National Bancshares 10-Q 2012 Q3 Quarterly report

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 September 30, 2012

OR

¨ 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.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T 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 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 filer	¨	Accelerated filer	¨
Non-accelerated filer	¨	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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of November 9, 2012.

Common Stock, Without Par Value: 2,218,465 shares Outstanding

NATIONAL BANCSHARES CORPORATION

Index

		Page Number
Part I. Financial Information
Item 1.	Financial Statements (Unaudited)
	Consolidated Balance Sheets as of September 30, 2012 and December 31, 2011		2
	Consolidated Statements of Income and Comprehensive Income for the three and nine months ended September 30, 2012 and 2011		3
	Condensed Consolidated Statement of Changes in Shareholders’ Equity for the nine months ended September 30, 2012 and 2011		5
	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2012 and 2011		6
	Notes to Consolidated Financial Statements (Unaudited)		7 - 23
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		23 - 29
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		29
��      Item 4T.	Controls and Procedures		30
Part II. Other Information
Item 1.	Legal Proceedings – None		31
Item 1A.	Risk Factors		31
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds - None		31
Item 3.	Defaults Upon Senior Securities – None		31
Item 4.	Mine Safety Disclosures – None		-
Item 5.	Other Information – None		31
Item 6.	Exhibits		31
Signatures			32
Exhibits			33 - 35

Item 1. Financial Statements

NATIONAL BANCSHARES CORPORATION

CONSOLIDATED BALANCE SHEETS (Unaudited)

(dollars in thousands)	Sept. 30, 2012			Dec. 31, 2011
ASSETS
Cash and due from banks	$	36,833		$	15,213
Time deposits with other financial institutions		0			246
Securities available for sale		131,450			150,175
Restricted equity securities		3,221			3,220
Loans held for sale		347			207
Loans, net of allowance for loan losses:
September 30, 2012 - $3,402; December 31, 2011 - $3,163		255,448			213,952
Premises and equipment, net		11,544			12,173
Goodwill		4,723			4,723
Accrued interest receivable		1,618			1,404
Cash surrender value of life insurance		2,703			2,649
Other assets		2,164			2,124
Total assets	$	450,051		$	406,086
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits
Noninterest bearing	$	92,487		$	70,810
Interest bearing		290,192			269,854
Total deposits		382,679			340,664
Repurchase agreements		12,627			10,168
Federal Home Loan Bank advances		5,000			8,000
Accrued interest payable		197			219
Accrued expenses and other liabilities		4,598			4,290
Total liabilities		405,101			363,341
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		4,875			4,815
Retained earnings		25,652			24,335
Treasury stock, at cost (71,063 and 76,259 shares)		(1,394	)		(1,495	)
Accumulated other comprehensive income		4,370			3,643
Total shareholders’ equity		44,950			42,745
Total liabilities and shareholders’ equity	$	450,051		$	406,086

See accompanying notes to consolidated financial statements.

2

NATIONAL BANCSHARES CORPORATION

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (Unaudited)

	Three months ended				Nine months ended
(dollars in thousands, except per share data)	Sept. 30, 2012		Sept. 30, 2011		Sept. 30, 2012			Sept. 30, 2011
Interest and dividend income
Loans, including fees	$	3,121	$	2,729	$	8,800		$	7,901
Securities:
Taxable		516		757		1,685			2,317
Nontaxable		448		408		1,361			1,192
Federal funds sold and other		23		26		46			77
Total interest and dividend income		4,108		3,920		11,892			11,487
Interest expense
Deposits		377		412		1,159			1,350
Short-term borrowings		11		12		32			33
Federal Home Loan Bank advances		51		57		152			198
Total interest expense		439		481		1,343			1,581
Net interest income		3,669		3,439		10,549			9,906
Provision for loan losses		209		150		1,339			447
Net interest income after provision for loan losses		3,460		3,289		9,210			9,459
Noninterest income
Checking account fees		268		273		785			808
Visa check card interchange fees		151		141		439			403
Deposit and miscellaneous service fees		95		84		291			239
Mortgage banking activities		120		68		324			145
Securities gains, net		0		122		0			173
Gain/loss on other real estate owned		1		0		(3	)		(38	)
Gain on sale of loans guaranteed by SBA		0		43		0			171
Other		79		86		237			269
Total noninterest income		714		817		2,073			2,170
Noninterest expense
Salaries and employee benefits		1,557		1,521		4,508			4,470
Data processing		304		296		889			865
Net occupancy		348		368		1,050			1,113
FDIC assessment		66		72		215			302
Professional and consulting fees		101		171		297			497
Franchise tax		102		88		302			272
Maintenance and repairs		41		44		150			179
Amortization of intangibles		0		22		0			65
Telephone		54		62		171			183
Marketing		62		60		184			180
Director fees		51		47		145			141
Director pension expense		33		21		60			47
Software expense		43		65		162			185
Postage and supplies		72		67		227			213
Other		259		252		746			738
Total noninterest expense		3,093		3,156		9,106			9,450
Income before income tax expense		1,081		950		2,177			2,179
Income tax expense		224		188		303			341
Net income		857		762		1,874			1,838

(Continued)

3

NATIONAL BANCSHARES CORPORATION

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (Unaudited) (Continued)

(Continued)	Three months ended					Nine months ended
	Sept. 30, 2012		Sept. 30, 2011			Sept. 30, 2012		Sept. 30, 2011
Other comprehensive income, net of tax:
Unrealized gains on securities available for sale, net of taxes of $(248), $(482), $(374) and $(983)		483		943			727		1,909
Reclassification adjustment for realized gains included in earnings, net of taxes of $0, $38, $0 and $59		0		(81	)		0		(114	)
Total other comprehensive income, net of taxes		483		862			727		1,795
Comprehensive income	$	1,340	$	1,624		$	2,601	$	3,633
Weighted average basic common shares outstanding		2,218,445		2,213,269			2,217,194		2,210,914
Weighted average diluted common shares outstanding		2,220,891		2,213,269			2,219,708		2,210,914
Basic and diluted earnings per common share	$	0.39	$	0.34		$	0.85	$	0.83
Dividends declared per common share	$	0.08	$	0.08		$	0.24	$	0.24

See accompanying notes to consolidated financial statements.

4

NATIONAL BANCSHARES CORPORATION

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

	Nine months ended,
(dollars in thousands, except per share data)	Sept. 30, 2012			Sept. 30, 2011
Balance at beginning of period	$	42,745		$	38,981
Net income		1,874			1,838
Other comprehensive income		727			1,795
Stock awards issued from Treasury Shares (5,196 and 7,296 shares)		77			98
Compensation expense under stock-based compensation plans		60			33
Cash dividends declared ($0.24 per share in 2012 and 2011)		(533	)		(530	)
Balance at end of period	$	44,950		$	42,215

See accompanying notes to consolidated financial statements.

