- Quarterly Report (10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2011

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

For the transition period from _________ to __________

Commission file number 000-09785

TRI CITY BANKSHARES CORPORATION

(Exact name of registrant as specified in its charter)

Wisconsin (State or other jurisdiction of incorporation or organization)	39-1158740 (IRS Employer Identification No.)

6400 S. 27th Street, Oak Creek, WI (Address of principal executive offices)

53154 (Zip Code)

(414) 761-1610 (Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES X NO ___

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

YES X NO ___

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

Large accelerated filer ____ Accelerated filer ____

Non-accelerated filer (Do not check if a smaller reporting company) ____

Smaller reporting company X

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

YES ___ NO X

The number of shares outstanding of the registrant’s $1.00 par value common stock as of August 5, 2011 was 8,904,915 shares.

PART I - FINANCIAL INFORMATION

ITEM 1 -	FINANCIAL STATEMENTS	4

ITEM 2 -	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	27

ITEM 3 -	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	42

ITEM 4 -	CONTROLS AND PROCEDURES	42

PART II - OTHER INFORMATION

ITEM 1 -	LEGAL PROCEEDINGS	43

ITEM 1A -	RISK FACTORS	43

ITEM 2 -	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	44

ITEM 3 -	DEFAULTS UPON SENIOR SECURITIES	44

ITEM 5 -	OTHER INFORMATION	44

ITEM 6 -	EXHIBITS	44

Signatures		45

Exhibit Index		46

PART I - FINANCIAL INFORMATION

ITEM 1 - FINANCIAL STATEMENTS

TRI CITY BANKSHARES CORPORATION

CONSOLIDATED BALANCE SHEETS

	June 30, 2011 (Unaudited)		December 31, 2010
ASSETS
Cash and due from banks	$	26,412,385	$	39,849,020
Federal funds sold		3,365,930		88,221,710
Cash and cash equivalents		29,778,315		128,070,730
Held to maturity securities, fair value of $317,062,830 and $227,276,572 as of June 30, 2011 and December 31 2010, respectively		314,946,712		227,803,832
Loans, less allowance for loan losses of $9,874,383 and $9,526,592 as of June 30, 2011 and December 31, 2010, respectively		712,810,148		737,302,103
Premises and equipment – net		19,665,110		20,321,474
Cash surrender value of life insurance		12,256,383		12,024,264
Mortgage servicing rights – net		1,610,009		1,702,696
Core deposit intangible		1,214,244		1,423,354
Other real estate owned		8,565,443		5,407,205
Other assets		8,211,476		7,631,485
TOTAL ASSETS	$	1,109,057,840	$	1,141,687,143


LIABILITIES AND STOCKHOLDERS’ EQUITY

LIABILITIES
Deposits
Demand	$	161,765,574	$	163,121,460
Savings and NOW		624,421,048		644,239,785
Other time		196,786,962		211,086,047
Total Deposits		982,973,584		1,018,447,292
Federal funds purchased and securities sold under repurchase agreements		1,026,327		-
Other borrowings		1,122,235		4,815,964
Other liabilities		4,662,790		4,089,334
Total Liabilities		989,784,936		1,027,352,590

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS’ EQUITY
Cumulative preferred stock, $1 par value, 200,000 shares authorized, no shares issued		-		-
Common stock, $1 par value, 15,000,000 shares authorized, 8,904,915 shares issued and outstanding of June 30, 2011 and December 31, 2010		8,904,915		8,904,915
Additional paid-in capital		26,543,470		26,543,470
Retained earnings		83,824,519		78,886,168
Total Stockholders’ Equity		119,272,904		114,334,553
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	1,109,057,840	$	1,141,687,143

See notes to unaudited consolidated financial statements.

TRI CITY BANKSHARES CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

For Three Months Ended June 30, 2011 and 2010

(Unaudited)

	2011		2010
INTEREST INCOME
Loans	$	12,045,919	$	14,460,721
Investment Securities:
Taxable		1,196,359		1,223,962
Tax exempt		340,022		387,352
Federal funds sold		2,205		5,846
Other		9,663		9,663
Total Interest Income		13,594,168		16,087,544

INTEREST EXPENSE
Deposits		1,167,970		1,371,650
Other borrowings		11,989		581
Total Interest Expense		1,179,959		1,372,231
Net interest income before provision for loan losses		12,414,209		14,715,313
Provision for loan losses		1,920,000		950,000
Net interest income after provision for loan losses		10,494,209		13,765,313

