended June 30, 2011
Basic earnings per share:
Net income	$	1,027	$	762	$	2,029	$	1,510
Weighted average common shares outstanding		2,376,334		2,344,838		2,373,912		2,342,964
Less unallocated ESOP shares		12,967		21,962		14,011		22,915
Weighted average common shares outstanding for basic earnings per share		2,363,367		2,322,876		2,359,901		2,320,049
Basic earnings per share	$	0.43	$	0.33	$	0.86	$	0.65
Diluted earnings per share:
Net income	$	1,027	$	762	$	2,029	$	1,510
Weighted average common shares outstanding for basic earnings per share		2,363,367		2,322,876		2,359,901		2,320,049
Add: Dilutive effect of assumed exercise of stock options		6,678		4,397		5,455		4,565
Weighted average common and dilutive potential common shares outstanding		2,370,045		2,327,273		2,365,356		2,324,614
Diluted earnings per share	$	0.43	$	0.33	$	0.86	$	0.65

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Consolidated Statements of Income (Unaudited) (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011
Interest income:
Loans, including fees	$ 4,629	$ 4,334	$ 9,140	$ 8,704
Securities:
Taxable	63	171	219	309
Tax-exempt	246	218	488	434
Other	31	47	57	98
Total interest income	4,969	4,770	9,904	9,545
Interest expense:
Deposits	587	803	1,248	1,647
Other	129	148	262	307
Total interest expense	716	951	1,510	1,954
Net interest income	4,253	3,819	8,394	7,591
Provision for loan losses	475	375	700	500
Net interest income after provision for loan losses	3,778	3,444	7,694	7,091
Non-interest income:
Service charges on deposit accounts	413	568	807	1,079
Trust fees	263	293	561	568
Net gains on security calls and sales			3	2
Net gains on loan sales	476	205	878	522
Earnings on life insurance assets	80	84	168	164
Brokerage income	49	46	103	94
ATM and debit card fee income	292	257	564	492
Other	127	124	281	237
Total non-interest income	1,700	1,577	3,365	3,158
Non-interest expense:
Salaries and employee benefits	2,267	2,294	4,688	4,741
Occupancy, net	277	336	560	709
Equipment	217	204	409	407
Printing, postage and supplies	105	102	244	243
Telecommunication expenses	61	98	157	197
Professional and outside services	280	199	536	420
FDIC assessments	100	110	200	275
Software maintenance	120	110	231	215
Amortization of other intangibles	81	84	162	169
Expenses relating to OREO property	74	86	202	131
ATM expenses	109	92	210	174
Other	451	344	825	669
Total non-interest expense	4,142	4,059	8,424	8,350
INCOME BEFORE INCOME TAXES	1,336	962	2,635	1,899
Federal income tax provision	309	200	606	389
NET INCOME	$ 1,027	$ 762	$ 2,029	$ 1,510
Basic Earnings Per Common Share	$ 0.43	$ 0.33	$ 0.86	$ 0.65
Diluted Earnings Per Common Share	$ 0.43	$ 0.33	$ 0.86	$ 0.65
Dividends Declared Per Common Share	$ 0.09	$ 0.05	$ 0.16	$ 0.10

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Loans and Allowance for Loan Losses

6 Months Ended

Jun. 30, 2012

Loans and Allowance for Loan Losses [Abstract]

LOANS AND ALLOWANCE FOR LOAN LOSSES

NOTE D – LOANS AND ALLOWANCE FOR LOAN LOSSES

Credit Risk Elements:

Construction loans are underwritten utilizing independent appraisals, sensitivity analysis of absorption, vacancy and lease rates and financial analysis of the developers and property owners. Construction loans are generally based upon estimates of costs and value associated with the complete project. Construction loans often involve the disbursement of funds with repayment substantially dependent on the success of the ultimate project. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, general economic conditions and the availability of long-term financing. The Bank typically requires guarantees on these loans. The Bank’s construction loans are secured primarily by properties located in its primary market area.

The Bank originates 1 – 4 family real estate and consumer loans utilizing credit reports to supplement the underwriting process. The Bank’s manual underwriting standards for 1 – 4 family loans are generally in accordance with FHLMC and loan policy manual underwriting guidelines. Properties securing 1 – 4 family real estate loans are appraised by fee appraisers, which are independent of the loan origination function and have been approved by management. The loan-to-value ratios normally do not exceed 80% without credit enhancements such as mortgage insurance. The Bank will lend up to 100% of the lesser of the appraised value or purchase price for conventional 1 – 4 family real estate loans, provided private mortgage insurance is obtained. The underwriting standards for consumer loans include a determination of the applicant’s payment history on other debts and an assessment of their ability to meet existing obligations and payments on the proposed loan. To monitor and manage loan risk, policies and procedures are developed and modified, as needed by management. This activity, coupled with smaller loan amounts that are spread across many individual borrowers, minimizes risk. Additionally, market conditions are reviewed by management on a regular basis. The Bank’s 1 – 4 family real estate loans are secured primarily by properties located in its primary market area.

Commercial and agricultural real estate loans are subject to underwriting standards and processes similar to commercial and agricultural operating loans, in addition to those unique to real estate loans. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial and agricultural real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Loan to value is generally 75% of the lower of the cost or value of the assets. Appraisals on properties securing these loans are generally performed by fee appraisers approved by the Commercial Loan Committee. Because payments on commercial and agricultural real estate loans are often dependent on the successful operation or management of the properties, repayment of such loans may be subject to adverse conditions in the real estate market or the economy. Management monitors and evaluates commercial and agricultural real estate loans based on collateral and risk rating criteria. The Bank typically requires guarantees on these loans. The Bank’s commercial and agricultural real estate loans are secured primarily by properties located in its primary market area.

Commercial and agricultural operating loans are underwritten based on the Bank’s examination of current and projected cash flows to determine the ability of the borrower to repay their obligations as agreed. This underwriting includes the evaluation of cash flows of the borrower, underlying collateral, if applicable, and the borrower’s ability to manage its business activities. The cash flows of borrowers and the collateral securing these loans may fluctuate in value after the initial evaluation. A first priority lien on the general assets of the business normally secures these types of loans. Loan to value limits vary and are dependent upon the nature and type of the underlying collateral and the financial strength of the borrower. Crop and hail insurance is required for most agricultural borrowers. Loans are generally guaranteed by the principal(s). The Bank’s commercial and agricultural operating lending is principally in its primary market area.

