National Bancshares 10-Q 2011 Q2 Quarterly report

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2011

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 0-14773

NATIONAL BANCSHARES CORPORATION

exact name of registrant as specified in its charter

Ohio	34-1518564
State of incorporation	IRS Employer Identification No.

112 West Market Street, Orrville, Ohio 44667
Address of principal executive offices

Registrant’s telephone number: (330) 682-1010

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.

     Yesþ Noo

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.)

     Yesþ Noo

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company as defined in Rule 12b-2 of the Exchange Act. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in rule 12b-2 of the Exchange Act.

Large accelerated filero Accelerated filero Non-accelerated filero(Do not check if a smaller reporting company) Smaller reporting companyþ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)

     Yeso Noþ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of August 10, 2011.

Common Stock, Without Par Value: 2,213,269 shares Outstanding

NATIONAL BANCSHARES CORPORATION

Index

	Page
	Number
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of June 30, 2011 and December 31, 2010		2
Consolidated Statements of Income and Comprehensive Income for the three and six months ended June 30, 2011 and 2010		3
Condensed Consolidated Statement of Changes in Shareholders’ Equity for the six months ended June 30, 2011 and 2010		5
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2011 and 2010		6
Notes to Consolidated Financial Statements (Unaudited)		7 - 20
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		20 - 26
Item 3. Quantitative and Qualitative Disclosures About Market Risk		26 - 27
Item 4T. Controls and Procedures		27
Part II. Other Information
Item 1. Legal Proceedings — None		28
Item 1A. Risk Factors		28
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds — None		28
Item 3. Defaults Upon Senior Securities — None		28
Item 4. Removed and Reserved		—
Item 5. Other Information — None		28
Item 6. Exhibits		28
Signatures		29
Exhibits		30 - 32
EX-31.1
EX-31.2
EX-32
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

Item 1. Financial Statements

NATIONAL BANCSHARES CORPORATION

CONSOLIDATED BALANCE SHEETS (Unaudited)

	June 30,			December 31,
(dollars in thousands)	2011			2010
ASSETS
Cash and due from banks	$	31,694		$	12,837
Time deposits with other financial institutions		1,232			5,697
Securities available for sale		135,926			138,033
Restricted equity securities		3,220			3,219
Loans, net of allowance for loan losses:
June 30, 2011 — $2,881; December 31, 2010 — $2,585		203,255			190,685
Premises and equipment, net		12,357			12,526
Goodwill		4,723			4,723
Identified intangible assets		64			107
Accrued interest receivable		1,337			1,270
Cash surrender value of life insurance		2,907			2,862
Other assets		2,072			2,137
Total assets	$	398,787		$	374,096
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits
Noninterest bearing	$	71,567		$	57,435
Interest bearing		264,961			251,699
Total deposits		336,528			309,134
Repurchase agreements		8,782			7,747
Federal Reserve Bank note account		357			724
Federal Home Loan Bank advances		9,000			15,000
Accrued interest payable		239			312
Accrued expenses and other liabilities		3,174			2,198
Total liabilities		358,080			335,115
SHAREHOLDERS’ EQUITY
Common stock, no par value; 6,000,000 shares authorized; 2,289,528 shares issued		11,447			11,447
Additional paid-in capital		4,795			4,775
Retained earnings		23,174			22,475
Treasury stock, at cost (79,811 and 83,555 shares)		(1,565	)		(1,639	)
Accumulated other comprehensive income		2,856			1,923
Total shareholders’ equity		40,707			38,981
Total liabilities and shareholders’ equity	$	398,787		$	374,096

See accompanying notes to consolidated financial statements.

2

NATIONAL BANCSHARES CORPORATION

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (Unaudited)

	Three months ended						Six months ended
(dollars in thousands, except per share data)	June 30, 2011			June 30, 2010			June 30, 2011			June 30, 2010
Interest and dividend income
Loans, including fees	$	2,654		$	2,638		$	5,172		$	5,240
Securities:
Taxable		821			938			1,560			1,967
Nontaxable		394			293			784			564
Federal funds sold and other		23			51			51			107
Total interest and dividend income		3,892			3,920			7,567			7,878
Interest expense
Deposits		453			557			938			1,129
Short-term borrowings		10			13			21			26
Federal Home Loan Bank advances		59			249			141			510
Total interest expense		522			819			1,100			1,665
Net interest income		3,370			3,101			6,467			6,213
Provision for loan losses		150			615			297			1,122
Net interest income after provision for loan losses		3,220			2,486			6,170			5,091
Noninterest income
Checking account fees		269			272			535			534
Visa check card interchange fees		141			112			262			210
Deposit and miscellaneous service fees		80			80			155			163
Mortgage banking activities		40			50			77			101
Securities gains, net		46			—			51			76
Loss on other real estate owned		(38	)		—			(38	)		(11	)
Gain on sale of SBA loans		—			—			128			—
Other		83			98			183			164
Total noninterest income		621			612			1,353			1,237
Noninterest expense
Salaries and employee benefits		1,455			1,357			2,949			2,735
Data processing		286			256			569			497
Net occupancy		378			304			745			598
FDIC assessment		94			145			230			266
Professional and consulting fees		176			210			326			392
Franchise tax		91			87			184			177
Maintenance and repairs		58			43			135			113
Amortization of intangibles		22			23			43			45
Telephone		62			58			121			116
Marketing		60			66			120			131
Director fees and pension		60			68			120			140
Software expense		66			50			120			93
Postage and supplies		72			75			146			155
Other		268			260			486			473
Total noninterest expense		3,148			3,002			6,294			5,931
Income before income tax expense		693			96			1,229			397
Income tax expense (benefit)		104			(62	)		153			(54	)
Net income		589			158			1,076			451

(Continued)

3

NATIONAL BANCSHARES CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (Unaudited)

	Three months ended					Six months ended
(Continued)	June 30, 2011			June 30, 2010		June 30, 2011			June 30, 2010
Other comprehensive income:
Unrealized appreciation in fair value of securities available for sale, net of taxes of $(306), $(193), $(498) and $(524)		595			325		967			1,017
Reclassification adjustment for realized gains included in earnings, net of taxes of $16, $0, $17 and $26		(30	)		—		(34	)		(50	)
Total other comprehensive income, net of taxes		565			325		933			967
Comprehensive income	$	1,154		$	483	$	2,009		$	1,418
Weighted average basic and diluted common shares outstanding		2,209,717			2,205,973		2,209,717			2,205,973
Basic and diluted earnings per common share	$	0.27		$	0.07	$	0.49		$	0.20
Dividends declared per common share	$	0.08		$	0.08	$	0.16		$	0.16

See accompanying notes to consolidated financial statements.

4

NATIONAL BANCSHARES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)

	Six months ended,
	June 30,			June 30,
(dollars in thousands, except per share data)	2011			2010
Balance at beginning of period	$	38,981		$	38,903
Comprehensive income
Net income		1,076			451
Other comprehensive income		933			967
Total comprehensive income		2,009			1,418
Stock awards issued from Treasury Shares (3,744 shares)		50			—
Compensation expense under stock-based compensation plans		20			9
Cash dividends declared ($0.16 per share in 2011 and 2010)		(353	)		(353	)
Balance at end of period	$	40,707		$	39,977

See accompanying notes to consolidated financial statements.