NONINTEREST INCOME
Service charges on deposits		2,497,717		2,600,980
Loan servicing income		126,920		131,261
Net gain on sale of loans		88,699		171,324
Increase in cash surrender value of life insurance		117,586		119,166
Non-accretable loan discount		715,569		199,435
Other income		157,450		691,022
Total Noninterest Income		3,703,941		3,913,188

NONINTEREST EXPENSE
Salaries and employee benefits		5,521,641		5,368,604
Net occupancy costs		979,184		972,944
Furniture and equipment expenses		397,487		457,206
Computer services		930,323		880,999
Advertising and promotional		306,219		354,237
FDIC and other regulatory assessments		323,696		1,239,890
Office supplies		196,238		201,134
Acquisition expense		-		122,385
Core deposit intangible amortization		104,554		141,928
Other		1,338,645		1,283,915
Total Noninterest Expense		10,097,987		11,023,242
Income before income taxes		4,100,163		6,655,259
Less: Applicable income taxes		1,447,501		2,477,000
Net Income	$	2,652,662	$	4,178,259
Basic and fully diluted earnings per share	$	0.29	$	0.47
Dividends per share	$	-	$	0.30
Weighted average shares outstanding		8,904,915		8,904,915

See notes to unaudited consolidated financial statements.

TRI CITY BANKSHARES CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

For Six Months Ended June 30, 2011 and 2010

(Unaudited)

	2011		2010
INTEREST INCOME
Loans	$	23,732,841	$	29,471,274
Investment Securities:
Taxable		2,008,792		2,375,807
Tax exempt		671,896		761,126
Federal funds sold		14,205		20,089
Other		9,663		9,663
Total Interest Income		26,437,397		32,637,959

INTEREST EXPENSE
Deposits		2,495,569		2,924,201
Other borrowings		12,112		844
Total Interest Expense		2,507,681		2,925,045
Net interest income before provision for loan losses		23,929,716		29,712,914
Provision for loan losses		3,320,000		2,730,000
Net interest income after provision for loan losses		20,609,716		26,982,914

NONINTEREST INCOME
Service charges on deposits		4,876,807		5,060,303
Loan servicing income		214,999		234,003
Net gain on sale of loans		323,962		337,311
Increase in cash surrender value of life insurance		232,119		234,495
Non-accretable loan discount		1,097,195		1,347,579
Other income		334,833		1,124,484
Total Noninterest Income		7,079,915		8,338,175

NONINTEREST EXPENSE
Salaries and employee benefits		11,167,267		10,855,349
Net occupancy costs		2,096,582		1,998,907
Furniture and equipment expenses		798,739		871,589
Computer services		1,822,733		1,692,585
Advertising and promotional		561,274		667,621
FDIC and other regulatory assessments		717,650		1,574,303
Office supplies		385,560		402,706
Acquisition expense		-		354,131
Core deposit intangible amortization		209,109		283,856
Other		2,670,582		2,416,661
Total Noninterest Expense		20,429,496		21,117,708
Income before income taxes		7,260,135		14,203,381
Less: Applicable income taxes		2,321,787		5,328,500
Net Income	$	4,938,348	$	8,874,881
Basic and fully diluted earnings per share	$	0.55	$	1.00
Dividends per share	$	-	$	0.60
Weighted average shares outstanding		8,904,915		8,904,915

See notes to unaudited consolidated financial statements.

TRI CITY BANKSHARES CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

For Six Months Ended June, 2011 and 2010

(Unaudited)