In evaluating the allowance for loan losses, loans are analyzed based on the department originating the loan (commercial, mortgage or consumer), which in some instances may be different than how the loans are categorized for regulatory reporting purposes. Consequently, loan groupings for impaired loans for purposes of calculating the allowance for loan losses by portfolio segment may differ from impaired loan groupings for regulatory reporting purposes.

The following is an analysis of the allowance for loan losses by portfolio segment and based on impairment method as of and for the six month periods ended June 30, 2012 and 2011 (in thousands):

	Commercial including Commercial Real Estate			Consumer			Real Estate Mortgage 1 st Lien			Real Estate Mortgage Junior Lien			Total
June 30, 2012:
Balance at January 1	$	4,039		$	68		$	1,155		$	150		$	5,412
Provision for loan losses		439			6			252			3			700
Loans charged off		(809	)		(19	)		(224	)		(15	)		(1,067	)
Recoveries		92			14			8			8			122
Balance at June 30	$	3,761		$	69		$	1,191		$	146		$	5,167
Ending balance individually evaluated for impairment	$	341			—		$	256			—		$	597
Ending balance collectively evaluated for impairment		3,420			69			935			146			4,570
Total	$	3,761		$	69		$	1,191		$	146		$	5,167
June 30, 2011:
Balance at January 1	$	4,239		$	86		$	1,211		$	158		$	5,694
Provision for loan losses		175			31			149			145			500
Loans charged off		(523	)		(40	)		(241	)		(105	)		(909	)
Recoveries		101			5			8			3			117
Balance at June 30	$	3,992		$	82		$	1,127		$	201		$	5,402
Ending balance individually evaluated for impairment	$	817			—		$	232		$	13		$	1,062
Ending balance collectively evaluated for impairment	$	3,175		$	82		$	895		$	188		$	4,340
Total	$	3,992		$	82		$	1,127		$	201		$	5,402

Commercial loans also include demand deposit loan account charge-offs and recoveries amounting to $63,000 and $68,000, respectively, for the six months ended June 30, 2012 and $78,000 and $42,000, respectively, for the six months ended June 30, 2011.

The following is a summary of the recorded investment in loans, by portfolio segment and based on impairment method, as of June 30, 2012 and December 31, 2011 (in thousands):

	Commercial including Commercial Real Estate		Consumer		Real Estate Mortgage 1 st Lien		Real Estate Mortgage Junior  Lien		Total
June 30, 2012:
Ending balance individually evaluated for impairment	$	7,220	$	35	$	3,314	$	137	$	10,706
Ending balance collectively evaluated for impairment		254,504		7,892		63,576		12,439		338,502
Total loans	$	261,783	$	7,927	$	66,922	$	12,576	$	349,208
December 31, 2011:
Ending balance individually evaluated for impairment	$	6,440	$	29	$	3,326	$	86	$	9,881
Ending balance collectively evaluated for impairment		237,263		7,800		64,927		12,933		322,923
Total loans	$	243,703	$	7,829	$	68,253	$	13,019	$	332,804

The following tables present loans individually evaluated for impairment by class of loans as of June 30, 2012 and December 31, 2011 (in thousands):

	Unpaid Principal Balance		Allowance for Loan Losses Allocated
June 30, 2012:
With no related allowance recorded:
Commercial	$	924	$	—
Real estate – commercial		4,135		—
Real estate – construction		107		—
Consumer		35		—
Real estate mortgage		2,219		—
With an allowance recorded:
Commercial		78		50
Real estate – commercial		817		39
Real estate – construction		—		—
Consumer		—		—
Real estate mortgage		2,391		508
Total	$	10,706	$	597

	Unpaid Principal Balance		Allowance for Loan Losses Allocated
December 31, 2011:
With no related allowance recorded:
Commercial	$	135	$	—
Real estate – commercial		2,649		—
Real estate – construction		232		—
Consumer		29		—
Real estate mortgage		2,485		—
With an allowance recorded:
Commercial		744		26
Real estate – commercial		1,403		490
Real estate – construction		—		—
Consumer		—		—
Real estate mortgage		2,204		468
Total	$	9,881	$	984

The following table presents the aging of the recorded investment in past due and nonaccrual loans as of June 30, 2012 and December 31, 2011 by class of loans (in thousands):

	Loans Past Due Accruing Interest
	30-59 Days		60-89 Days		Over 90 Days		Total		Loans on Non- Accrual		Loans Not Past Due or Non- Accrual		Total
June 30, 2012:
Commercial	$	160	$	—	$	—	$	160	$	487	$	78,720	$	79,367
Real estate – commercial		1,032		95		—		1,127		2,863		154,357		158,347
Real estate – construction		161		—		—		161		107		14,627		14,895
Consumer		18		2		8		28		35		8,240		8,303
Real estate mortgage		826		10		—		836		2,805		84,655		88,296
Total	$	2,197	$	107	$	8	$	2,312	$	6,297	$	340,599	$	349,208
December 31, 2011:
Commercial	$	182	$	120	$	6	$	308	$	413	$	69,335	$	70,056
Real estate – commercial		538		144		—		682		2,982		147,165		150,829
Real estate – construction		—		—		—		—		231		12,248		12,479
Consumer		22		4		—		26		29		8,112		8,167
Real estate mortgage		1,476		780		—		2,256		2,048		86,969		91,273
Total	$	2,218	$	1,048	$	6	$	3,272	$	5,703	$	323,829	$	332,804

Modifications:

The Company’s loan portfolio also includes certain loans that have been modified in a Troubled Debt Restructuring (TDR), where economic concessions have been granted to borrowers who have experienced or are expected to experience financial difficulties. These concessions typically result from the Company’s loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions. Certain TDRs are classified as nonperforming at the time of restructure and may only be returned to performing status after considering the borrower’s sustained repayment performance for a reasonable period, generally six months.

When the Company modifies a loan, management evaluates any possible concession based on the present value of expected future cash flows, discounted at the contractual interest rate of the original loan agreement, except when the sole source of repayment for the loan is the liquidation of the collateral. In these cases, management uses the current fair value of the collateral, less selling costs. If management determines that the value of the modified loan is less than the recorded investment in the loan (net of previous charge-offs and deferred loan fees or costs), impairment is recognized through an allowance estimate or a charge-off to the allowance.