5

NATIONAL BANCSHARES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

	Six months ended
	June 30,			June 30,
(dollars in thousands, except per share data)	2011			2010
Net cash from operating activities	$	2,739		$	1,958
Cash flows from investing activities
Proceeds from time deposits with other financial institutions		4,465			4,136
Securities available for sale
Proceeds from maturities and repayments		17,386			19,463
Proceeds from sales		2,395			1,988
Purchases		(16,821	)		(21,732	)
Purchases of property and equipment		(284	)		(2,402	)
Proceeds from the sale of other real estate owned		54			35
Proceeds from the sale of an impaired loan		—			930
Proceeds from the sale of loans guaranteed by SBA		1,841			—
Purchase of loans		—			(1,184	)
Net change in loans		(14,628	)		1,938
Net cash from investing activities		(5,592	)		3,172
Cash flows from financing activities
Net change in deposits		27,394			17,707
Net change in short-term borrowings		668			(2,633	)
Repayments of Federal Home Loan Bank advances		(6,000	)		(2,000	)
Dividends paid		(352	)		(353	)
Net cash from financing activities		21,710			12,721
Net change in cash and cash equivalents		18,857			17,851
Beginning cash and cash equivalents		12,837			8,124
Ending cash and cash equivalents	$	31,694		$	25,975
Supplemental Disclosures
Cash paid for interest	$	1,173		$	1,705
Cash paid for income taxes	$	60		$	470
Supplemental noncash disclosures:
Transfer from loans to other real estate owned	$	54		$	41
Issuance of stock awards	$	50		$	—

See accompanying notes to consolidated financial statements.

6

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 1 — Basis of Presentation

(dollars in thousands)

Company Organization and Financial Presentation

The accompanying consolidated financial statements include the accounts of National Bancshares Corporation (the “Company”) and its wholly owned subsidiaries, First National Bank, Orrville, Ohio (the “Bank”) and NBOH Properties, LLC. The Bank has a minority interest in First Kropf Title, LLC. The Bank’s investment in First Kropf Title, LLC is immaterial to the consolidated financial statements. All significant intercompany transactions and balances have been eliminated.

The Company provides a broad range of financial services to individuals and companies in Medina, Stark, Summit and Wayne Counties, Ohio. While the Company’s chief decision makers monitor the revenue streams of the various products and services, operations are managed and financial performance is evaluated on a Company-wide basis. Accordingly, all the Company’s banking operations are considered by management to be aggregated in one reportable operating segment.

The consolidated financial statements have been prepared by the Company without audit. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.

The consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q, but do not include all the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. These statements should be read in conjunction with the consolidated financial statements and footnotes in the Company’s annual report on Form 10-K for the year ended December 31, 2010. The Company believes the disclosures are adequate to make the information presented not misleading; however, the results of operations and other data presented for the periods presented are not necessarily indicative of results to be expected for the entire fiscal year.

Use of Estimates

To prepare financial statements in conformity with U.S. generally accepted accounting principles, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and actual results could differ. The allowance for loan losses and fair values of financial instruments are particularly subject to change.

Cash Flows

Cash and cash equivalents include cash, deposits with other banks with original maturities under 90 days, and federal funds sold. Net cash flows are reported for customer loan and deposit transactions, repurchase agreements and other short-term borrowings.

Earnings Per Common Share

Earnings per common share is net income divided by the weighted average number of shares outstanding during the period. Diluted earnings per share includes the dilutive effect of additional potential common shares issuable under stock options. 88,000 and 48,400 stock options were not considered in computing diluted earnings per common share for the three and six month periods ending June 30, 2011 and 2010, respectively, because they were antidilutive.

Adoption of New Accounting Standards

In April 2011, the FASB amended existing guidance for assisting a creditor in determining whether a restructuring is a troubled debt restructuring. The amendments clarify the guidance for a creditor’s evaluation of whether it has granted a concession and whether a debtor is experiencing financial difficulties. With regard to determining whether a concession has been granted, the ASU clarifies that creditors are precluded from using the effective interest method to determine whether a concession has been granted. In the absence of using the effective interest method, a creditor must now focus on other considerations such as the value of the underlying collateral, evaluation of other collateral or guarantees, the debtor’s ability to access other funds at market rates, interest rate increases and whether the restructuring results in a delay in payment that is insignificant. This guidance is effective for interim and annual reporting periods beginning after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. For purposes of measuring impairment on newly identified troubled debt restructurings, the amendments should be applied prospectively for the first interim or annual period beginning on or after June 15, 2011.

7

Note 2 — Securities

(dollars in thousands)

Securities consist of the following at June 30, 2011 and December 31, 2010:

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
June 30, 2011
U.S. Government and federal agency	$	2,689	$	28	$	—		$	2,717
State and municipal		46,329		1,527		(114	)		47,742
Corporate bonds and notes		500		9		—			509
Mortgage-backed: residential		82,057		2,878		(20	)		84,915
Equity securities		23		20		—			43
Total	$	131,598	$	4,462	$	(134	)	$	135,926
December 31, 2010
U.S. Government and federal agency	$	2,954	$	21	$	—		$	2,975
State and municipal		44,656		833		(484	)		45,005
Corporate bonds and notes		1,487		29		—			1,516
Mortgage-backed: residential		86,001		2,766		(240	)		88,527
Equity securities		23		—		(13	)		10
Total	$	135,121	$	3,649	$	(737	)	$	138,033

	For the six months ended
	June 30,		June 30,
	2011		2010
Sales of available for sale securities were as follows:
Proceeds	$	2,395	$	1,988
Gross gains		51		76
Gross losses		—		—

	For the three months ended
	June 30,		June 30,
	2011		2010
Sales of available for sale securities were as follows:
Proceeds	$	1,281	$	—
Gross gains		46		—
Gross losses		—		—

The tax provision related to net realized gains and losses for the six months ended June 30, 2011 and 2010 was $17 and $26. The tax provision related to net realized gains and losses was $16 for the three months ended June 30, 2011.

The fair value of securities at June 30, 2011 by contractual maturity were as follows. Securities not due at a single maturity date, primarily mortgage-backed securities, are shown separately.

	Amortized Cost		Fair Value
Due in one year or less	$	3,709	$	3,720
Due from one to five years		5,714		5,931
Due from five to ten years		17,346		18,170
Due after ten years		22,749		23,147
Mortgage-backed: residential		82,057		84,915
Equity securities		23		43
Total	$	131,598	$	135,926

Securities pledged at June 30, 2011 and December 31, 2010 had a fair value of $65,629 and $58,827 and were pledged to secure public deposits and repurchase agreements.

At June 30, 2011 and December 31, 2010, there were no holdings of securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of shareholders’ equity.

8

Securities with unrealized losses at June 30, 2011 and December 31, 2010, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are as follows:

	Less than 12 months					12 months or more				Total
	Fair		Unrealized			Fair		Unrealized		Fair		Unrealized
June 30, 2011	Value		Loss			Value		Loss		Value		Loss
State and municipal	$	6,067	$	(114	)	$	—	$	—	$	6,067	$	(114	)
Mortgage-backed: residential		3,950		(20	)		—		—		3,950		(20	)
Total temporarily impaired	$	10,017	$	(134	)	$	—	$	—	$	10,017	$	(134	)

	Less than 12 months					12 months or more					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
December 31, 2010	Value		Loss			Value		Loss			Value		Loss
State and municipal	$	18,125	$	(484	)	$	—	$	—		$	18,125	$	(484	)
Mortgage-backed: residential		17,067		(240	)		—		—			17,067		(240	)
Equity securities		—		—			10		(13	)		10		(13	)
Total temporarily impaired	$	35,192	$	(724	)	$	10	$	(13	)	$	35,202	$	(737	)

Management believes the unrealized losses of securities as of June 30, 2011 are the result of fluctuations in interest rates and do not reflect deterioration in the credit quality of the securities. Accordingly management considers these unrealized losses to be temporary in nature. The Company does not have the intent to sell and does not believe it is more likely than not the Company will be required to sell these securities before their recovery. The fair value of debt securities is expected to recover as the securities approach their maturity date.