5

NATIONAL BANCSHARES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

	Nine months ended
(dollars in thousands, except per share data)	Sept. 30, 2012			Sept. 30, 2011
Net cash from operating activities	$	4,888		$	4,815
Cash flows from investing activities
Proceeds from time deposits with other financial institutions		246			5,451
Securities available for sale
Proceeds from maturities and repayments		25,872			25,382
Proceeds from sales		0			10,905
Purchases		(7,336	)		(40,280	)
Purchases of property and equipment		(44	)		(356	)
Proceeds from the sale of loans guaranteed by SBA		0			2,360
Proceeds from the sale of other real estate owned		401			54
Net change in loans		(43,348	)		(19,083	)
Net cash from investing activities		(24,209	)		(15,567	)
Cash flows from financing activities
Net change in deposits		42,015			31,185
Net change in repurchase agreements		2,459			2,330
Repayments of Federal Home Loan Bank advances		(3,000	)		(6,000	)
Dividends paid		(533	)		(529	)
Net cash from financing activities		40,941			26,986
Net change in cash and cash equivalents		21,620			16,234
Beginning cash and cash equivalents		15,213			12,837
Ending cash and cash equivalents	$	36,833		$	29,071
Supplemental Disclosures
Cash paid for interest	$	1,365		$	1,664
Cash paid for income taxes	$	385		$	265
Supplemental noncash disclosures:
Transfer from loans to other real estate owned	$	693		$	54
Issuance of stock awards	$	77		$	98

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. 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, 2011. 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 and 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. 100,800 and 88,000 stock options were not considered in computing diluted earnings per common share for the three and nine month periods ending September 30, 2012 and 2011, respectively, because they were antidilutive.

Adoption of New Accounting Standards

In May, 2011, the FASB issued an amendment to achieve common fair value measurement and disclosure requirements between U.S. and International accounting principles. Overall, the guidance is consistent with existing U.S. accounting principles; however, there are some amendments that change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. The amendments in this guidance are effective for interim and annual reporting periods beginning after December 15, 2011. The adoption of this guidance has resulted in added disclosure in the consolidated financial statements.

7

Note 2 – Securities

(dollars in thousands)

Securities consist of the following at September 30, 2012 and December 31, 2011:

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
September 30, 2012
U.S. Government and federal agency	$	1,950	$	9	$	0		$	1,959
State and municipal		52,863		4,356		(18	)		57,201
Mortgage-backed: residential		69,994		2,300		(16	)		72,278
Equity securities		23		0		(11	)		12
Total	$	124,830	$	6,665	$	(45	)	$	131,450
December 31, 2011
U.S. Government and federal agency	$	2,430	$	16	$	0		$	2,446
State and municipal		53,841		3,592		(10	)		57,423
Mortgage-backed: residential		88,362		2,060		(136	)		90,286
Equity securities		23		0		(3	)		20
Total	$	144,656	$	5,668	$	(149	)	$	150,175

	For the nine months ended
	Sept. 30, 2012		Sept. 30, 2011
Sales of available for sale securities were as follows:
Proceeds	$	0	$	10,905
Gross gains		0		173
Gross losses		0		0
	For the three months ended
	Sept. 30, 2012		Sept. 30, 2011
Sales of available for sale securities were as follows:
Proceeds	$	0	$	8,511
Gross gains		0		122
Gross losses		0		0

The tax provision related to net realized gains and losses for the nine months ended September 30, 2012 and 2011 was $0 and $59. The tax provision related to net realized gains and losses for the three months ended September 30, 2012 and 2011 was $0 and $41.

The fair value of securities at September 30, 2012 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	$	1,124	$	1,126
Due from one to five years		5,250		5,447
Due from five to ten years		19,831		21,628
Due after ten years		28,608		30,959
Mortgage-backed: residential		69,994		72,278
Equity securities		23		12
Total	$	124,830	$	131,450

Securities pledged at September 30, 2012 and December 31, 2011 had a fair value of $55,802 and $63,941 and were pledged to secure public deposits and repurchase agreements.

8

At September 30, 2012 and December 31, 2011, 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.

Securities with unrealized losses at September 30, 2012 and December 31, 2011, 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
September 30, 2012	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
State and municipal	$	1,325	$	(17	)	$	317	$	(1	)	$	1,642	$	(18	)
Mortgage-backed: residential		1,220		(16	)		0		0			1,220		(16	)
Equity securities		12		(11	)		0		0			12		(11	)
Total temporarily impaired	$	2,557	$	(44	)	$	317	$	(1	)	$	2,874	$	(45	)
	Less than 12 months					12 months or more					Total
December 31, 2011	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
State and municipal	$	366	$	(3	)	$	891	$	(7	)	$	1,257	$	(10	)
Mortgage-backed: residential		22,639		(136	)		0		0			22,639		(136	)
Equity securities		20		(3	)		0		0			20		(3	)
Total temporarily impaired	$	23,025	$	(142	)	$	891	$	(7	)	$	23,916	$	(149	)

Management believes the unrealized losses of securities as of September 30, 2012 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 September 30, 2012:

September 30, 2012	Commercial			Commercial Real Estate		Residential Real Estate			Home Equity			Consumer			Total
Beginning balance	$	1,140		$	1,600	$	618		$	79		$	43		$	3,480
Provision for loan losses		78			94		62			(9	)		(16	)		209
Loans charged-off		(282	)		0		(23	)		0			0			(305	)
Recoveries		0			0		4			0			14			18
Ending balance	$	936		$	1,694	$	661		$	70		$	41		$	3,402

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

September 30, 2011	Commercial		Commercial Real Estate			Residential Real Estate		Home Equity			Consumer			Unallocated			Total
Beginning balance	$	634	$	1,332		$	775	$	75		$	63		$	2		$	2,881
Provision for loan losses		160		(3	)		40		(19	)		(26	)		(2	)		150
Loans charged-off		0		0			0		0			0			0			0
Recoveries		0		0			0		0			3			0			3
Ending balance	$	794	$	1,329		$	815	$	56		$	40		$	0		$	3,034

The following table presents the activity in the allowance for loan losses by portfolio segment for the nine months ended September 30, 2012:

September 30, 2012	Commercial			Commercial Real Estate			Residential Real Estate			Home Equity			Consumer			Total
Beginning balance	$	788		$	1,408		$	861		$	66		$	40		$	3,163
Provision for loan losses		430			768			37			95			9			1,339
Loans charged-off		(282	)		(482	)		(249	)		(91	)		(26	)		(1,130	)
Recoveries		0			0			12			0			18			30
Ending balance	$	936		$	1,694		$	661		$	70		$	41		$	3,402