The following table summarizes the number and volume of TDRs the Company has recorded in its loan portfolio as of June 30, 2012 and the amount of specific reserves in the allowance for loan losses relating to the TDRs (in thousands):

	Number of Loans		Amount		Specific Reserves Allocated
June 30, 2012
Commercial		5	$	695	$	—
Real estate – commercial		6		2,120		12
Real estate – construction		—		—		—
Real estate – mortgage		17		1,599		161
Consumer		—		—		—
Total		28	$	4,414	$	173

The following summarizes the number and volume of loans the Company classified as TDRs during the first six months of 2012 (in thousands):

	Number of Loans Added		Amount		Specific Reserves Allocated
June 30, 2012
Commercial		—	$	—	$	—
Real estate – commercial		1		515		—
Real estate – construction		—		—		—
Real estate – mortgage		—		—		—
Consumer		—		—		—
Total		1	$	515	$	—

Credit Quality Indicators:

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt, such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis includes all loans from the commercial loan department. This analysis is performed at least annually. The Company uses the following definitions for risk ratings:

Special Mention: Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the Company’s credit position at some future date.

Substandard: Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

Doubtful: Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans.

As of June 30, 2012 and December 31, 2011, based on the most recent analysis performed, the risk category of loans by class of loans was as follows (in thousands):

	Pass		Special Mention		Substandard		Doubtful		Not Risk Rated		Total
June 30, 2012
Commercial	$	69,117	$	4,962	$	5,288	$	—	$	—	$	79,367
Real estate—commercial		137,813		11,505		8,676		—		353		158,347
Real estate—construction		8,535		1,668		1,118		—		3,574		14,895
Real estate—mortgage		6,827		2,370		3,014		—		76,085		88,296
Consumer		—		—		—		—		8,303		8,303
Total	$	222,292	$	20,505	$	18,096	$	—	$	88,315	$	349,208
December 31, 2011
Commercial	$	59,492	$	5,855	$	4,709	$	—	$	—	$	70,056
Real estate—commercial		128,405		14,681		7,437		—		306		150,829
Real estate—construction		5,547		2,542		520		—		3,870		12,479
Real estate—mortgage		7,399		3,177		2,743		—		77,954		91,273
Consumer		—		—		—		—		8,167		8,167
Total	$	200,843	$	26,255	$	15,409	$	—	$	90,297	$	332,804

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Earnings Per Share

6 Months Ended

Jun. 30, 2012

Earnings Per Share [Abstract]

EARNINGS PER SHARE

NOTE C – EARNINGS PER SHARE

Basic earnings per common share is net income divided by the weighted average number of common shares outstanding during the period. ESOP shares are considered outstanding for this calculation unless unearned. Diluted earnings per common share includes the dilutive effect of additional potential common shares issuable under stock options. Earnings and dividends per common share are restated for all stock splits and stock dividends through the date of issue of the financial statements.

A reconciliation of the numerators and denominators of basic and diluted earnings per share for the three and six month periods ended June 30, 2012 and 2011 is as follows (dollars in thousands, except per share data):

	Three Months Ended June 30, 2012		Three Months Ended June 30, 2011		Six Months Ended June 30, 2012		Six Months Ended June 30, 2011
Basic earnings per share:
Net income	$	1,027	$	762	$	2,029	$	1,510
Weighted average common shares outstanding		2,376,334		2,344,838		2,373,912		2,342,964
Less unallocated ESOP shares		12,967		21,962		14,011		22,915
Weighted average common shares outstanding for basic earnings per share		2,363,367		2,322,876		2,359,901		2,320,049
Basic earnings per share	$	0.43	$	0.33	$	0.86	$	0.65
Diluted earnings per share:
Net income	$	1,027	$	762	$	2,029	$	1,510
Weighted average common shares outstanding for basic earnings per share		2,363,367		2,322,876		2,359,901		2,320,049
Add: Dilutive effect of assumed exercise of stock options		6,678		4,397		5,455		4,565
Weighted average common and dilutive potential common shares outstanding		2,370,045		2,327,273		2,365,356		2,324,614
Diluted earnings per share	$	0.43	$	0.33	$	0.86	$	0.65

Stock option awards that were anti-dilutive, and therefore not included in the computation of diluted earnings per share, were as follows: 191,586 and 191,886 as of June 30, 2012 and 2011, respectively.

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Earnings Per Share (Details) (USD $) In Thousands, except Share data, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2012	Jun. 30, 2011
Basic earnings per share:
Net income	$ 1,027	$ 762		$ 2,029	$ 1,510
Weighted average common shares outstanding	2,376,334	2,344,838		2,373,912	2,342,964
Less unallocated ESOP shares	12,967	21,962	14,011		22,915
Weighted average common shares outstanding for basic earnings per share	2,363,367	2,322,876	2,359,901	2,359,901	2,320,049
Basic earnings per share	$ 0.43	$ 0.33		$ 0.86	$ 0.65
Diluted earnings per share:
Net income	$ 1,027	$ 762		$ 2,029	$ 1,510
Weighted average common shares outstanding for basic earnings per share	2,363,367	2,322,876	2,359,901	2,359,901	2,320,049
Add: Dilutive effect of assumed exercise of stock options	6,678	4,397		5,455	4,565
Weighted average common and dilutive potential common shares outstanding	2,370,045	2,327,273		2,365,356	2,324,614
Diluted earnings per share	$ 0.43	$ 0.33		$ 0.86	$ 0.65

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Loans and Allowance for Loan Losses (Tables)

6 Months Ended

Jun. 30, 2012

Loans and Allowance for Loan Losses [Abstract]

Analysis of the Allowance for Loan Losses by Portfolio Segment and Based on Impairment