9

Note 3 — Loans and Allowance for Loan Losses

(dollars in thousands)

The following table presents the activity in the allowance for loan losses by portfolio segment for the three months ended June 30, 2011 and 2010:

																				Three Months
																				Ended
			Commercial		Residential			Home												June 30, 2010
	Commercial		Real Estate		Real Estate			Equity			Consumer			Unallocated			Total			Total
Beginning balance	$	494	$	1,270	$	789		$	100		$	62		$	5		$	2,720		$	3,394
Provision for loan losses		115		62		9			(25	)		(8	)		(3	)		150			615
Loans charged-off		—		—		(24	)		—			(5	)		—			(29	)		(1,461	)
Recoveries		25		—		1			—			14			—			40			12
Ending balance	$	634	$	1,332	$	775		$	75		$	63		$	2		$	2,881		$	2,560

The following table presents the activity in the allowance for loan losses by portfolio segment for the six months ended June 30, 2011 and 2010:

																				Six Months
																				Ended
			Commercial		Residential			Home												June 30, 2010
	Commercial		Real Estate		Real Estate			Equity			Consumer			Unallocated			Total			Total
Beginning balance	$	460	$	1,267	$	675		$	100		$	53		$	30		$	2,585		$	2,906
Provision for loan losses		149		65		126			(26	)		11			(28	)		297			1,122
Loans charged-off		—		—		(27	)		—			(17	)		—			(44	)		(1,482	)
Recoveries		25		—		1			1			16			—			43			14
Ending balance	$	634	$	1,332	$	775		$	75		$	63		$	2		$	2,881		$	2,560

10

The recorded investment in loans includes the principal balance outstanding, net of unearned and deferred income and including accrued interest receivable. The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of June 30, 2011 and December 31, 2010:

			Commercial		Residential		Home
	Commercial		Real Estate		Real Estate		Equity		Consumer		Unallocated		Total
June 30, 2011
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	101	$	183	$	235	$	—	$	—	$	—	$	519
Collectively evaluated for impairment		547		1,092		569		88		64		2		2,362
Total ending allowance balance	$	648	$	1,275	$	804	$	88	$	64	$	2	$	2,881
Recorded investment in loans:
Loans individually evaluated for impairment	$	599	$	2,677	$	1,123	$	—	$	—	$	—	$	4,399
Loans collectively evaluated for impairment		32,761		64,029		68,221		29,360		7,847		—		202,218
Total ending loans balance	$	33,360	$	66,706	$	69,344	$	29,360	$	7,847	$	—	$	206,617
December 31, 2010
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	—	$	30	$	239	$	—	$	—	$	—	$	269
Collectively evaluated for impairment		460		1,237		436		100		53		30		2,316
Total ending allowance balance	$	460	$	1,267	$	675	$	100	$	53	$	30	$	2,585
Recorded investment in loans:
Loans individually evaluated for impairment	$	662	$	2,881	$	1,149	$	—	$	—	$	—	$	4,692
Loans collectively evaluated for impairment		25,539		65,035		60,609		27,914		10,049		—		189,146
Total ending loans balance	$	26,201	$	67,916	$	61,758	$	27,914	$	10,049	$	—	$	193,838

11

The impact on interest income of impaired loans was not significant to the consolidated statements of income.

Impaired loans are generally measured for impairment using the fair value of the collateral supporting the loan. Evaluating impaired loan collateral is based on level 3 inputs utilizing outside appraisals adjusted by management for sales costs and other assumptions regarding market conditions to arrive at fair value.

The following table presents loans individually evaluated for impairment by class of loans as of June 30, 2011 and December 31, 2010:

	Unpaid				Allowance for		Average
	Principal		Recorded		Loan Losses		Recorded
	Balance		Investment		Allocated		Investment
June 30, 2011
With no related allowance recorded:
Real estate:
Commercial and land development	$	426	$	426	$	—	$	561
One-to-four family		49		49		—		50
Real estate construction:
Commercial and land development		1,287		1,287		—		1,940
Commercial		31		31		—		45
With an allowance recorded:
Real estate:
Commercial and land development		962		962		183		965
One-to-four family		1,074		1,074		235		1,081
Real estate construction:
Commercial and land development		—		—		—		—
Commercial		568		568		101		461
	$	4,399	$	4,399	$	519	$	5,103

	Unpaid				Allowance for
	Principal		Recorded		Loan Losses
	Balance		Investment		Allocated
December 31, 2010
With no related allowance recorded:
Real estate:
Commercial and land development	$	1,258	$	1,258	$	—
One-to-four family		52		52		—
Real estate construction:
One-to-four family		1,326		1,326		—
Commercial		662		662		—
With an allowance recorded:
Real estate:
Commercial and land development		99		99		10
One-to-four family		1,097		1,097		239
Multifamily		—		—		—
Real estate construction:
Commercial and land development		198		198		20
	$	4,692	$	4,692	$	269

Nonaccrual loans and loans past due 90 days still on accrual include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.

12

The following table presents the recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans as of June 30, 2011 and December 31, 2010:

	June 30, 2011				December 31, 2010
			Loans Past Due				Loans Past Due
			Over 90 Days				Over 90 Days
	Nonaccrual		Still Accruing		Nonaccrual		Still Accruing
Real estate:
Commercial and land development	$	1,388	$	—	$	1,358	$	—
One-to-four family		450		41		448		360
Home equity		382		21		382		116
Real estate construction:
Commercial and land development		1,289		387		1,524		—
Commercial		599		—		661		—
Consumer:
Auto:
Indirect		—		—		—		11
	$	4,108	$	449	$	4,373	$	487

The following table presents the aging of the recorded investment in past due loans as of June 30, 2011 by class of loans:

	30 - 59		60 - 89		Greater Than
	Days		Days		90 Days		Total		Loans Not
	Past Due(1)		Past Due(2)		Past Due(3)		Past Due		Past Due(4)		Total
Real estate:
Commercial and land development	$	—	$	—	$	1,124	$	1,124	$	59,027	$	60,151
One-to-four family		742		307		442		1,491		50,084		51,575
Home equity		123		—		403		526		28,834		29,360
Multifamily		—		—		—		—		17,356		17,356
Real estate construction:
Commercial and land development		893		—		782		1,675		4,880		6,555
One-to-four family		—		—		—		—		413		413
Commercial		—		—		577		577		32,783		33,360
Consumer:
Auto:
Direct		—		—		—		—		2,193		2,193
Indirect		35		—		—		35		4,757		4,792
Other		4		—		—		4		858		862
	$	1,797	$	307	$	3,328	$	5,432	$	201,185	$	206,617

(1)	Includes $893 of loans on nonaccrual status.
(2)	Includes $26 of loans on nonaccrual status.
(3)	All loans are nonaccrual status except for $449 of loans past due over 90 days still on accrual.
(4)	Includes $310 of loans on nonaccrual status.

13

The following table presents the aging of the recorded investment in past due loans as of December 31, 2010 by class of loans:

	30 - 59		60 - 89		Greater Than
	Days		Days		90 Days		Total		Loans Not
	Past Due(1)		Past Due(2)		Past Due(3)		Past Due		Past Due(4)		Total
Real estate:
Commercial and land development	$	—	$	165	$	1,076	$	1,241	$	56,726	$	57,967
One-to-four family		769		167		784		1,720		45,394		47,114
Home equity		2		45		498		545		27,369		27,914
Multifamily		—		—		—		—		14,353		14,353
Real estate construction:
Commercial and land development		930		396		198		1,524		8,425		9,949
One-to-four family		—		—		—		—		291		291
Commercial		—		22		661		683		25,518		26,201
Consumer:
Auto:
Direct		22		—		—		22		2,453		2,475
Indirect		52		—		11		63		6,524		6,587
Other		9		—		—		9		978		987
	$	1,784	$	795	$	3,228	$	5,807	$	188,031	$	193,838

(1)	Includes $854 of loans on nonaccrual status.
(2)	Includes $399 of loans on nonaccrual status.
(3)	All loans are nonaccrual status except for $487 of loans past due over 90 days still on accrual.
(4)	Includes $379 of loans on nonaccrual status.