The following table presents the activity in the allowance for loan losses by portfolio segment for the nine months ended September 30, 2011:

September 30, 2011	Commercial		Commercial Real Estate		Residential Real Estate			Home Equity			Consumer			Unallocated			Total
Beginning balance	$	460	$	1,267	$	675		$	100		$	53		$	30		$	2,585
Provision for loan losses		309		62		166			(45	)		(15	)		(30	)		447
Loans charged-off		0		0		(27	)		0			(17	)		0			(44	)
Recoveries		25		0		1			1			19			0			46
Ending balance	$	794	$	1,329	$	815		$	56		$	40		$	0		$	3,034

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 September 30, 2012 and December 31, 2011:

	Commercial		Commercial Real Estate		Residential Real Estate		Home Equity		Consumer		Total
September 30, 2012
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	0	$	33	$	0	$	0	$	0	$	33
Collectively evaluated for impairment		936		1,661		661		70		41		3,369
Total ending allowance balance	$	936	$	1,694	$	661	$	70	$	41	$	3,402
Recorded investment in loans:
Loans individually evaluated for impairment	$	286	$	1,075	$	44	$	0	$	0	$	1,405
Loans collectively evaluated for impairment		47,448		83,351		88,225		30,947		8,252		258,223
Total ending loans balance	$	47,734	$	84,426	$	88,269	$	30,947	$	8,252	$	259,628
December 31, 2011
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	151	$	183	$	182	$	0	$	0	$	516
Collectively evaluated for impairment		637		1,225		679		66		40		2,647
Total ending allowance balance	$	788	$	1,408	$	861	$	66	$	40	$	3,163
Recorded investment in loans:
Loans individually evaluated for impairment	$	597	$	2,420	$	320	$	0	$	0	$	3,337
Loans collectively evaluated for impairment		32,984		69,290		74,230		30,288		7,698		214,490
Total ending loans balance	$	33,581	$	71,710	$	74,550	$	30,288	$	7,698	$	217,827

11

The impact on interest income of impaired loans was immaterial to the consolidated statements of income for the three and nine month periods ending September 30, 2012 and 2011.

The following table presents loans individually evaluated for impairment by class of loans as of September 30, 2012 and December 31, 2011:

	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated		Nine-month Average Recorded Investment		Three-month Average Recorded Investment
September 30, 2012
With no related allowance recorded:
Real estate:
Commercial and land development	$	380	$	380	$	0	$	947	$	622
One-to-four family		44		44		0		45		44
Real estate construction:
Commercial and land development		652		652		0		657		654
Commercial		1,018		286		0		571		564
With an allowance recorded:
Real estate:
Commercial and land development		43		43		33		43		43
One-to-four family		0		0		0		0		0
Real estate construction:
Commercial and land development		0		0		0		0		0
Commercial		0		0		0		0		0
	$	2,137	$	1,405	$	33	$	2,263	$	1,927
	December 31, 2011						September 30, 2011
	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated		Nine-month Average Recorded Investment		Three-month Average Recorded Investment
December 31, 2011
With no related allowance recorded:
Real estate:
Commercial and land development	$	406	$	406	$	0	$	432	$	420
One-to-four family		46		46		0		50		48
Real estate construction:
Commercial and land development		1,252		1,252		0		1,298		1,281
Commercial		29		29		0		31		30
With an allowance recorded:
Real estate:
Commercial and land development		1,037		762		183		949		917
One-to-four family		274		274		182		286		278
Commercial		1,031		568		151		489		567
	$	4,075	$	3,337	$	516	$	3,535	$	3,541

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 September 30, 2012 and December 31, 2011:

	September 30, 2012				December 31, 2011
	Nonaccrual		Loans Past Due 90 or More Days Still Accruing		Nonaccrual		Loans Past Due 90 or More Days Still Accruing
Real estate:
Commercial and land development	$	423	$	0	$	1,168	$	0
One-to-four family		44		90		438		181
Home equity		0		0		382		0
Real estate construction:
Commercial and land development		652		0		1,252		0
Commercial		286		0		0		0
Consumer		0		0		596		0
	$	1,405	$	90	$	3,836	$	181

The following table presents the aging of the recorded investment in past due loans as of September 30, 2012 by class of loans:

	30 - 59 Days Past Due		60 - 89 Days Past Due		90 or More Days Past Due  (1)		Total Past Due		Loans Not Past Due (2)		Total
Real estate:
Commercial and land development	$	249	$	0	$	203	$	452	$	76,752	$	77,204
One-to-four family		135		128		113		376		65,866		66,242
Home equity		40		0		0		40		30,907		30,947
Multifamily		0		0		0		0		21,515		21,515
Real estate construction:
Commercial and land development		0		0		396		396		6,826		7,222
One-to-four family		0		0		0		0		512		512
Commercial		0		33		286		319		47,415		47,734
Consumer:
Auto:
Direct		0		10		0		10		1,699		1,709
Indirect		28		0		0		28		4,763		4,791
Other		2		0		0		2		1,750		1,752
	$	454	$	171	$	998	$	1,623	$	258,005	$	259,628

(1) All loans are nonaccrual status except for $90 of loans past due 90 or more days still on accrual.

(2) Includes $497 of loans on nonaccrual status.

13

The following table presents the aging of the recorded investment in past due loans as of December 31, 2011 by class of loans:

	30 - 59 Days Past Due (1)		60 - 89 Days Past Due		90 or More Days Past Due  (2)		Total Past Due		Loans Not Past Due (3)		Total
Real estate:
Commercial and land development	$	0	$	30	$	922	$	952	$	65,940	$	66,892
One-to-four family		245		297		572		1,114		55,754		56,868
Home equity		0		0		382		382		29,906		30,288
Multifamily		0		0		0		0		17,001		17,001
Real estate construction:
Commercial and land development		856		0		396		1,252		3,566		4,818
One-to-four family		0		0		0		0		681		681
Commercial		37		0		597		634		32,947		33,581
Consumer:
Auto:
Direct		1		0		0		1		2,071		2,072
Indirect		17		0		0		17		4,629		4,646
Other		14		0		0		14		966		980
	$	1,170	$	327	$	2,869	$	4,366	$	213,461	$	217,827

(1) Includes $856 of loans on nonaccrual status.

(2) All loans are nonaccrual status except for $181 of loans past due 90 or more days still on accrual.

(3) Includes $292 of loans on nonaccrual status.