	Commercial including Commercial Real Estate			Consumer			Real Estate Mortgage 1 st Lien			Real Estate Mortgage Junior Lien			Total
June 30, 2012:
Balance at January 1	$	4,039		$	68		$	1,155		$	150		$	5,412
Provision for loan losses		439			6			252			3			700
Loans charged off		(809	)		(19	)		(224	)		(15	)		(1,067	)
Recoveries		92			14			8			8			122
Balance at June 30	$	3,761		$	69		$	1,191		$	146		$	5,167
Ending balance individually evaluated for impairment	$	341			—		$	256			—		$	597
Ending balance collectively evaluated for impairment		3,420			69			935			146			4,570
Total	$	3,761		$	69		$	1,191		$	146		$	5,167
June 30, 2011:
Balance at January 1	$	4,239		$	86		$	1,211		$	158		$	5,694
Provision for loan losses		175			31			149			145			500
Loans charged off		(523	)		(40	)		(241	)		(105	)		(909	)
Recoveries		101			5			8			3			117
Balance at June 30	$	3,992		$	82		$	1,127		$	201		$	5,402
Ending balance individually evaluated for impairment	$	817			—		$	232		$	13		$	1,062
Ending balance collectively evaluated for impairment	$	3,175		$	82		$	895		$	188		$	4,340
Total	$	3,992		$	82		$	1,127		$	201		$	5,402

Summary of Recorded Investment in Loans by Portfolio Segment and Based on Impairment

	Commercial including Commercial Real Estate		Consumer		Real Estate Mortgage 1 st Lien		Real Estate Mortgage Junior  Lien		Total
June 30, 2012:
Ending balance individually evaluated for impairment	$	7,220	$	35	$	3,314	$	137	$	10,706
Ending balance collectively evaluated for impairment		254,504		7,892		63,576		12,439		338,502
Total loans	$	261,783	$	7,927	$	66,922	$	12,576	$	349,208
December 31, 2011:
Ending balance individually evaluated for impairment	$	6,440	$	29	$	3,326	$	86	$	9,881
Ending balance collectively evaluated for impairment		237,263		7,800		64,927		12,933		322,923
Total loans	$	243,703	$	7,829	$	68,253	$	13,019	$	332,804

Summary of Loans Individually Evaluated for Impairment by Class of Loans

	Unpaid Principal Balance		Allowance for Loan Losses Allocated
June 30, 2012:
With no related allowance recorded:
Commercial	$	924	$	—
Real estate – commercial		4,135		—
Real estate – construction		107		—
Consumer		35		—
Real estate mortgage		2,219		—
With an allowance recorded:
Commercial		78		50
Real estate – commercial		817		39
Real estate – construction		—		—
Consumer		—		—
Real estate mortgage		2,391		508
Total	$	10,706	$	597

	Unpaid Principal Balance		Allowance for Loan Losses Allocated
December 31, 2011:
With no related allowance recorded:
Commercial	$	135	$	—
Real estate – commercial		2,649		—
Real estate – construction		232		—
Consumer		29		—
Real estate mortgage		2,485		—
With an allowance recorded:
Commercial		744		26
Real estate – commercial		1,403		490
Real estate – construction		—		—
Consumer		—		—
Real estate mortgage		2,204		468
Total	$	9,881	$	984

Summary of the Aging of the Recorded Investment in Past Due and Nonaccrual Loans

	Loans Past Due Accruing Interest
	30-59 Days		60-89 Days		Over 90 Days		Total		Loans on Non- Accrual		Loans Not Past Due or Non- Accrual		Total
June 30, 2012:
Commercial	$	160	$	—	$	—	$	160	$	487	$	78,720	$	79,367
Real estate – commercial		1,032		95		—		1,127		2,863		154,357		158,347
Real estate – construction		161		—		—		161		107		14,627		14,895
Consumer		18		2		8		28		35		8,240		8,303
Real estate mortgage		826		10		—		836		2,805		84,655		88,296
Total	$	2,197	$	107	$	8	$	2,312	$	6,297	$	340,599	$	349,208
December 31, 2011:
Commercial	$	182	$	120	$	6	$	308	$	413	$	69,335	$	70,056
Real estate – commercial		538		144		—		682		2,982		147,165		150,829
Real estate – construction		—		—		—		—		231		12,248		12,479
Consumer		22		4		—		26		29		8,112		8,167
Real estate mortgage		1,476		780		—		2,256		2,048		86,969		91,273
Total	$	2,218	$	1,048	$	6	$	3,272	$	5,703	$	323,829	$	332,804

Summary of the Number and Volume of TDRs, Recorded in Loan Portfolio

	Number of Loans		Amount		Specific Reserves Allocated
June 30, 2012
Commercial		5	$	695	$	—
Real estate – commercial		6		2,120		12
Real estate – construction		—		—		—
Real estate – mortgage		17		1,599		161
Consumer		—		—		—
Total		28	$	4,414	$	173

Summary of the Number and Volume of Loans classified as TDRs

	Number of Loans Added		Amount		Specific Reserves Allocated
June 30, 2012
Commercial		—	$	—	$	—
Real estate – commercial		1		515		—
Real estate – construction		—		—		—
Real estate – mortgage		—		—		—
Consumer		—		—		—
Total		1	$	515	$	—

Summary of the Risk Category of Loans by Class of Loans

	Pass		Special Mention		Substandard		Doubtful		Not Risk Rated		Total
June 30, 2012
Commercial	$	69,117	$	4,962	$	5,288	$	—	$	—	$	79,367
Real estate—commercial		137,813		11,505		8,676		—		353		158,347
Real estate—construction		8,535		1,668		1,118		—		3,574		14,895
Real estate—mortgage		6,827		2,370		3,014		—		76,085		88,296
Consumer		—		—		—		—		8,303		8,303
Total	$	222,292	$	20,505	$	18,096	$	—	$	88,315	$	349,208
December 31, 2011
Commercial	$	59,492	$	5,855	$	4,709	$	—	$	—	$	70,056
Real estate—commercial		128,405		14,681		7,437		—		306		150,829
Real estate—construction		5,547		2,542		520		—		3,870		12,479
Real estate—mortgage		7,399		3,177		2,743		—		77,954		91,273
Consumer		—		—		—		—		8,167		8,167
Total	$	200,843	$	26,255	$	15,409	$	—	$	90,297	$	332,804

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Fair Value Measurements

6 Months Ended

Jun. 30, 2012

Fair Value Measurements [Abstract]

FAIR VALUE MEASUREMENTS

NOTE G – FAIR VALUE MEASUREMENTS

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability is not adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact, and (iv) willing to transact.