Troubled Debt Restructuring

The Company has $1,860 of loans individually evaluated for impairment whose loan terms have been modified in troubled debt restructurings as of June 30, 2011. $250 of specific reserve has been allocated for these loans. The Company has not committed to lend any additional amounts as of June 30, 2011 to customers with outstanding loans that are classified as troubled debt restructurings. There were $1,876 of loans whose terms have been modified in troubled debt restructurings as of December 31, 2010. No specific reserve has been allocated for these loans.

Credit Quality Indicators

The Corporation 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 and other information specific to each borrower. The Corporation analyzes loans individually by classifying the loans as to credit risk. This analysis includes non-homogeneous loans, such as commercial and commercial real estate loans. This analysis is performed on an annual basis or more frequently if management becomes aware of information affecting a borrower’s ability to fulfill its obligation. The Corporation 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 institution’s credit position at some future date.

Substandard

Loans classified as substandard are inadequately protected by the current financial condition and paying capacity of the obligor or of the collateral securing the loan. Substandard loans have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt with a distinct possibility that the institution 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.

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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, 2011 and December 31, 2010, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

			Special
June 30, 2011	Pass		Mention		Substandard		Doubtful		Total
Real estate:
Commercial and land development	$	56,410	$	273	$	3,468	$	—	$	60,151
Real estate construction:
Commercial and land development		3,007		1,987		1,561		—		6,555
Commercial		30,707		846		1,807		—		33,360
	$	90,124	$	3,106	$	6,836	$	—	$	100,066

			Special
December 31, 2010	Pass		Mention		Substandard		Doubtful		Total
Real estate:
Commercial and land development	$	53,714	$	350	$	3,903	$	—	$	57,967
Real estate construction:
Commercial and land development		6,359		1,788		1,802		—		9,949
Commercial		23,670		507		2,024		—		26,201
	$	83,743	$	2,645	$	7,729	$	—	$	94,117

The Corporation considers the performance of the loan portfolio and its impact on the allowance for loan losses. For residential and consumer loan classes, the Corporation also evaluates credit quality based on the aging status of the loan, which was previously presented, and by payment activity. The following table presents the recorded investment in residential and consumer loans based on payment activity as of June 30, 2011 and December 31, 2010:

			Consumer						Residential Real Estate
											One-to-four		Home
June 30, 2011	Direct		Indirect		Other		Construction		Multifamily		Family		Equity		Total
Performing	$	2,193	$	4,792	$	862	$	413	$	17,356	$	51,133	$	28,957	$	105,706
Nonperforming		—		—		—		—		—		442		403		845
	$	2,193	$	4,792	$	862	$	413	$	17,356	$	51,575	$	29,360	$	106,551

			Consumer						Residential Real Estate
											One-to-four		Home
Dec. 31, 2010	Direct		Indirect		Other		Construction		Multifamily		Family		Equity		Total
Performing	$	2,475	$	6,576	$	987	$	291	$	14,353	$	46,330	$	27,416	$	98,428
Nonperforming		—		11		—		—		—		784		498		1,293
	$	2,475	$	6,587	$	987	$	291	$	14,353	$	47,114	$	27,914	$	99,721

Note 4 — Interest-Rate Swaps
(dollars in thousands)

The Company utilizes interest-rate swap agreements as part of its asset liability management strategy to help manage its interest rate risk position, not for speculation. The notional amount of the interest-rate swaps does not represent amounts exchanged by the parties. The amount exchanged is determined by reference to the notional amount and the other terms of the individual interest-rate swap agreements.

The Company implemented a program in 2009 whereby it lends to its borrowers at a fixed rate with the loan agreement containing a two-way yield maintenance provision. The program has one participant as of June 30, 2011. If the borrower prepays the loan, the yield maintenance provision will result in a prepayment penalty or benefit depending on the interest rate environment at the time of the prepayment. This provision represents an embedded derivative which is required to be bifurcated from the host loan contract. As a result of bifurcating the embedded derivative, the Company records the transaction with the borrower as a floating rate loan and a pay floating / receive fixed interest-rate swap. To offset the risk of the interest-rate swap with the borrower, the Company enters into an interest-rate swap with an outside counterparty that mirrors the terms of the interest-rate swap between the Company and the borrower. Both interest-rate swaps are carried as freestanding derivatives with their changes in fair value reported in current earnings. The interest-rate swaps are not designated as hedges. The change in the fair value of the interest-rate swap between the Company and its borrower was an increase of $6 for the six months ended June 30, 2011, which was offset by an equal decrease in value during the six months

15

ended June 30, 2011 on the interest-rate swap with an outside counterparty, with the result that there was no impact on income as of June 30, 2011.

Summary information about the interest-rate swaps not designated as hedges between the Company and its borrower as of June 30, 2011 is as follows:

Notional amount	$	1,470
Weighted average receive rate		5.33	%
Weighted average pay rate		3.30	%
Weighted average maturity (years)		2.5
Fair value of interest-rate swaps	$	53

Summary information about the interest-rate swaps between the Company and outside parties as of June 30, 2011 is as follows:

Notional amount	$	1,470
Weighted average pay rate		5.33	%
Weighted average receive rate		3.30	%
Weighted average maturity (years)		2.5
Fair value of interest-rate swaps	$	(53	)

The fair value of the interest-rate swaps at June 30, 2011 is reflected in other assets and other liabilities with a corresponding offset to noninterest income.

Note 5 — Stock-Based Compensation
(dollars in thousands, except per share information)

The Corporation’s 2008 Equity Incentive Plan (“the Plan”), which is shareholder-approved, permits the grant of stock options or restricted stock awards, to its officers, employees, consultants and non-employee directors for up to 223,448 shares of common stock.

Option awards are granted with an exercise price equal to the fair value of the Corporation’s common stock at the date of grant; those option awards have vesting periods determined by the Corporation’s compensation committee and have terms that shall not exceed 10 years.

On May 20, 2008, the Corporation granted options to purchase 58,000 shares of stock to directors and certain key officers, of which 45,000 remain outstanding at June 30, 2011. The exercise price of the options is $18.03 per share. The options vest in five equal installments over a five-year period and have a term of 10 years. None of these options have been exercised as of June 30, 2011.

On October 19, 2010, the Corporation granted options to purchase 43,000 shares of stock to directors and certain key officers, all of which remained outstanding at June 30, 2011. The exercise price of the options is $13.22 per share. The options vest in five equal installments over a five-year period and have a term of 10 years. None of these options have been exercised as of June 30, 2011.

A summary of the activity in the stock option plan for 2011 follows:

						Weighted
				Weighted		Average
				Average		Remaining		Aggregate
				Exercise		Contractual		Intrinsic
	Shares			Price		Term		Value
Outstanding — January 1, 2011		89,000		$	15.71
Granted		—			—
Exercised		—			—
Forfeited or expired		(1,000	)		18.03
Outstanding — June 30, 2011		88,000		$	15.71		8.1	$	—
Fully Expected to Vest at June 30, 2011		(61,000	)	$	15.10		8.6	$	—
Exercisable at June 30, 2011		27,000		$	18.03		6.9	$	—

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The total compensation cost that has been charged against income for the plan was $20 and $9 for the six month periods ended June 30, 2011 and 2010 and $10 and $5 for the quarters ended June 30, 2011 and 2010. The total income tax benefit was $3 and $2 for the quarters ended June 30, 2011 and 2010 and $7 and $3 for the six month periods ended June 30, 2011 and 2010. As of June 30, 2011, there was $89 of total unrecognized compensation cost related to nonvested stock options granted under the Plan. The cost is expected to be recognized over a weighted-average period of 3.1 years.

Restricted Stock Awards

On January 3, 2011, the Company granted restricted stock awards for 3,744 shares of the Corporation’s common stock to certain directors in lieu of cash payment of fees. The awards vested immediately and the compensation expense related to the awards of $50 was recorded in 2010. The fair value of the stock was determined using closing market price of the Corporation’s common stock on the date of the grant.