Troubled Debt Restructuring

As of September 30, 2012, certain loans were modified as troubled debt restructurings. The modification of the terms of such loans included one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; or a permanent reduction of the recorded investment in the loan.

The Corporation has one commercial loan relationship with a balance of $660 that was individually evaluated for impairment whose loan terms have been modified in troubled debt restructurings as of September 30, 2012 and $1,661 as of December 31, 2011. $0 and $300 of specific reserves have been allocated for these loans as of September 30, 2012 and December 31, 2011. The Corporation has not committed to lend any additional amounts as of period ending September 30, 2012 and December 31, 2011 to the customer with outstanding loans that are classified as troubled debt restructurings.

There have been no new loans classified as troubled debt restructurings for the three and nine month periods ending September 30, 2012. The commercial loan that was modified as troubled debt restructurings experienced payment default within twelve months following the modification. A loan is considered to be in payment default once it is 30 days contractually past due under the modified terms.

In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under the Corporation’s internal underwriting policy.

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, commercial real estate loans, and loans to commercial enterprises secured by one-to-four family residential properties. 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.

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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.

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 September 30, 2012 and December 31, 2011, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

	Pass		Special Mention		Substandard		Doubtful		Total
September 30, 2012
Real estate:
Commercial and land development	$	72,011	$	1,918	$	3,275	$	0	$	77,204
One-to-four family		0		18		44		0		62
Real estate construction:
Commercial and land development		6,003		192		1,027		0		7,222
Commercial		44,881		983		1,870		0		47,734
	$	122,895	$	3,111	$	6,216	$	0	$	132,222
	Pass		Special Mention		Substandard		Doubtful		Total
December 31, 2011
Real estate:
Commercial and land development	$	61,706	$	1,986	$	3,200	$	0	$	66,892
One-to-four family		0		263		1,129		0		1,392
Real estate construction:
Commercial and land development		3,104		196		1,518		0		4,818
Commercial		29,744		2,442		1,395		0		33,581
	$	94,554	$	4,887	$	7,242	$	0	$	106,683

The Company considers the performance of the loan portfolio and its impact on the allowance for loan losses. For residential and consumer loan classes, the Company 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 September 30, 2012 and December 31, 2011:

			Consumer						Residential Real Estate
	Direct		Indirect		Other		Construction		Multifamily		One-to-four Family		Home Equity		Total
September 30, 2012
Performing	$	1,709	$	4,791	$	1,752	$	512	$	21,515	$	66,111	$	30,947	$	127,337
Nonperforming		0		0		0		0		0		69		0		69
	$	1,709	$	4,791	$	1,752	$	512	$	21,515	$	66,180	$	30,947	$	127,406
			Consumer						Residential Real Estate
	Direct		Indirect		Other		Construction		Multifamily		One-to-four Family		Home Equity		Total
December 31, 2011
Performing	$	2,072	$	4,646	$	980	$	681	$	17,001	$	54,904	$	29,906	$	110,190
Nonperforming		0		0		0		0		0		572		382		954
	$	2,072	$	4,646	$	980	$	681	$	17,001	$	55,476	$	30,288	$	111,144

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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 September 30, 2012. 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 a decrease of $11 for the nine months ended September 30, 2012 and a decrease of $4 for the three months ended September 30, 2012, which was offset by an equal increase in value during the three and nine months ended September 30, 2012 on the interest-rate swap with an outside counterparty, resulting in no impact on income as of September 30, 2012.

Summary information about the interest-rate swaps not designated as hedges between the Company and its borrower as of September 30, 2012 is as follows:

Notional amount	$	1,374
Weighted average receive rate		5.33	%
Weighted average pay rate		3.50	%
Weighted average maturity (years)		1.3
Fair value of interest-rate swaps	$	35

Summary information about the interest-rate swaps between the Company and outside parties as of September 30, 2012 is as follows:

Notional amount	$	1,374
Weighted average pay rate		5.33	%
Weighted average receive rate		3.50	%
Weighted average maturity (years)		1.3
Fair value of interest-rate swaps	$	(35	)

The fair value of the interest-rate swaps at September 30, 2012 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 Company’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 Company’s common stock at the date of grant; those option awards have vesting periods determined by the Company’s compensation committee and have terms that shall not exceed 10 years.

On May 20, 2008, the Company granted options to purchase 58,000 shares of stock to directors and certain key officers, of which 42,800 remain outstanding at September 30, 2012. 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 September 30, 2012.

On October 19, 2010, the Company granted options to purchase 43,000 shares of stock to directors and certain key officers, of which 40,300 remained outstanding at September 30, 2012. 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 September 30, 2012.

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On January 17, 2012, the Company granted options to purchase 58,000 shares of stock to directors and certain key officers, all of which remained outstanding at September 30, 2012. The exercise price of the options is $14.10 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 September 30, 2012.

The fair value of each option award is estimated on the date of grant using a closed form option valuation (Black-Scholes) model that uses the assumptions noted in the table below. Expected volatilities are based on historical volatilities of the Company’s common stock. The Company uses historical data to estimate option exercise and post-vesting termination behavior. (Employee and management options are tracked separately.) The expected term of options granted is based on historical data and represents the period of time that options granted are expected to be outstanding, which takes into account that the options are not transferrable. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of the grant.

The fair value of options granted in 2012 was $1.77 per option was determined using the following weighted-average assumptions as of grant date.

Risk-free interest rate	1.39	%
Expected term (years)	7.0
Expected stock price volatility	16.40	%
Dividend yield	2.27	%

A summary of the activity in the stock option plan for 2012 follows:

	Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value (in  thousands)
Outstanding - January 1, 2012		84,500	$	15.70
Granted		58,000		14.10
Exercised		0		0
Forfeited or expired		1,400		13.91
Outstanding – September 30, 2012		141,100	$	15.16		7.8	$	140
Fully vested and exercisable at Sept. 30, 2012		42,700	$	17.10		6.1	$	16
Expected to vest in future periods		98,400		14.15		7.9		124
Fully vested and expected to vest at Sept. 30, 2012		141,100	$	15.16		7.8	$	140

The total compensation cost that has been charged against income for the plan was $60 and $33 for the nine months ended September 30, 2012 and 2011 and $18 and $13 for the quarters ended September 30, 2012 and 2011. The total income tax benefit was $6 and $4 for the quarters ended September 30, 2012 and 2011 and $20 and $11 for the nine month periods ended September 30, 2012 and 2011. As of September 30, 2012, there was $101 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 3.8 years.

Restricted Stock Awards

On January 3, 2011, the Company granted restricted stock awards for 3,744 shares of the Company’s common stock to certain directors in lieu of cash payment of fees earned in 2010. 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 Company’s common stock on the date of the grant.