Fair value must be determined using valuation techniques that are consistent with the market approach, the income approach, or the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement cost). Valuation techniques should be consistently applied. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. A fair value hierarchy for valuation inputs has been established that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

Level 1 Inputs – Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

Level 2 Inputs – Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds, credit risks, etc.), or inputs that are derived principally from or corroborated by market data by correlation or other means.

Level 3 Inputs – Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.

A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, follows. These valuation methodologies were applied to all of the Company’s financial and nonfinancial assets and liabilities carried at fair value.

In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality, the company’s creditworthiness, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time. The Company’s valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes the Company’s valuation methodologies 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 estimate of fair value at the reporting date.

Securities Available for Sale. Securities classified as available for sale are reported at fair value utilizing Level 1, Level 2 and Level 3 inputs. Unadjusted quoted prices in active markets for identical assets are utilized to determine fair value at the measurement date for Level 1 securities. For all other securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information, and the bond’s terms and conditions, among other things. When there are unobservable inputs, such securities are classified as Level 3.

Securities available for sale classified as Level 3 inputs represent non-publicly traded municipal issues with limited trading activity from entities within the Company’s market area. The fair value of these investments is determined using Level 3 valuation techniques, as there is no market available to price these investments. The method used for determining the fair value for these investments includes a comparison to the fair value of other investment securities valued with Level 2 inputs with similar characteristics (credit, time to maturity, call structure, etc.) and the interest yield curve for comparable debt investments.

Impaired Loans. The Company does not record impaired loans at fair value on a recurring basis. However, periodically, a loan is considered impaired and is reported at the fair value of the underlying collateral, less estimated costs to sell, if repayment is expected solely from the collateral. Impaired loans measured at fair value typically consist of loans on nonaccrual status and loans with a portion of the allowance for loan losses allocated specific to the loan. Some loans may be included in both categories whereas other loans may only be included in one category. Collateral values are estimated using Level 2 and 3 inputs, including recent appraisals, based on customized discounting criteria. Due to the significance of the Level 3 inputs, impaired loans have been classified as Level 3.

Other Real Estate Owned (OREO). The Company values OREO at the fair value of the underlying collateral less expected selling costs. Collateral values are estimated primarily using appraisals and reflect a market value approach.

The following table summarizes financial and nonfinancial assets (there were no financial or nonfinancial liabilities) measured at fair value as of June 30, 2012 and December 31, 2011, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value (in thousands):

	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
June 30, 2012
Recurring:
Securities available for sale:
Federal agencies	$	24,223	$	—	$	—	$	24,223
U.S. government sponsored entities and agencies		10,925		—		—		10,925
States and political subdivisions		—		32,532		1,956		34,488
Collateralized mortgage obligations		—		5,956		—		5,956
Mortgage-backed securities		—		462		—		462
Total available for sale	$	35,148	$	38,950	$	1,956	$	76,054
Nonrecurring:
Impaired loans	$	—	$	—	$	10,109	$	10,109
Other real estate owned	$	—	$	—	$	987	$	987

Impaired loans are reported net of a $597,000 allowance for loan losses.

	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
December 31, 2011
Recurring:
Securities available for sale:
Federal agencies	$	28,435	$	—	$	—	$	28,435
U.S. government sponsored entities and agencies		22,956		—		—		22,956
States and political subdivisions		—		31,213		2,232		33,445
Asset-backed securities		2,476		—		—		2,476
Mortgage-backed securities		—		3,032		—		3,032
Total available for sale	$	53,867	$	34,245	$	2,232	$	90,344
Nonrecurring:
Impaired loans	$	—	$	—	$	8,897	$	8,897
Other real estate owned	$	—	$	—	$	1,530	$	1,530

Impaired loans are reported net of a $984,000 allowance for loan losses.

The following is a summary of activity of securities available for sale which are measured at fair value on a recurring basis using significant unobservable (Level 3) inputs during the six month period ended June 30, 2012 (in thousands):

Balance at January 1, 2012	$	2,232
Net maturities and calls		(240	)
Transfers into Level 3		—
Purchases		—
Net unrealized losses included in other comprehensive income (loss)		(36	)
Balance at June 30, 2012		1,956

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Stock Options

6 Months Ended

Jun. 30, 2012

Stock Options [Abstract]

STOCK OPTIONS

NOTE E – STOCK OPTIONS

Shareholders of the Company approved a stock option plan in April 2000 and a stock incentive plan in June 2005. The plans authorized the Company to issue up to 115,500 and 157,500 shares, respectively. In May 2008, shareholders of the Company ratified amendments to the Stock Incentive Plan of 2005, which among other things increased the authorized shares for issuance from 157,500 to 300,000. On March 20, 2010, the April 2000 stock option plan terminated. As of June 30, 2012, there were 56,760 shares available for future issuance under the 2005 plan.

A summary of stock option activity is as follows for the six months ended June 30, 2012:

	Shares			Weighted Average Price
Outstanding at beginning of year		221,026		$	21.06
Granted		7,875			11.20
Exercised		—			—
Forfeited		(800	)		11.38
Outstanding at June 30, 2012		228,101		$	20.76
Options exercisable at June 30, 2012		212,151		$	21.42

The fair value of each option award is estimated on the date of grant using a Black-Scholes option valuation model that uses the weighted average assumptions noted in the following table. The expected volatility and life assumptions are based on historical experience. The interest rate is based on the U.S. Treasury yield curve and the dividend assumption is based on the Company’s history and expected dividend payouts. Following are the assumptions used in calculating the fair value of the options issued during the six months ended June 30, 2012:

Dividend yield		2.93	%
Expected life		8 years
Expected volatility		22.84	%
Risk-free interest rate		0.26	%
Weighted average fair value of options granted during 2012	$	1.59

The Company recorded compensation expense of $16,000 and $30,000, respectively, related to stock options during the six month periods ended June 30, 2012 and 2011.

Restricted Stock – Shares of restricted stock may also be granted under the Stock Incentive Plan of 2005. Compensation expense is recognized over the vesting period of the shares based on the market value of the shares on the grant date. All shares of restricted stock issued and outstanding vest 20% per year over five years. Compensation expense related to the award of shares of restricted stock was $78,000 and $40,000, respectively, during the six months ended June 30, 2012 and 2011. As of June 30, 2012, there was $496,000 of total unrecognized compensation expense related to non-vested shares of restricted stock granted under the plan, which is expected to be recognized over a weighted average period of 3.6 years.