Note 6 — Fair Value
(dollars in thousands)

ASC 820-10 establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The fair values of securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs) or matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the relationship to other benchmark quoted securities (Level 2 inputs). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3). Discounted cash flows are calculated using estimates of current market rates for each type of security. During times when trading is more liquid, broker quotes are used (if available) to validate the model. Rating agency and industry research reports as well as defaults and deferrals on individual securities are reviewed and incorporated into the calculations.

The fair value of derivatives is based on valuation models using observable market data as of the measurement date (Level 2 inputs).

The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining fair value.

Nonrecurring adjustments to certain commercial and residential real estate properties classified as other real estate owned are measured at the lower of carrying amount or fair value, less cost to sell. Fair values are generally based on third party appraisals of the property, resulting in a Level 3 classification. In cases where the carrying amount exceeds the fair value, less costs to sell, an impairment loss is recognized.

17

Assets and Liabilities Measured on a Recurring Basis

Assets and liabilities measured at fair value on a recurring basis are summarized below:

	Fair Value Measurements
	at June 30, 2011 Using
	Quoted Prices in		Significant
	Active Markets		Other		Significant
	for Identical		Observable		Unobservable
	Assets		Inputs		Inputs
	(Level 1)		(Level 2)		(Level 3)
Assets:
Available for sale securities:
U.S. Government and federal agency	$	—	$	2,717	$	—
State and municipal		—		47,742		—
Corporate bonds and notes		—		509		—
Mortgage-backed securities — residential		—		84,897		18
Equity securities		43		—		—
Interest rate swaps		—		53		—

	Fair Value Measurements
	at June 30, 2011 Using
	Quoted Prices in		Significant
	Active Markets		Other		Significant
	for Identical		Observable		Unobservable
	Assets		Inputs		Inputs
	(Level 1)		(Level 2)		(Level 3)
Liabilities:
Interest rate swaps	$	—	$	53	$	—

	Fair Value Measurements
	at December 31, 2010 Using
	Quoted Prices in		Significant
	Active Markets		Other		Significant
	for Identical		Observable		Unobservable
	Assets		Inputs		Inputs
	(Level 1)		(Level 2)		(Level 3)
Assets:
Available for sale securities:
U.S. Government and federal agency	$	—	$	2,975	$	—
State and municipal		—		44,705		300
Corporate bonds and notes		—		1,516		—
Mortgage-backed securities — residential		—		88,507		20
Equity securities		10		—		—
Interest rate swaps		—		47		—

	Fair Value Measurements
	at December 31, 2010 Using
	Quoted Prices in		Significant
	Active Markets		Other		Significant
	for Identical		Observable		Unobservable
	Assets		Inputs		Inputs
	(Level 1)		(Level 2)		(Level 3)
Liabilities:
Interest rate swaps	$	—	$	47	$	—

18

Assets and Liabilities Measured on a Non-Recurring Basis

Assets and liabilities measured at fair value on a non-recurring basis are summarized below:

	Fair Value Measurements
	at June 30, 2011 Using
	Quoted Prices in		Significant
	Active Markets		Other		Significant
	for Identical		Observable		Unobservable
	Assets		Inputs		Inputs
	(Level 1)		(Level 2)		(Level 3)
Assets:
Impaired loans
Commercial	$	—	$	—	$	466
Commercial real estate		—		—		2,014
Other real estate owned		—		—		20

	Fair Value Measurements
	at December 31, 2010 Using
	Quoted Prices in		Significant
	Active Markets		Other		Significant
	for Identical		Observable		Unobservable
	Assets		Inputs		Inputs
	(Level 1)		(Level 2)		(Level 3)
Assets:
Impaired loans	$	—	$	—	$	3,116
Other real estate owned		—		—		58

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a principal amount of $2,999, with a valuation allowance of $519, resulting in an additional provision for loan loss of $250 in the six months ended June 30, 2011. Impaired loans had a principal amount of $3,385, with a valuation allowance of $269, resulting in an additional provision of $1,790 for loan loss in the year ended December 31, 2010.

Other real estate owned measured at fair value less costs to sell, had a net carrying amount of $20, which is made up of the outstanding balance of $133, net of a valuation allowance of $113 at June 30, 2011. There was a $38 write-down of other real estate for the quarter ended June 30, 2011. There were no write-downs of other real estate owned for the quarter or year to date ended June 30, 2010.

Carrying amount and estimated fair values of financial instruments at June 30, 2011 were as follows:

	June 30,				December 31,
	2011				2010
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
Financial assets
Cash and cash equivalents	$	31,694	$	31,694	$	12,837	$	12,837
Time deposits with other financial institutions		1,232		1,232		5,697		5,697
Securities available for sale		135,926		135,926		138,033		138,033
Restricted equity securities		3,220	na			3,219	na
Loans, net		203,255		204,428		190,685		192,372
Accrued interest receivable		1,337		1,337		1,270		1,270
Interest rate swaps		53		53		47		47
Financial liabilities
Deposits	$	336,528	$	337,367	$	309,134	$	309,908
Short-term borrowings		9,139		9,139		8,471		8,471
Federal Home Loan Bank advances		9,000		9,337		15,000		15,337
Accrued interest payable		239		239		312		312
Interest rate swaps		53		53		47		47

The methods and assumptions used to estimate fair value are described as follows:

19

Carrying amount is the estimated fair value for cash and cash equivalents, time deposits with other financial institutions, interest bearing deposits, accrued interest receivable and payable, demand deposits, short-term debt, and variable rate loans or deposits that reprice frequently and fully. Securities fair values are determined as previously described. For fixed rate loans or deposits and for variable rate loans or deposits with infrequent repricing or repricing limits, fair value is based on discounted cash flows using current market rates applied to the estimated life and credit risk. Fair value of debt is based on current rates for similar financing. It was not practicable to determine the fair value of restricted equity securities due to restrictions placed on its transferability. The fair value of off-balance-sheet items is not considered material.

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

FORWARD-LOOKING INFORMATION

This Form 10-Q contains forward-looking statements as referenced in the Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to many risks and uncertainties. When used herein, the terms “anticipates,” “plans,” “expects,” “believes,” and similar expressions as they relate to the Company or its management are intended to identify such forward looking statements. Actual results could differ materially from those indicated by the forward-looking statements. Risks and uncertainties that could cause or contribute to differences include, changes in the regulatory environment, changes in business conditions and inflation, risks associated with credit quality and other factors discussed in the Company’s filings with the U.S. Securities and Exchange Commission, including its Annual Report on Form 10-K for the year ended December 31, 2010. The Company assumes no obligation to update any forward-looking statement.

GENERAL

The Company’s results of operations are dependent primarily on net interest income, provision for loan losses, noninterest income and its ability to control costs. Net interest income is the difference (“spread”) between the interest income earned on loans and securities and the cost of funds, consisting of interest paid on deposits, Federal Home Loan Bank advances and short-term funds. The interest rate spread is affected by regulatory, economic and competitive factors that influence interest rates, loan demand and deposit flows. The provision for loan losses is significantly affected by the relative strength or weakness of the local economy. The Company’s net income is also affected by, among other things, loan fee income, service charges, gains on securities and loans, operating expenses, FDIC assessment expense and franchise and income taxes. The Company’s operating expenses principally consist of employee compensation and benefits, occupancy and other general and administrative expenses. The Company’s results of operations are also significantly affected by general economic and competitive conditions, particularly changes in market interest rates, government policies and actions of regulatory authorities. Additionally, future changes in applicable laws, regulations or government policies may also materially impact the Company.

OVERVIEW

Total assets increased to $398.8 million as of June 30, 2011, from $374.1 million at December 31, 2010.