On July 1, 2011, the Company granted restricted stock awards for 3,552 shares of the Company’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 $48 was recorded in 2011. The fair value of the stock was determined using closing market price of the Company’s common stock on the date of the grant.

On January 3, 2012, the Company granted restricted stock awards for 3,330 shares of the Company’s common stock to certain directors in lieu of cash payment of fees earned in 2011. The awards vested immediately and the compensation expense related to the awards of $48 was recorded in 2011. The fair value of the stock was determined using closing market price of the Company’s common stock on the date of the grant.

17

On July 1, 2012, the Company granted restricted stock awards for 1,866 shares of the Company’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 $28 was recorded in 2012. The fair value of the stock was determined using closing market price of the Company’s common stock on the date of the grant.

Note 6 – Fair Value

(dollars in thousands)

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:

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 Corporation used the following methods and significant assumptions to estimate fair value:

Investment Securities: The fair values for investment securities are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2). 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). The fair values of level 3 investment securities are determined by the Accounting department, which reports to the Chief Financial Officer (CFO). The CFO reviews the fair values and these are reported to the ALCO (Asset Liability Management Committee) committee and the Board of Directors. Discounted cash flows are calculated using spread to swap and LIBOR curves that are updated to incorporate loss severities, volatility, credit spread and optionality. During times when trading is more liquid, broker quotes are used (if available) to validate the model. At least annually, a third party is engaged to validate the discounted cash flows and resulting fair value. Rating agency and industry research reports as well as defaults and deferrals on individual securities are reviewed and incorporated into the calculations.

Interest Rate Swaps: The fair values of interest rate swaps are based on valuation models using observable market data as of the measurement date (Level 2).

Impaired Loans: 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 usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

Other Real Estate Owned: Certain commercial and residential real estate properties classified as other real estate owned (OREO) are measured at fair value, less costs to sell, establishing a new cost basis. Fair values are based on recent real estate appraisals. These appraisals may use 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 independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.

Appraisals for both collateral-dependent impaired loans and other real estate owned are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Company. Once received, a member of the Credit Department reviews the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison with via independent data sources such as recent market data or industry-wide statistics. On an annual basis, the Company compares

18

the actual selling price of collateral that has been sold to the most recent appraised value to determine what additional adjustment should be made to the appraisal value to arrive at fair value. A discount is applied when deemed necessary, and is at the discretion of management based on the most recent appraisal analysis and guidelines set by management.

Loans Held for Sale: Loans held for sale are carried at the lower of cost or fair value. The fair value of loans held for sale is determined using quoted prices for similar assets, adjusted for specific attributes of that loan or other observable market data, such as outstanding commitments from third party investors (Level 2).

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 September 30, 2012 Using
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Available for sale securities:
U.S. Government and federal agency	$	0	$	1,959	$	0
State and municipal		0		57,201		0
Mortgage-backed securities - residential		0		72,264		14
Equity securities		12		0		0
Interest rate swaps		0		35		0
Liabilities:
Interest rate swaps	$	0	$	35	$	0
	Fair Value Measurements at December 31, 2011 Using
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Available for sale securities:
U.S. Government and federal agency	$	0	$	2,446	$	0
State and municipal		0		53,890		3,533
Mortgage-backed securities - residential		0		90,270		16
Equity securities		20		0		0
Interest rate swaps		0		46		0
Liabilities:
Interest rate swaps	$	0	$	46	$	0

The table below presents a reconciliation of all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and nine months ended September 30, 2012:

	Nine Months			Three Months
	2012			2012
Beginning Balance	$	3,549		$	196
State and Municipal:
Principal repayments
Total gains or losses for the period included in other comprehensive income		0			0
Maturities		(3,031	)		(181	)
Transfers from Level 3 to Level 2		(502	)		0
Mortgage-backed securities:
Principal repayments		(2	)		(1	)
Ending balance	$	14		$	14

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Two state and municipal securities with a fair value of $499 as of September 30, 2012 were transferred from Level 3 to Level 2 because observable market data became available for securities with similar characteristics. The Company’s policy is to recognize transfers into or out of a level as of the end of the reporting period.

The Company’s state and municipal security valuations were supported by analysis prepared by an independent third party. The third party uses Interactive Data Corporation (IDC) as the primary source for security valuations. IDC’s evaluations are based on market data. IDC utilizes evaluated pricing models that vary based by asset class and include available trade, bid, and other market information. Generally, the methodology includes broker quotes, proprietary models, vast descriptive terms and conditions databases, as well as extensive quality control programs. IDC evaluators follow multiple review processes to assess the available market, credit, and deal level information to support the evaluation process. If they determine sufficient objectively verifiable information is not available to support a valuation, they will discontinue evaluating that security. Given this approach, the state and municipal security with the pricing source of IDC is considered level 2.

For level 3 investments, the Company uses significant unobservable inputs that reflect a reporting entity’s own assumptions that market participants would use in pricing an asset or liability. The Company uses different valuation processes such as market approach, income approach, or the cost approach.

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 September 30, 2012 Using
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Impaired loans
Commercial	$	0	$	0	$	264
Commercial and land development		0		0		406
One-to-four family		0		0		0
	Fair Value Measurements at December 31, 2011 Using
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Impaired loans
Commercial	$	0	$	0	$	417
Commercial and land development		0		0		974
One-to-four family		0		0		92
Other real estate owned		0		0		18

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a principal amount of $703, with a valuation allowance of $33, resulting in an increase in the provision for loan loss of $0 in the three months ended September 30, 2012 and an increase of $549 in the nine months ended September 30, 2012. Impaired loans had a principal amount of $1,999, with a valuation allowance of $516, resulting in an additional provision of $247 for loan loss in the year ended December 31, 2011.

There was no valuation allowance related to other real estate property at September 30, 2012. There were no write-downs of other real estate in 2012. Other real estate owned measured at fair value less costs to sell, had a net carrying amount of $18, which is made up of the outstanding balance of $131, net of a valuation allowance of $113 at December 31, 2011. The property was written-down $38 in 2011.