A summary of restricted stock activity is as follows for the six months ended June 30, 2012:

	Shares			Weighted Average Grant Date Fair Value
Nonvested at January 1, 2012		41,309		$	11.33
Granted		18,125			11.20
Vested		(10,735	)		11.75
Forfeited		(520	)		11.52
Nonvested at June 30, 2012		48,179		$	11.19

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Fair Value Information

6 Months Ended

Jun. 30, 2012

Fair Value Information [Abstract]

FAIR VALUE INFORMATION

NOTE F – FAIR VALUE INFORMATION

The following methods and assumptions were used by the Company in estimating fair values for financial instruments:

Cash and cash equivalents and federal funds sold: The carrying amount reported in the balance sheet approximates fair value.

Securities available for sale: Fair values for securities available for sale are based on quoted market prices, where available. For all other securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information, and the securities’ terms and conditions, among other things.

Loans and loans held for sale, net: For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. The fair values for other loans are estimated using discounted cash flows analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. The allowance for loan losses is considered to be a reasonable estimate of discount for credit quality concerns.

Accrued interest receivable: The carrying amount reported in the balance sheet approximates fair value.

Off-balance-sheet financial instruments: The estimated fair value of off-balance-sheet financial instruments is based on current fees or costs that would be charged to enter or terminate the arrangements. The estimated fair value is not considered to be significant for this presentation.

Deposits: The fair values disclosed for demand deposits (e.g., interest and non-interest checking, passbook savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). 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 expected monthly maturities on time deposits.

Securities sold under agreements to repurchase and overnight borrowings: The carrying amount reported in the balance sheet approximates fair value.

Other borrowings: The fair value of other borrowings is estimated using discounted cash flows analysis based on the current incremental borrowing rate for similar types of borrowing arrangements.

Subordinated debentures: The carrying amount reported in the balance sheet approximates fair value of the variable-rate subordinated debentures.

Accrued interest payable: The carrying amount reported in the balance sheet approximates fair value.

While these estimates of fair value are based on management’s judgment of appropriate factors, there is no assurance that if the Company had disposed of such items at June 30, 2012 or December 31, 2011, the estimated fair values would have been realized. Market values may differ depending on various circumstances not taken into consideration in this methodology. The estimated fair values at June 30, 2012 and December 31, 2011, should not be considered to apply at subsequent dates.

In addition, other assets and liabilities that are not defined as financial instruments are not included in the following disclosures, such as property and equipment. Also, non-financial instruments typically not recognized in financial statements may have value but are not included in the following disclosures. These include, among other items, the estimated earnings power of core deposit accounts, trained work force, customer goodwill and similar items.

The estimated fair values of the Company’s financial instruments are as follows (in thousands):

	June 30, 2012						December 31, 2011
	Carrying Amount			Fair Value			Carrying Amount			Fair Value
Financial assets:
Cash and cash equivalents	$	34,772		$	34,772		$	42,185		$	42,185
Federal funds sold		253			253			287			287
Securities available for sale		76,054			76,054			90,344			90,344
Loans held for sale		1,624			1,624			1,088			1,088
Loans, net of allowance for loan losses		344,041			348,520			327,392			333,283
Accrued interest receivable		1,826			1,826			2,148			2,148
Financial liabilities:
Deposits	$	(417,547	)	$	(419,093	)	$	(420,511	)	$	(422,493	)
Securities sold under agreements to repurchase and overnight borrowings		(14,214	)		(14,214	)		(18,074	)		(18,074	)
Other borrowings		(7,448	)		(7,491	)		(7,751	)		(7,860	)
Subordinated debentures		(5,155	)		(5,155	)		(5,155	)		(5,155	)
Accrued interest payable		(112	)		(112	)		(131	)		(131	)

The preceding table does not include net cash surrender value of life insurance and dividends payable, which are also considered financial instruments. The estimated fair value of such items is considered to be their carrying amount.

The Company also has unrecognized financial instruments, which include commitments to extend credit and standby letters of credit. The estimated fair value of such instruments is considered to be their contract amount.

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Subsequent Events

6 Months Ended

Jun. 30, 2012

Subsequent Events [Abstract]

SUBSEQUENT EVENTS

NOTE H – SUBSEQUENT EVENTS

Management evaluated subsequent events through the date the financial statements were issued. Events or transactions occurring after June 30, 2012, but prior to when the financial statements were issued, that provided additional evidence about conditions that existed at June 30, 2012, have been recognized in the financial statements for the six month period ended June 30, 2012. Events or transactions that provided evidence about conditions that did not exist at June 30, 2012, but arose before the financial statements were issued, have not been recognized in the financial statements for the six month period ended June 30, 2012.

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Stock Options (Details 1) (USD $)	6 Months Ended
	Jun. 30, 2012
Summary of Assumptions Used in Calculating the Fair Value of the Options Issued
Dividend yield	2.93%
Expected life	8 years
Expected volatility	22.84%
Risk-free interest rate	0.26%
Weighted average fair value of options granted during 2012	$ 1.59

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Fair Value Information (Tables)

6 Months Ended

Jun. 30, 2012

Fair Value Information [Abstract]

The Estimated Fair Values of the Financial Instruments

	June 30, 2012						December 31, 2011
	Carrying Amount			Fair Value			Carrying Amount			Fair Value
Financial assets:
Cash and cash equivalents	$	34,772		$	34,772		$	42,185		$	42,185
Federal funds sold		253			253			287			287
Securities available for sale		76,054			76,054			90,344			90,344
Loans held for sale		1,624			1,624			1,088			1,088
Loans, net of allowance for loan losses		344,041			348,520			327,392			333,283
Accrued interest receivable		1,826			1,826			2,148			2,148
Financial liabilities:
Deposits	$	(417,547	)	$	(419,093	)	$	(420,511	)	$	(422,493	)
Securities sold under agreements to repurchase and overnight borrowings		(14,214	)		(14,214	)		(18,074	)		(18,074	)
Other borrowings		(7,448	)		(7,491	)		(7,751	)		(7,860	)
Subordinated debentures		(5,155	)		(5,155	)		(5,155	)		(5,155	)
Accrued interest payable		(112	)		(112	)		(131	)		(131	)