Net income for the first six months of 2011 was $1.1 million compared to $451 thousand for the same period of 2010 or $0.49 and $0.20 basic and diluted per share, respectively. Net income was positively impacted by an increase in net interest income, a decrease in the provision for loan losses and a gain on sale of a portion of five loans guaranteed by the Small Business Association (SBA), partially offset by an increase in noninterest expense.

Net interest income for the six month period ended June 30, 2011 increased $254 thousand, or 4.1%, compared to the same period in 2010, despite a declining interest rate environment. The provision for loan losses decreased to $297 thousand for the six months ended June 30, 2011 compared to $1,122 thousand for the same period in 2010. The change in the provision was primarily related to an increase in the specific loss allocations of two loans adversely classified during 2010. Noninterest income for the first six months of 2011 increased $116 thousand compared to the same period in 2010, primarily related to the gain on sale of a portion of five loans guaranteed by the SBA.

Noninterest expense for the first six months of 2011 increased $363 thousand compared to the same period in 2010 due primarily to an increase in salaries and employee benefits, data processing and occupancy expense. Income tax expense was $153 thousand for the six months ended June 30, 2011 compared to an income tax benefit of $54 thousand for the same period in 2010.

Office of the Controller of the Currency (“OCC”) regulations requires banks to maintain certain minimum levels of regulatory capital. Additionally, the regulations establish a framework for the classification of banks into five categories: well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. Generally, an institution is considered well-capitalized if it has a core (Tier 1) capital ratio of at least 5.0% (based on adjusted total assets); a core (Tier 1) risk-based capital ratio of a least 6.0%; and a total risk-based capital ratio of at least 10.0%. The Bank had capital ratios above the minimum to be well-capitalized at June 30, 2011 and December 31, 2010.

20

The Company is not aware of any market or institutional trends, events or uncertainties that are expected to have a material effect on liquidity, capital resources or operations or any current recommendations by its regulators which would have a material effect if implemented. The Company has not engaged in sub-prime lending activities and does not plan to engage in those activities in the future.

FINANCIAL CONDITION — JUNE 30, 2011, COMPARED TO DECEMBER 31, 2010

Balance Sheet

Cash and due from banks increased $18.9 million to $31.7 million at June 30, 2011.

Securities available for sale decreased $2.1 million due primarily to maturities and repayments of $17.4 million and $2.4 million in sales, offset by the purchase of $16.8 million of securities. The net unrealized gains on securities increased to $4.3 million as of June 30, 2011 compared to $2.9 million net unrealized gains on securities as of December 31, 2010.

Loans increased $12.9 million during the first half of 2011. Loan growth has improved as a result of efforts made in the last three years to add experienced lenders and loan products that borrowers want and need. The commercial lending products now offered, along with knowledgeable lenders, have given the Bank the ability to offer a full range of lending products to our existing and potential customers. The Bank is also concentrating on the expansion of our agricultural business and lending services.

Loans at June 30, 2011 and December 31, 2010 were as follows:

(dollars in thousands)

	June 30,			December 31,
	2011			2010
Real estate:
Commercial and land development	$	60,195		$	58,047
One-to-four family		51,653			47,204
Home equity		29,183			27,766
Multifamily		17,403			14,397
Real estate construction:
Commercial and land development		6,547			9,942
One-to-four family		421			301
Commercial		33,273			26,158
Consumer:
Auto:
Direct		2,193			2,474
Indirect		4,791			6,401
Other		863			989
		206,522			193,679
Unearned and deferred income		(386	)		(409	)
Allowance for loan losses		(2,881	)		(2,585	)
Total	$	203,255		$	190,685

Allowance for loan losses is a valuation allowance for probable incurred credit losses. This account is increased by the provision for loan losses and decreased by charge-offs less recoveries. The allowance balance required is established using the following methodology:

• All problem loans, impaired loans, past due loans and non-performing loans are closely monitored and analyzed by management on an ongoing basis. A classification rating is assigned to problem loans based on information about specific borrower situations and estimated collateral values. These loans are classified as either special mention, substandard, doubtful or loss.

• Specific problem loans, past due loans or non-performing loans are identified and analyzed individually in an effort to determine the expected probable incurred loss on these specifically identified loans.

• For problem loans that are not analyzed individually, a provision is established based on a historical migration analysis. The historical migration analysis identifies the percentage of problem loans that have been ultimately charged-off historically and over what time periods such loans have been charged off. Historical migration percentages are reviewed and adjusted by management to reflect various factors such as the growth and change in mix of the loan portfolio and by Comptroller of the Currency regulatory guidance. Non-individually analyzed loans are pooled and evaluated by loan type. The probable incurred loss on these pooled past due loans is estimated using historical loan loss experience.

21

• National and local economic conditions and other factors are also considered in determining the adequacy of the allowance for loan losses.

• A percentage of the allowance is allocated to specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged-off.

• The allowance for loan losses is reviewed on a regular basis to determine the adequacy of the allowance.

The allowance for loan losses to total loans outstanding was 1.40% as of June 30, 2011, which is an increase from 1.34% at December 31, 2010. The provision for loan losses for the six months ended June 30, 2011 was $297 thousand, compared to $1,122 thousand for the same period in 2010. Net charge-offs were $1 thousand for the six months ended June 30, 2011, compared to $1.5 million for the same period in 2010.

The ratio of non-performing loans to total loans was 2.20% ($4.5 million) for June 30, 2011 compared to 2.55% ($4.9 million) for December 31, 2010. Non-performing loans consist of loans that have been placed on non-accrual status and loans past due over 90 days and still accruing interest. Loans past due 30 through 89 days and still accruing decreased from $1.3 million as of December 31, 2010 to $1.2 million as of June 30, 2011.

Adversely classified assets at June 30, 2011 and December 31, 2010 were as follows:
(dollars in thousands)

	June 30, 2011					December 31, 2010
			Percent of					Percent of
	Amount		total loans			Amount		total loans
Classified loans:
Special mention	$	3,127		1.5	%	$	2,667		1.4	%
Substandard		8,543		4.2	%		9,878		5.1	%
Doubtful		—		0.0	%		—		0.0	%
Loss		—		0.0	%		—		0.0	%
Total classified loans		11,670		5.7	%		12,545		6.5	%
Other real estate owned		20		0.0	%		58		0.0	%
Total classified assets	$	11,690		5.7	%	$	12,603		6.5	%

Total classified loans decreased from $12.5 million at December 31, 2010 to $11.7 million at June 30, 2011. The Bank’s classification ratio was 26.4% and 32.0% as of June 30, 2011 and December 31, 2010. The classification ratio is calculated using total adversely classified assets (excluding special mention loans) divided by Tier 1 capital plus allowance for loan losses. Management believes the allowance for loan losses is adequate as of June 30, 2011.

Total deposits increased $27.4 million as of June 30, 2011 compared to December 31, 2010. The increase is primarily attributed to growth in noninterest-bearing demand accounts and interest-bearing demand accounts. Historically noninterest-bearing demand accounts have fluctuated based upon the liquidity needs of our customers. The increase in interest-bearing demand accounts can be attributed to the Company’s success in marketing our “Platinum Checking” and “Reward Checking” accounts.

Deposits at June 30, 2011 and December 31, 2010 were as follows:
(dollars in thousands)

	June 30,		December 31,
	2011		2010
Demand, noninterest-bearing	$	71,567	$	57,435
Demand, interest-bearing		147,227		133,987
Savings		54,799		49,804
Time, $100,000 and over		16,355		16,089
Time, other		46,580		51,819
	$	336,528	$	309,134

Shareholders’ Equity

Total shareholders’ equity increased $1.7 million to $40.7 million as of June 30, 2011 from $39.0 million as of December 31, 2010. Net income for the six months ended June 30, 2011 was $1.1 million, while dividends declared were $353 thousand. Accumulated other comprehensive income increased from $1.9 million on December 31, 2010 to $2.9 million as of June 30, 2011.