20

The following table presents quantitative information about level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at September 30, 2012:

	Fair value		Valuation Technique(s)	Unobservable Input(s)	Range (Weighted Average)
Impaired loans – Commercial	$	264	Sales comparison approach	Adjustment for differences between comparable sales	10%
Impaired loans – Commercial and land development	$	406	Sales comparison approach	Adjustment for differences between comparable sales	10%-46% (15%)

21

Carrying amount and estimated fair values of financial instruments at September 30, 2012 and December 31, 2011 were as follows:

			Fair Value Measurements at September 30, 2012
	Carrying Amount		Level 1		Level 2		Level 3		Total
Financial assets
Cash and cash equivalents	$	36,833	$	36,833	$	0	$	0	$	36,833
Securities available for sale		131,450		12		131,424		14		131,450
Restricted equity securities		3,221		na		na		na		na
Loans, net		255,448		0		0		257,393		257,393
Loans held for sale		347		0		347		0		347
Accrued interest receivable		1,618		0		850		768		1,618
Interest rate swaps		35		0		35		0		35
Financial liabilities
Deposits	$	382,679	$	321,110	$	62,201	$	0	$	383,311
Short-term borrowings		12,627		0		12,627		0		12,627
Federal Home Loan Bank		5,000		0		5,220		0		5,220
advances
Accrued interest payable		197		30		167		0		197
Interest rate swaps		35		0		35		0		35
							Carrying Amount		Fair Value
December 31, 2011
Financial assets
Cash and cash equivalents							$	15,213	$	15,213
Time deposits with other financial institutions								246		246
Securities available for sale								150,175		150,175
Restricted equity securities								3,220		na
Loans, net								213,952		215,490
Accrued interest receivable								1,404		1,404
Interest rate swaps								46		46
Financial liabilities
Deposits							$	340,664	$	341,356
Short-term borrowings								10,168		10,168
Federal Home Loan Bank advances								8,000		8,299
Accrued interest payable								219		219
Interest rate swaps								46		46

The methods and assumptions used to estimate fair value on the preceding tables are described as follows:

(a) Cash and Cash Equivalents: The carrying amounts of cash and short-term instruments approximate fair values and are classified Level 1.

(b) Restricted Equity Securities: It is not practical to determine the fair value of FHLB stock due to restrictions placed on its transferability.

(c) Loans: Fair values of loans, excluding loans held for sale, are estimated as follows: For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values resulting in a Level 3 classification. Fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality resulting in a Level 3 classification. Impaired loans are valued at the lower of cost or fair value as described previously. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price.

The fair value of loans held for sale is estimated based upon binding contracts and quotes from third party investors resulting in a Level 2 classification.

(d) 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 amount) resulting in a Level 1 classification. Fair values for fixed rate certificates of deposit are estimated using a discounted cash flows calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits resulting in a Level 2 classification.

22

(e) Short-term borrowings: The carrying amounts of federal funds purchased, borrowings under repurchase agreements, and other short-term borrowings, generally maturing within ninety days, approximate their fair values resulting in a Level 2 classification.

(f) Federal Home Loan Bank advances: The fair values of the Company’s long-term borrowings are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 2 classification.

(g) Accrued interest receivable/payable: The carrying amounts of accrued interest approximate fair value resulting in a Level 1, Level 2 or Level 3 classification that is consistent with the associated asset or liability.

(h) Off-balance sheet instruments: Fair values for off-balance sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The fair value of commitments is not 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, 2011. 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 $450.1 million as of September 30, 2012, from $406.1 million at December 31, 2011.

Net income for the first nine months of 2012 was $1.9 million compared to $1.8 million for the same period of 2011 or $0.85 and $0.83 basic and diluted per share, respectively. Net income was positively impacted by an increase in net interest income and a decrease in noninterest expense and negatively impacted by an increase in the provision for loan losses.

Net interest income for the nine month period ended September 30, 2012 increased $643 thousand, or 6.5%, compared to the same period in 2011, despite a declining interest rate environment. The provision for loan losses increased to $1,339 thousand for the nine months ended September 30, 2012 compared to $447 thousand for the same period in 2011.

Noninterest income for the first nine months of 2012 decreased $97 thousand compared to the same period in 2011. Noninterest income in 2011 included $171 thousand of gains recorded on the sale of the guaranteed portion of six Small Business Administration (SBA) loans, and $173 thousand of gains on the sale of securities. Mortgage banking income increased $179 thousand for the nine month period ended September 30, 2012 compared to the same period in 2011.

23

Noninterest expense for the first nine months of 2012 decreased $344 thousand compared to the same period in 2011 due primarily to a decrease in professional and consulting expense and the FDIC assessment expense. Income tax expense was $303 thousand for the nine months ended September 30, 2012 compared to $341 thousand for the same period in 2011.

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 September 30, 2012 and December 31, 2011.

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 – SEPTEMBER 30, 2012, COMPARED TO DECEMBER 31, 2011

Balance Sheet

Cash and due from banks increased $21.6 million to $36.8 million at September 30, 2012, primarily related to an increase in local governmental deposit accounts.

Securities available for saledecreased $18.7 million due primarily to maturities and repayments of $25.9 million, offset by the purchase of $7.3 million securities. The net unrealized gains on securities increased to $6.6 million as of September 30, 2012 compared to $5.5 million net unrealized gains on securities as of December 31, 2011.

Loans increased $41.5 million during the first nine months of 2012. 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 September 30, 2012 and December 31, 2011 were as follows:

(dollars in thousands)

	September 30, 2012			December 31, 2011
Real estate:
Commercial and land development	$	77,168		$	66,886
One-to-four family		66,266			56,917
Home equity		30,684			30,086
Multifamily		21,537			17,041
Real estate construction:
Commercial and land development		7,238			4,822
One-to-four family		514			683
Commercial		47,516			33,473
Consumer:
Auto:
Direct		1,693			2,065
Indirect		4,693			4,541
Other		1,750			980
		259,059			217,494
Unearned and deferred income		(209	)		(379	)
Allowance for loan losses		(3,402	)		(3,163	)
Total	$	255,448		$	213,952

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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.

• 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 increased from $3.2 million as of December 31, 2011 to $3.4 million at September 30, 2012. The allowance for loan losses to total loans decreased from 1.46% at year-end 2011 to 1.31% at September 30, 2012. The provision for loan losses for the nine months ended September 30, 2012 was $1.3 million compared to $447 thousand for the same period in 2011. The increase in the provision in 2012 was related to growth in loans during 2012 and decreases in the collateral valuations based on information obtained in 2012 for two commercial real estate loan relationships that were deemed collateral dependant. Net charge-offs were $1.1 million for the nine months ended September 30, 2012, compared to net recoveries of $2 thousand for the same period in 2011. Charge-offs of $481 thousand and $282 thousand were recorded on the aforementioned commercial real estate loans during the second and third quarters of 2012, respectively.

Total nonperforming loans decreased from $4.0 million as of December 31, 2011 to $1.5 million at September 30, 2012. Non-performing loans consist of loans placed on non-accrual status and loans past due 90 or more days and still accruing interest. Loans past due 30 through 89 days and still accruing, decreased from $641 thousand to $618 thousand as of September 30, 2012.