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Loans and Allowance for Loan Losses (Details 1) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2012	Dec. 31, 2011
Summary of Recorded Investment in Loans by Portfolio Segment and Based on Impairment
Ending balance individually evaluated for impairment	$ 10,706	$ 9,881
Ending balance collectively evaluated for impairment	338,502	322,923
Total loans	349,208	332,804
Commercial including Commercial Real Estate [Member]
Summary of Recorded Investment in Loans by Portfolio Segment and Based on Impairment
Ending balance individually evaluated for impairment	7,220	6,440
Ending balance collectively evaluated for impairment	254,504	237,263
Total loans	261,783	243,703
Consumer [Member]
Summary of Recorded Investment in Loans by Portfolio Segment and Based on Impairment
Ending balance individually evaluated for impairment	35	29
Ending balance collectively evaluated for impairment	7,892	7,800
Total loans	7,927	7,829
Real Estate Mortgage 1st Lien [Member]
Summary of Recorded Investment in Loans by Portfolio Segment and Based on Impairment
Ending balance individually evaluated for impairment	3,314	3,326
Ending balance collectively evaluated for impairment	63,576	64,927
Total loans	66,922	68,253
Real Estate Mortgage Junior Lien [Member]
Summary of Recorded Investment in Loans by Portfolio Segment and Based on Impairment
Ending balance individually evaluated for impairment	137	86
Ending balance collectively evaluated for impairment	12,439	12,933
Total loans	$ 12,576	$ 13,019

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Consolidated Statements of Comprehensive Income (Unaudited) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011
Consolidated Statements of Comprehensive Income [Abstract]
NET INCOME	$ 1,027	$ 762	$ 2,029	$ 1,510
OTHER COMPREHENSIVE INCOME (LOSS)
Unrealized gain (loss) on available for sale securities	115	198	(33)	770
Reclassification adjustments for net realized gains included in net income			(3)	(2)
Other Comprehensive income (loss) before tax	115	198	(36)	768
Income tax effect	39	67	(13)	261
Other comprehensive income (loss)	76	376	(23)	507
TOTAL COMPREHENSIVE INCOME	$ 1,103	$ 1,138	$ 2,006	$ 2,017

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New Accounting Pronouncements

6 Months Ended

Jun. 30, 2012

Summary of Significant Accounting Policies and New Accounting Pronouncements [Abstract]

NEW ACCOUNTING PRONOUNCEMENTS

NOTE B – NEW ACCOUNTING PRONOUNCEMENTS

Adoption of New Accounting Standards:

In May 2011, the Financial Accounting Standards Board (FASB) issued ASU No. 2011-04 Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The amendments in ASU 2011-04 generally represent clarifications of Topic 820, but also include some instances where a particular principle or requirement for measuring fair value or disclosing information about fair value measurements has changed. ASU 2011-04 results in common principles and requirements for measuring fair value and for disclosing information about fair value measurements in accordance with U.S. GAAP and IFRSs. The amendments in ASU 2011-04 are to be applied prospectively. ASU 2011-04 was adopted effective January 1, 2012, but did not have any impact on the Company’s financial position or results of operations.

In June 2011, FASB issued ASU No. 2011-05 Amendments to Topic 220, Comprehensive Income. Under the amendments in ASU 2011-05, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. Either option requires the entity to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendments in ASU 2011-05 do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income.

The Company adopted ASU 2011-05 for the first quarter of 2012 and elected to present the components of other comprehensive income in a separate statement. The adoption of ASU 2011-05 did not have any impact on the Company’s financial condition or results of operations.

In September 2011, FASB issued ASU 2011-08, Intangibles – Goodwill and Other (Topic 350) Testing Goodwill for Impairment. The amendments in ASU 2011-08 gives the entity the option of first assessing qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after the assessment, the entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. The amendments in ASU 2011-08 are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The Company will consider the provisions of ASU 2011-08 when performing annual goodwill and other intangible asset impairment testing later in 2012.

In December 2011, FASB issued ASU 2011-11, Disclosures about Offsetting Assets and Liabilities, amending ASC Topic 210 requiring an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effects of those arrangements on its financial position. ASU 2011-11 is effective for annual and interim periods beginning on or after January 1, 2013. The Company has not yet determined what, if any, financial statement impact the adoption of ASU 2011-11 will have.

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Loans and Allowance for Loan Losses (Details 2) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2012	Dec. 31, 2011
Summary of Loans Individually Evaluated for Impairment by Class of Loans
Unpaid Principal Balance, Net	$ 10,706	$ 9,881
Allowance for Loan Losses Allocated, With an allowance recorded	597	984
Commercial [Member]
Summary of Loans Individually Evaluated for Impairment by Class of Loans
Unpaid Principal Balance, With no related allowance recorded	924	135
Unpaid Principal Balance, With an allowance recorded	78	744
Allowance for Loan Losses Allocated, With an allowance recorded	50	26
Real estate - commercial [Member]
Summary of Loans Individually Evaluated for Impairment by Class of Loans
Unpaid Principal Balance, With no related allowance recorded	4,135	2,649
Unpaid Principal Balance, With an allowance recorded	817	1,403
Allowance for Loan Losses Allocated, With an allowance recorded	39	490
Real estate - construction [Member]
Summary of Loans Individually Evaluated for Impairment by Class of Loans
Unpaid Principal Balance, With no related allowance recorded	107	232
Unpaid Principal Balance, With an allowance recorded
Allowance for Loan Losses Allocated, With an allowance recorded
Consumer [Member]
Summary of Loans Individually Evaluated for Impairment by Class of Loans
Unpaid Principal Balance, With no related allowance recorded	35	29
Real estate mortgage [Member]
Summary of Loans Individually Evaluated for Impairment by Class of Loans
Unpaid Principal Balance, With no related allowance recorded	2,219	2,485
Unpaid Principal Balance, With an allowance recorded	2,391	2,204
Allowance for Loan Losses Allocated, With an allowance recorded	$ 508	$ 468