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The Bank is subject to regulatory capital requirements. The following is a summary of the actual and required regulatory capital amounts and ratios. Management believes the capital position of the Bank remains strong.

(dollars in thousands)

											To Be Well Capitalized
						For Capital					Under Prompt Corrective
June 30, 2011	Actual					Adequacy Purposes					Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total capital to risk-weighted assets	$	32,499		13.64	%	$	19,065		8.00	%	$	23,831		10.00	%
Tier 1 capital to risk-weighted assets		29,618		12.43	%		9,532		4.00	%		14,298		6.00	%
Tier 1 capital to average assets		29,618		7.76	%		15,274		4.00	%		19,092		5.00	%

											To Be Well Capitalized
						For Capital					Under Prompt Corrective
December 31, 2010	Actual					Adequacy Purposes					Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total capital to risk-weighted assets	$	31,032		13.59	%	$	18,267		8.00	%	$	22,834		10.00	%
Tier 1 capital to risk-weighted assets		28,447		12.46	%		9,134		4.00	%		13,701		6.00	%
Tier 1 capital to average assets		28,447		7.46	%		15,261		4.00	%		19,077		5.00	%

Statements of Cash Flows

Net cash from operating activities for the first six months of 2011 was $2.7 million compared to $2.0 million for the same period of 2010. Net cash from investing activities for the first six months of 2011 was $(5.6) million, compared to $3.2 million for the first six months of 2010. Net cash from financing activities was $21.7 million for the first six months of 2011 compared to $12.7 million for the first six months of 2010. The increase in cash and cash equivalents was $18.9 million during the first six months of 2011 primarily related to an increase in local governmental deposit accounts. Total cash and cash equivalents was $31.7 million as of June 30, 2011 compared to $12.8 million at December 31, 2010.

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COMPARISON OF RESULTS OF OPERATIONS FOR THE SIX MONTH PERIODS ENDED
June 30, 2011 and 2010

Net income for the first six months of 2011 was $1.1 million or $0.49 per basic and diluted earnings per share compared to $451 thousand or $0.20 per basic and diluted earnings per share for the same period in 2010. Net income was positively impacted by an increase in net interest income, a decrease in the provision for loan losses and a gain on sale of a portion of five loans guaranteed by the SBA, partially offset by an increase in noninterest expense.

Annualized return on average equity (“ROAE”) and average assets (“ROAA”) for the first six months of 2011 were 5.45% and 0.56%, respectively, compared with 2.28% and 0.24% for the first six months of 2010.

	Six months ended June 30,
			2011							2010
	Daily Average				Average			Daily Average				Average
(dollars in thousands)	Balance		Interest		yield/cost (1)			Balance		Interest		yield/cost (1)
Assets
Interest earning assets:
Securities:
Taxable	$	90,729	$	1,560		3.54	%	$	100,131	$	1,967		4.08	%
Nontaxable (tax equivalent basis) (2)		47,137		1,188		5.09	%		30,754		855		5.73	%
Interest bearing deposits		24,990		51		0.41	%		22,308		107		0.96	%
Net loans (including nonaccrual loans)		195,203		5,172		5.30	%		193,266		5,240		5.42	%
Total interest-earning assets		358,059		7,971		4.45	%		346,459		8,169		4.72	%
All other assets		26,229							27,001
Total assets	$	384,288						$	373,460
Liabilities and Shareholders’ Equity
Interest-bearing liabilities:
Interest-bearing checking	$	137,157		404		0.59	%	$	118,609		341		0.57	%
Savings		52,460		42		0.16	%		47,705		37		0.16	%
Time, $100,000 and over		17,654		114		1.29	%		17,344		158		1.82	%
Time, other		49,524		378		1.53	%		56,995		593		2.08	%
Federal Home Loan Bank advances		10,856		141		2.60	%		25,481		510		4.00	%
Short-term borrowings		8,691		21		0.48	%		10,592		26		0.49	%
Total interest-bearing liabilities		276,342		1,100		0.80	%		276,726		1,665		1.20	%
Demand deposits		65,401							53,890
Other liabilities		2,743							3,329
Shareholders’ equity		39,802							39,515
Total liabilities and shareholders’ equity	$	384,288						$	373,460
Net interest income (tax equivalent basis) (2)			$	6,871						$	6,504
Interest rate spread (3)						3.65	%						3.52	%
Net yield on interest-earning assets (4)						3.84	%						3.75	%
Ratio of average interest-earning assets to average interest-bearing liabilities						129.57	%						125.20	%

(1)	Average yields are computed using annualized interest income and expense for the periods.
(2)	Tax equivalence based on highest statutory rate of 34%.
(3)	Interest rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities.
(4)	Net yield on interest-earning assets represents net interest income as a percentage of average interest-earning assets.

Interest and dividend income totaled $7.6 million, a decrease of $311 thousand for the six months ended June 30, 2011 compared to the same period in 2010. Adjusted on a fully tax-equivalent (“FTE”) basis the yield on earning assets in the first six months of 2011 was 4.45% compared to 4.72% in the first six months of 2010. The decrease in the average yield on earning assets is primarily related to a lower average yield on taxable and nontaxable securities.

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Interest expense totaled $1.1 million, a decrease of $565 thousand or 33.9% for the six months ended June 30, 2011 as compared to the same period in 2010. The average cost for interest bearing liabilities was 0.80% for the first six months of 2011 compared to 1.20% for the same period in 2010.

The decrease of 40 basis points from the first six months of 2011 is the result of change in the average volume in the mix of interest bearing liabilities and declining interest rates. The increase in interest-bearing liabilities is due primarily to growth in interest-bearing demand accounts and savings accounts. The cost of interest-bearing demand deposits and savings accounts is relatively low compared to other interest-bearing liabilities. The Company has repaid $16.0 million of high-cost FHLB advances since November of 2010.

Net interest income increased $254 thousand, or 4.1% for the six month period ended June 30, 2011 as compared to June 30, 2010. During the first six months of 2011, the interest rate spread on a FTE basis increased by 13 basis points when compared to the first six months of 2010.

Provision for loan losses totaled $297 thousand for the first six months of 2011 compared to $1.1 million for the same period in 2010. The change in the provision was primarily due to a decrease in general loss reserves, slightly offset by an increase in specific loss allocations.

Non-performing loans were $4.5 million as of June 30, 2011, compared to $4.9 million as of December 31, 2010. Adversely classified loans decreased to $11.7 million at June 30, 2011 compared to $12.5 million as of December 31, 2010. Adversely classified loans are credits that Bank management has graded special mention, substandard and doubtful. Loans past due 30 through 89 days and still accruing decreased from $1.3 million as of December 31, 2010 to $1.2 million as of June 30, 2011.

Each quarter, management reviews the adequacy of the allowance for loan losses by reviewing the overall quality and risk profile of the Company’s loan portfolio, by reviewing specific problem credits and assessing the potential for losses based on expected cash flows or collateral values, by reviewing trends in problem loan levels, by updating loss history for the Company’s loans, by analyzing the growth and change in mix of the portfolio, and by analyzing economic trends that are believed to impact the Company’s borrowers. Management reviewed all of these factors and determined the allowance for loan losses was adequate as of June 30, 2011.

Noninterest income for the six months ended June 30, 2011 increased to $1.4 million or 9.4%, from $1.2 million for the same period in 2010. The change is primarily related to a $128 thousand gain on sale of the guaranteed portion of five SBA loans.

Noninterest expense for the six months ended June 30, 2011 was $6.3 million, an increase of 6.1% from $5.9 million for the same period in 2010. The increase in salaries and employee benefits was primarily related to the opening of the retail banking office in Fairlawn, Ohio and the increase of office hours at all retail banking locations implemented during the fourth quarter of 2010. There were also slight increases to data processing expense and net occupancy expense.