Adversely classified assets at September 30, 2012 and December 31, 2011 were as follows:

(dollars in thousands)

	September 30, 2012			December 31, 2011
Classified loans:
Substandard	$	6,216		$	7,242
Doubtful		0			0
Loss		0			0
Total classified loans		6,216			7,242
Other real estate owned		452			18
Total classified assets	$	6,668		$	7,260
Total classified loans to total assets		2.4	%		3.3	%
Total classified assets to total assets		1.5	%		1.8	%

Total classified loans decreased from $7.2 million at December 31, 2011 to $6.2 million at September 30, 2012. The Bank’s classification ratio was 18.3% and 21.1% as of September 30, 2012 and December 31, 2011. 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 September 30, 2012.

Total deposits increased $42.0 million as of September 30, 2012 compared to December 31, 2011. 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 “Bonus Checking” accounts.

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Deposits at September 30, 2012 and December 31, 2011 were as follows:

(dollars in thousands)

	September 30, 2012		December 31, 2011
Demand, noninterest-bearing	$	92,487	$	70,810
Demand, interest-bearing		168,127		154,410
Savings		60,496		55,781
Time, $100,000 and over		18,167		15,305
Time, other		43,402		44,358
	$	382,679	$	340,664

Shareholders’ Equity

Total shareholders’ equity increased $2.2 million to $45.0 million as of September 30, 2012 from $42.7 million as of December 31, 2011. Net income for the nine months ended September 30, 2012 was $1.9 million, while dividends declared were $533 thousand. Accumulated other comprehensive income increased from $3.6 million on December 31, 2011 to $4.4 million as of September 30, 2012.

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)

	Actual					For Capital Adequacy Purposes					To Be Well Capitalized Under Prompt Corrective Action Provisions
September 30, 2012
	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total capital to risk-weighted assets	$	36,430		12.70	%	$	22,950		8.00	%	$	28,687		10.00	%
Tier 1 capital to risk-weighted assets		33,028		11.51	%		11,475		4.00	%		17,213		6.00	%
Tier 1 capital to average assets		33,028		7.45	%		17,437		4.00	%		22,171		5.00	%
	Actual					For Capital Adequacy Purposes					To Be Well Capitalized Under Prompt Corrective Action Provisions
December 31, 2011
	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total capital to risk-weighted assets	$	34,367		13.74	%	$	20,015		8.00	%	$	25,019		10.00	%
Tier 1 capital to risk-weighted assets		31,256		12.49	%		10,008		4.00	%		15,011		6.00	%
Tier 1 capital to average assets		31,256		7.78	%		16,069		4.00	%		20,086		5.00	%

Statements of Cash Flows

Net cash from operating activities for the first nine months of 2012 was $4.9 million compared to $4.8 million for the same period of 2011. Net cash from investing activities for the first nine months of 2012 was $(24.2) million, compared to $(15.6) million for the first nine months of 2011. Net cash from financing activities was $40.9 million for the first nine months of 2012 compared to $27.0 million for the first nine months of 2011. The increase in cash and cash equivalents was $21.6 million during the first nine months of 2012 primarily related to an increase in local governmental deposit accounts. Total cash and cash equivalents was $36.8 million as of September 30, 2012 compared to $15.2 million at December 31, 2011.

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COMPARISON OF RESULTS OF OPERATIONS FOR THE NINE MONTH PERIODS ENDED

September 30, 2012 and 2011

Net income for the first nine months of 2012 was $1.9 million or $0.85 per basic and diluted earnings per share compared to $1.8 million or $0.83 per basic and diluted earnings per share for the same period in 2011. Net income was positively impacted by a $643 thousand increase in net interest income and a $344 thousand decrease in noninterest expense and negatively impacted by a $892 thousand increase in the provision for loan losses.

Annualized return on average equity (“ROAE”) and average assets (“ROAA”) for the first nine months of 2012 were 5.74% and 0.58%, respectively, compared with 6.08% and 0.62% for the first nine months of 2011.

					Nine months ended September 30,
			2012							2011
(dollars in thousands)	Daily Average Balance		Interest		Average yield/cost (1)			Daily Average Balance		Interest		Average yield/cost (1)
Assets
Interest earning assets:
Securities:
Taxable	$	88,192	$	1,685		2.62	%	$	91,265	$	2,317		3.49	%
Nontaxable (tax equivalent basis) (2)		57,048		2,062		5.19	%		47,402		1,806		5.21	%
Interest bearing deposits		29,105		46		0.21	%		24,990		77		0.41	%
Net loans (including nonaccrual loans)		235,184		8,800		5.00	%		198,676		7,901		5.30	%
Total interest-earning assets		409,529		12,593		4.11	%		362,333		12,101		4.45	%
All other assets		21,521							32,146
Total assets	$	431,050						$	394,478
Liabilities and Shareholders’ Equity
Interest-bearing liabilities:
Interest-bearing checking	$	160,970		536		0.44	%	$	146,007		583		0.63	%
Savings		57,766		62		0.14	%		53,208		61		0.15	%
Time, $100,000 and over		17,518		130		0.99	%		17,144		167		1.30	%
Time, other		44,137		431		1.30	%		48,277		539		1.49	%
Federal Home Loan Bank advances		7,967		152		2.55	%		10,231		198		2.58	%
Short-term borrowings		10,440		32		0.41	%		9,127		33		0.48	%
Total interest-bearing liabilities		298,798		1,343		0.60	%		283,994		1,581		0.74	%
Demand deposits		84,121							67,063
Other liabilities		4,483							3,016
Shareholders’ equity		43,648							40,406
Total liabilities and shareholders’ equity	$	431,050						$	394,478
Net interest income (tax equivalent basis) (2)			$	11,250						$	10,520
Interest rate spread (3)						3.51	%						3.71	%
Net yield on interest-earning assets (4)						3.67	%						3.87	%
Ratio of average interest-earning assets to average interest-bearing liabilities						137.06	%						127.58	%

(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 $11.9 million, an increase of $405 thousand for the nine months ended September 30, 2012 compared to the same period in 2011. Adjusted on a fully tax-equivalent (“FTE”) basis the yield on earning assets in the first nine months of 2012 was 4.11% compared to 4.45% in the first nine months of 2011. The decrease in the average yield on earning assets is primarily related to the overall decline in interest rates.

27

Interest expense totaled $1.3 million, a decrease of $238 thousand or 15.1% for the nine months ended September 30, 2012 as compared to the same period in 2011. The average cost for interest bearing liabilities was 0.60% for the first nine months of 2012 compared to 0.74% for the same period in 2011.

The decrease of 14 basis points from the first nine months of 2012 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.