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Fair Value Measurements (Details) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2012	Dec. 31, 2011
Recurring [Member]
Summary of Financial and Nonfinancial Assets Measured at Fair Value
Total available for sale	$ 76,054	$ 90,344
Recurring [Member] | Federal agencies [Member]
Summary of Financial and Nonfinancial Assets Measured at Fair Value
Total available for sale	24,223	28,435
Recurring [Member] | U.S. government sponsored entities and agencies [Member]
Summary of Financial and Nonfinancial Assets Measured at Fair Value
Total available for sale	10,925	22,956
Recurring [Member] | States and political subdivisions [Member]
Summary of Financial and Nonfinancial Assets Measured at Fair Value
Total available for sale	34,488	33,445
Recurring [Member] | Asset-backed securities [Member]
Summary of Financial and Nonfinancial Assets Measured at Fair Value
Total available for sale		2,476
Recurring [Member] | Collateralized mortgage obligations [Member]
Summary of Financial and Nonfinancial Assets Measured at Fair Value
Total available for sale	5,956
Recurring [Member] | Mortgage-backed securities [Member]
Summary of Financial and Nonfinancial Assets Measured at Fair Value
Total available for sale	462	3,032
Recurring [Member] | Level 1 Inputs [Member]
Summary of Financial and Nonfinancial Assets Measured at Fair Value
Total available for sale	35,148	53,867
Recurring [Member] | Level 1 Inputs [Member] | Federal agencies [Member]
Summary of Financial and Nonfinancial Assets Measured at Fair Value
Total available for sale	24,223	28,435
Recurring [Member] | Level 1 Inputs [Member] | U.S. government sponsored entities and agencies [Member]
Summary of Financial and Nonfinancial Assets Measured at Fair Value
Total available for sale	10,925	22,956
Recurring [Member] | Level 1 Inputs [Member] | States and political subdivisions [Member]
Summary of Financial and Nonfinancial Assets Measured at Fair Value
Total available for sale
Recurring [Member] | Level 1 Inputs [Member] | Asset-backed securities [Member]
Summary of Financial and Nonfinancial Assets Measured at Fair Value
Total available for sale		2,476
Recurring [Member] | Level 1 Inputs [Member] | Collateralized mortgage obligations [Member]
Summary of Financial and Nonfinancial Assets Measured at Fair Value
Total available for sale
Recurring [Member] | Level 1 Inputs [Member] | Mortgage-backed securities [Member]
Summary of Financial and Nonfinancial Assets Measured at Fair Value
Total available for sale
Recurring [Member] | Level 2 Inputs [Member]
Summary of Financial and Nonfinancial Assets Measured at Fair Value
Total available for sale	38,950	34,245
Recurring [Member] | Level 2 Inputs [Member] | Federal agencies [Member]
Summary of Financial and Nonfinancial Assets Measured at Fair Value
Total available for sale
Recurring [Member] | Level 2 Inputs [Member] | U.S. government sponsored entities and agencies [Member]
Summary of Financial and Nonfinancial Assets Measured at Fair Value
Total available for sale
Recurring [Member] | Level 2 Inputs [Member] | States and political subdivisions [Member]
Summary of Financial and Nonfinancial Assets Measured at Fair Value
Total available for sale	32,532	31,213
Recurring [Member] | Level 2 Inputs [Member] | Collateralized mortgage obligations [Member]
Summary of Financial and Nonfinancial Assets Measured at Fair Value
Total available for sale	5,956
Recurring [Member] | Level 2 Inputs [Member] | Mortgage-backed securities [Member]
Summary of Financial and Nonfinancial Assets Measured at Fair Value
Total available for sale	462	3,032
Recurring [Member] | Level 3 Inputs [Member]
Summary of Financial and Nonfinancial Assets Measured at Fair Value
Total available for sale	1,956	2,232
Recurring [Member] | Level 3 Inputs [Member] | Federal agencies [Member]
Summary of Financial and Nonfinancial Assets Measured at Fair Value
Total available for sale
Recurring [Member] | Level 3 Inputs [Member] | U.S. government sponsored entities and agencies [Member]
Summary of Financial and Nonfinancial Assets Measured at Fair Value
Total available for sale
Recurring [Member] | Level 3 Inputs [Member] | States and political subdivisions [Member]
Summary of Financial and Nonfinancial Assets Measured at Fair Value
Total available for sale	1,956	2,232
Recurring [Member] | Level 3 Inputs [Member] | Collateralized mortgage obligations [Member]
Summary of Financial and Nonfinancial Assets Measured at Fair Value
Total available for sale
Recurring [Member] | Level 3 Inputs [Member] | Mortgage-backed securities [Member]
Summary of Financial and Nonfinancial Assets Measured at Fair Value
Total available for sale
Nonrecurring [Member]
Summary of Financial and Nonfinancial Assets Measured at Fair Value
Impaired loans	10,109	8,897
Other real estate owned	987	1,530
Nonrecurring [Member] | Level 1 Inputs [Member]
Summary of Financial and Nonfinancial Assets Measured at Fair Value
Impaired loans
Other real estate owned
Nonrecurring [Member] | Level 2 Inputs [Member]
Summary of Financial and Nonfinancial Assets Measured at Fair Value
Impaired loans
Other real estate owned
Nonrecurring [Member] | Level 3 Inputs [Member]
Summary of Financial and Nonfinancial Assets Measured at Fair Value
Impaired loans	10,109	8,897
Other real estate owned	$ 987	$ 1,530

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Stock Options (Tables)

6 Months Ended

Jun. 30, 2012

Stock Options [Abstract]

Summary of Stock Option Activity

	Shares			Weighted Average Price
Outstanding at beginning of year		221,026		$	21.06
Granted		7,875			11.20
Exercised		—			—
Forfeited		(800	)		11.38
Outstanding at June 30, 2012		228,101		$	20.76
Options exercisable at June 30, 2012		212,151		$	21.42

Summary of Assumptions Used in Calculating the Fair Value of the Options Issued

Dividend yield		2.93	%
Expected life		8 years
Expected volatility		22.84	%
Risk-free interest rate		0.26	%
Weighted average fair value of options granted during 2012	$	1.59

Summary of Restricted Stock Activity

	Shares			Weighted Average Grant Date Fair Value
Nonvested at January 1, 2012		41,309		$	11.33
Granted		18,125			11.20
Vested		(10,735	)		11.75
Forfeited		(520	)		11.52
Nonvested at June 30, 2012		48,179		$	11.19