Income tax expense was $153 thousand for the six months ended June 30, 2011 which represents an increase of $207 thousand compared to the same period in 2010. Higher pre-tax income, partially offset by an increase in interest income from tax-exempt securities are the primary factors causing the increase in income tax expense.

Quarters ended June 30, 2011 and June 30, 2010 income statement highlights:

• Net interest income increased $269 thousand, compared to the same period in 2010. The change was driven by an increase in average earning assets and growth in low-cost core deposit funding.

• Interest income decreased $28 thousand or 0.7%, related to a decrease in interest income from taxable securities, partially offset by an increase in interest income from loans and nontaxable securities.

• Interest expense decreased $297 thousand or 36.3%, primarily related to a decrease in interest expense related to deposits and FHLB advances.

• The provision for loan losses was $150 thousand in the quarter ended June 30, 2011 compared to $615 thousand for the same period in 2010. The provision for loan losses in 2010 was primarily related to an increase in the specific allocation for two loan relationships. $1.4 million of loan charge-offs were recorded for these two loan relationships during the second quarter of 2010

• Securities gains were $46 thousand for the quarter ended June 30, 2011. No securities were sold during the quarter ended June 30, 2010.

• Loss on other real estate owned was $38 thousand for the quarter ended June 30, 2011. A valuation allowance was recorded on the only property held by the Company as of June 30, 2011.

• Salaries and benefits expense increased $98 thousand, primarily related to opening a retail banking office in Fairlawn, Ohio and an increase in office hours at all retail banking locations in December of 2010.

• FDIC Assessment expense decreased from $145 thousand in the quarter ended June 30, 2010 to $94 thousand for the same period in 2011. A change in the methodology of calculating the FDIC assessment, effective April 1, 2011, was

25

	responsible for the decrease. The new methodology is based on the asset size of a bank, instead of the amount of customer deposits.
•	Occupancy expense increased $74 thousand, compared to the same period in 2010. The change was the result of improvement made to existing Bank facilities in late 2010 and the purchase of a building in Fairlawn, Ohio during the second quarter of 2010.
•	Income tax expense was $104 thousand for the three months ended June 30, 2011, an increase of $166 thousand compared to the same period in 2010. Higher pre-tax income, partially offset by an increase in interest income from tax-exempt securities, compared to the same period in 2010, is the primary cause of the increase.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Economic Value of Equity

The economic value of equity, (EVE), is the difference between the net present value of the assets and the net present value of liabilities. EVE can be thought of as the liquidation value of the Bank on the date the calculation is made. Calculating EVE involves using a discount rate to calculate the net present value of assets and liabilities after making assumptions about the duration of assets and liabilities. As interest rates change, the discount rate changes and the change in interest rates effects the duration of assets and liabilities. If interest rates fall, for example, the duration of loans shortens since borrowers tend to prepay. Conversely the duration of loans increases if interest rates rise since borrowers are inclined to hold on to the favorable rate they were able to obtain in the lower interest rate environment.

The Board of Directors has established revised limits on a decline in the economic value of equity (EVE) and earnings at risk (EAR) given changes in interest rates. These limits are that EVE shall not decline by more than 10%, 20% and 30% given a 1%, 2% and 3% increase or decrease in interest rates respectively and that EAR shall not be greater than 8%, 16% or 24% given a 1%, 2% or 3% increase or decrease in interest rates respectively. The following illustrates our equity at risk in the economic value of equity model.

June 30, 2011

Basis Point Change in Rates	+300 bp			+200bp			+100bp			-100bp			-200bp	-300bp
Increase (decrease) in EVE		(10.5	)%		(4.9	)%		(0.9	)%		(4.3	)%	nm	nm
December 31, 2010
Basis Point Change in Rates	+300 bp			+200bp			+100bp			-100bp			-200bp	-300bp
Increase (decrease) in EVE		(12.9	)%		(6.8	)%		(1.9	)%		(4.3	)%	nm	nm

nm— not meaningful

The Bank is in compliance with the interest rate risk policy limits related to EVE as of June 30, 2011 and December 31, 2010.

Earnings at Risk

Earnings at risk, is the amount by which net interest income will be affected given a change in interest rates. The interest income and interest expense for each category of earning assets and interest bearing liabilities is recalculated after making up and down assumptions about the change in interest rates. Changes in prepayment speeds and repricing speeds are also taken into account when computing earnings at risk given a change in interest rates.

The following illustrates the effect on earnings or EAR given rate increases of 100 to 300 basis points and decreases in interest rates of 100 to 300 basis points.

June 30, 2011

Basis Point Change in Rates	+300bp			+200bp			+100bp			-100bp			-200bp	-300bp
Increase (decrease) in Earnings		1.7	%		1.3	%		0.7	%		(0.8	)%	nm	nm
December 31, 2010
Basis Point Change in Rates	+300bp			+200bp			+100bp			-100bp			-200bp	-300bp
Increase (decrease) in Earnings		(0.7	)%		(0.4	)%		(0.3	)%		(1.4	)%	nm	nm

nm— not meaningful

26

The Bank is in compliance with the interest rate risk policy limits related to EAR as of June 30, 2011 and December 31, 2010.

Item 4T. Controls and Procedures

The Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of June 30, 2011, pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures were, to the best of their knowledge, effective as of June 30, 2011, in timely alerting them to material information relating to the Company (including its consolidated subsidiary) required to be included in the Company’s periodic SEC filings.

There were no changes in the Company’s internal controls over financial reporting during the six months ended June 30, 2011 that materially affected or are reasonably likely to materially affect the Company’s internal controls over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings — None

Item 1A. Risk Factors — There have been no significant changes in the Company’s risk factors as outlined in the Company’s Form 10-K for the period ending December 31, 2010.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds — None

Item 3. Defaults Upon Senior Securities — None

Item 4. Removed and Reserved

Item 5. Other Information — None

Item 6. Exhibits

Exhibit No.		If incorporated by Reference,
Under Reg.		Documents with Which Exhibit
S-K, Item 601	Description of Exhibits	Was Previously Filed with SEC
(3.1)	Amended Articles of Incorporation	Annual Report 10-K filed 3/26/04 File No. 000-14773
(3.2)	Code of Regulations	Annual Report 10-K filed 3/26/04 File No. 000-14773
(10.1)	Directors Defined Benefit Plan Agreement	Annual Report 10-K filed 3/29/01 File No. 000-14773
(10.2)	Employment Agreement entered into by David C. Vernon and National Bancshares and First National Bank	Special Report 8-K filed 12/7/06
(10.3)	Special Separation Agreement of James R. VanSickle	Quarterly Report 10-Q filed 8/14/07 File No. 000-14473
(10.4)	Special Separation Agreement of Thomas R. Poe	Quarterly Report 10-Q filed 11/16/09 File No. 000-14473
(10.5)	Special Separation Agreement of Myron Filarski	Quarterly Report 10-Q filed 11/2/10 File No. 000-14473
(10.6)	Amendment to Employment Agreement entered into by David C. Vernon and National Bancshares Corporation and First National Bank	Annual Report 10-K filed 3/29/10 File No. 000-14773
(11)	Computation of Earnings per Share	See Consolidated Statements of Income and Comprehensive Income Page 4
(31.1)	Certification
(31.2)	Certification
(32)	Certification

Exhibit 101.1	Instance Document
Exhibit 101.2	Schema Document
Exhibit 101.3	Calculation Linkbase Document
Exhibit 101.4	Labels Linkbase Document
Exhibit 101.5	Presentation Linkbase Document
Exhibit 101.6	Definition Linkbase Document

No other exhibits are required to be filed herewith pursuant to Item 601 of Regulation S-K.

28

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.

	National Bancshares Corporation
Date: August 10, 2011	/s/David C. Vernon
	David C. Vernon, President and
	Chief Executive Officer
Date: August 10, 2011	/s/James R. VanSickle
	James R. VanSickle, Chief Financial Officer

29