Net interest incomeincreased $643 thousand, or 6.5% for the nine month period ended September 30, 2012 as compared to September 30, 2011. During the first nine months of 2012, the interest rate spread on a FTE basis decreased 20 basis points to 3.51% when compared to the first nine months of 2011.

Provision for loan losses totaled $1.3 million for the first nine months of 2012 compared to $447 thousand for the same period in 2011. The increase in the provision for loan losses is primarily related to changes in the collateral valuations based on information obtained in 2012 for two commercial real estate loan relationships. Charge-offs of $481 thousand and $282 thousand were recorded for these relationships, in the second and third quarters of 2012 respectively.

Total non-performing loans decreased from $4.0 million as of December 31, 2011 to $1.5 million at September 30, 2012. The decrease was primarily due to three loans that were transferred to other real estate owned and one significant relationship that was changed from nonaccrual status to accrual. Non-performing loans consist of loans placed on non-accrual status and loans past due 90 or more days and still accruing interest. Adversely classified loans, including substandard and doubtful, decreased from $7.2 million at December 31, 2011 to $6.2 million at September 30, 2012. Loans past due 30 through 89 days and still accruing, decreased from $641 thousand to $618 thousand as of September 30, 2012.

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 September 30, 2012.

Noninterest income for the nine months ended September 30, 2012 decreased to $2.1 million or 4.5%, from $2.2 million for the same period in 2011. Noninterest income in 2011 included $171 thousand of gains recorded on the sale of the guaranteed portion of six Small Business Administration (SBA) loans and $173 thousand of gains recorded on the sale of securities. Mortgage banking income increased $179 thousand for the nine month period ended September 30, 2012 compared to the same period in 2011, due to an increase of mortgage loans sold.

Noninterest expense for the nine months ended September 30, 2012 was $9.1 million, a decrease of 3.6% from $9.5 million for the same period in 2011 due primarily to a decrease in professional and consulting expense, primarily related to a reduction of legal expenses and a reduction in the use of outside information technology consultants and a decrease in the FDIC assessment expense, due to a change in the methodology of calculating the FDIC assessment.

Income tax expense was $303 thousand for the nine months ended September 30, 2012 which represents a decrease of $38 thousand compared to the same period in 2011. An increase in interest income from tax-exempt securities are the primary factors causing the decrease in income tax expense.

Quarters ended September 30, 2012 and September 30, 2011 income statement highlights:

• Net interest income increased $230 thousand, compared to the same period in 2011. The change was driven by an increase in average earning assets and growth in low-cost core deposit funding.

• Interest income increased $188 thousand or 4.8%, related to an increase in interest income from loans and nontaxable securities, partially offset by a decrease in interest income taxable securities.

• Interest expense decreased $42 thousand or 8.7%, primarily related to a decrease in interest expense related to deposits due to the declining interest rate environment.

• The provision for loan losses was $209 thousand in the quarter ended September 30, 2012 compared to $150 thousand for the same period in 2011. The increase in the provision for loan losses in the third quarter of 2012 was primarily related to the growth in the loan portfolio.

• Mortgage banking income increased from $68 thousand during the quarter ended September 30, 2011 to $120 thousand during the same period in 2012. The Bank experienced an increase of mortgage loans sold in 2012 compared to 2011.

28

• Professional and consulting expense was $101 thousand for the three months ended September 30, 2012, compared to $171 thousand for the same period in 2011. The decrease is primarily related to a reduction of legal expenses and a reduction in the use of outside information technology consultants.

• Income tax expense was $224 thousand for the three months ended September 30, 2012, an increase of $36 thousand compared to the same period in 2011. Higher pre-tax income, partially offset by an increase in interest income from tax-exempt securities, compared to the same period in 2011, 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%, 30% and 35% given a 1%, 2%, 3% and 4% increase or decrease in interest rates respectively and that EAR shall not be greater than 5%, 10%, 15% or 20% given a 1%, 2%, 3% or 4% increase or decrease in interest rates respectively. The following illustrates our equity at risk in the economic value of equity model.

September 30, 2012
Basis Point Change in Rates	+400 bp		+300 bp		+200 bp		+100 bp		-100 bp		-200 bp	-300 bp	-400 bp
Increase (decrease) in EVE	(10.7	)%	(5.4	)%	(0.8	)%	2.1	%	(7.9	)%	nm	nm	nm
December 31, 2011
Basis Point Change in Rates	+400 bp		+300 bp		+200 bp		+100 bp		-100 bp		-200 bp	-300 bp	-400 bp
Increase (decrease) in EVE	(18.7	)%	(13.3	)%	(6.3	)%	(1.1	)%	(8.2	)%	nm	nm	nm

nm – not meaningful

The Bank is in compliance with the interest rate risk policy limits related to EVE as of September 30, 2012 and December 31, 2011.

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 400 basis points and decreases in interest rates of 100 to 400 basis points.

September 30, 2012
Basis Point Change in Rates	+ 400 bp		+300 bp		+200 bp		+100 bp		-100 bp		-200 bp	-300 bp	-400 bp
Increase (decrease) in Earnings	2.1	%	1.2	%	0.9	%	0.6	%	(0.6	)%	nm	nm	nm
December 31, 2011
Basis Point Change in Rates	+400 bp		+300 bp		+200 bp		+100 bp		-100 bp		-200 bp	-300 bp	-400 bp
Increase (decrease) in Earnings	(1.1	)%	(1.0	)%	(0.4	)%	(0.1	)%	(0.4	)%	nm	nm	nm

nm – not meaningful

The Bank is in compliance with the interest rate risk policy limits related to EAR as of September 30, 2012 and December 31, 2011.

29

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 September 30, 2012, 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 September 30, 2012, 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 nine months ended September 30, 2012 that materially affected or are reasonably likely to materially affect the Company’s internal controls over financial reporting.

30

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, 2011.
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds - None
Item 3.	Defaults Upon Senior Securities - None
Item 4.	Mine Safety Disclosures - None
Item 5.	Other Information - None
Item 6.	Exhibits

Exhibit No. Under Reg. S-K, Item 601	Description of Exhibits	If incorporated by Reference, Documents with Which Exhibit 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 03/27/12 File No. 000-14773
(10.7)	Deferred Compensation Plan	Quarterly Report 10-Q filed 11/10/11 File No. 000-14473
(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.

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SIGNATURES

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

National Bancshares Corporation

Date: November 9, 2012	/s/ Mark R. Witmer
	Mark R. Witmer, President and
	Chief Executive Officer
Date: November 9, 2012	/s/ James R. VanSickle
	James R. VanSickle, Chief Financial Officer

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