	2011			2010
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income	$	4,938,348		$	8,874,881
Adjustments to reconcile net income to net cash flows provided by operating activities:
Depreciation		1,079,702			1,097,667
Amortization of servicing rights, premiums and discounts -net		(2,951,454	)		537,245
Net gain on sale of loans		(323,962	)		(337,311	)
Amortization of core deposit intangible		209,109			283,856
Provision for loan losses		3,320,000			2,730,000
Proceeds from sales of loans held for sale		16,020,441			16,848,451
Originations of loans held for sale		(15,799,066	)		(16,623,709	)
Increase in cash surrender value of life insurance		(232,119	)		(234,495	)
(Gain)/loss on disposal of fixed assets		(5,550	)		781
Gain on sale of other real estate owned		(460,034	)		(388,769	)
Net change in:
Accrued interest receivable and other assets		(579,990	)		3,475,460
Accrued interest payable and other liabilities		573,459			(8,312,075	)
Net Cash Flows Provided by Operating Activities		5,788,884			7,951,982
CASH FLOWS FROM INVESTING ACTIVITIES
Activity in held to maturity securities:
Maturities, prepayments and calls		49,068,685			87,554,589
Purchases		(136,768,094	)		(67,597,314	)
Net decrease in loans		17,333,004			8,406,340
Purchases of premises and equipment – net		(427,740	)		(564,373	)
Proceeds from sales of premises and equipment		9,952			-
Proceeds from sale of other real estate owned		4,844,004			4,687,874
Net Cash Flows Provided by/(Used In) Investing Activities		(65,940,189	)		32,487,116
CASH FLOWS FROM FINANCING ACTIVITIES
Net decrease in deposits		(35,473,708	)		(42,866,318	)
Net change in federal funds purchased and securities sold under repurchase agreements		1,026,327			-
Net change in other borrowings		(3,693,729	)		(1,253,447	)
Dividends paid		-			(5,342,949	)
Net Cash Flows Used in Financing Activities		(38,141,110	)		(49,462,714	)
Net Change in Cash and Cash Equivalents		(98,292,415	)		(9,023,616	)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD		128,070,730			100,102,542
CASH AND CASH EQUIVALENTS - END OF PERIOD	$	29,778,315		$	91,078,926
Non Cash Transactions:
Loans receivable transferred to other real estate owned	$	7,542,207		$	3,521,589
Mortgage servicing rights resulting from sale of loans	$	102,587		$	112,569
Supplemental Cash Flow Disclosures:
Cash paid for interest	$	2,563,847		$	3,894,632
Cash paid for income taxes	$	2,630,000		$	8,180,000

See notes to unaudited consolidated financial statements.

TRI CITY BANKSHARES CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation

The accompanying unaudited consolidated financial statements of Tri City Bankshares Corporation (“Tri City” or the “Corporation”) have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2010 (the “2010 Form 10-K”). The December 31, 2010 financial information included herein is derived from the December 31, 2010 Consolidated Balance Sheet of Tri City, which is included in the 2010 Form 10-K.

The Corporation’s business is conducted primarily through its wholly-owned banking subsidiary, Tri City National Bank (“Bank”).

In the opinion of management, the accompanying unaudited consolidated financial statements contain all interim adjustments, consisting of normal recurring accruals, for a fair presentation of the results for the interim periods presented. The operating results for the first six months of 2011 are not necessarily indicative of the results that may be expected for the entire 2011 fiscal year. Tri City has evaluated the consolidated financial statements for subsequent events through the date of the filing of this Form 10-Q.

2. Use of Estimates

In preparing consolidated financial statements in conformity with GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses and the estimated fair market values of both the acquired loans and other real estate owned.

3. Recent Accounting Pronouncements

ASU No. 2010-20, “Receivables (Topic 310): Disclosure about Credit Quality of Financing Receivables and Allowance For Credit Losses.” This guidance requires an entity to provide disclosures that facilitate the evaluation of the nature of credit risk inherent in its portfolio of financing receivables; how that risk is analyzed and assessed in determining the allowance for credit losses; and the changes and reasons for those changes in the allowance for credit losses. To achieve those objectives, disclosures on a disaggregated basis must be provided on two defined levels: (1) portfolio segment; and (2) class of financing receivable. This guidance makes changes to existing disclosure requirements and includes additional disclosure requirements relating to financing receivables. Short-term accounts receivable, receivables measured at fair value or lower of cost or fair value and debt securities are exempt from this guidance. The disclosures related to period-end information were required to be provided in all interim and annual periods ending on or after December 15, 2010. Disclosures of activity that occur during the reporting period are required in interim and annual periods beginning on or after December 15, 2010. The provisions of ASU No. 2010-20 had no impact on the Corporation’s consolidated financial condition, results of operations or liquidity.

“ ASU No. 2011-2, “Receivables (Topic 310): A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring.” This guidance provides additional guidance and clarification to assist creditors in determining whether a creditor has granted a concession and whether the debtor is experiencing financial difficulties for purposes of determining whether a restructuring constitutes a troubled debt restructuring. The amendments to Topic 310 clarify guidance on the creditor’s evaluation of whether it granted a concession by requiring the creditor to evaluate whether: (1) the debtor does not otherwise have access to funds at a market rate for debt with similar risk characteristics as the restructured debt such that the restructuring should be considered below-market rate, which may indicate that the creditor has granted a concession; (2) a temporary or permanent increase in the contractual interest rate as a result of the restructuring does not preclude the restructuring from being a concession as the new contractual rate may be below-market; and (3) a restructuring that results in a delay that is insignificant is not a concession. The guidance also clarifies whether a debtor is experiencing financial difficulties even though the debtor may not be in default. The amendments are effective for the first interim or annual period beginning on or after June 15, 2011 and apply retrospectively to restructurings occurring on or after the beginning of the year. The provisions of this guidance will not have a material impact on the Corporation’s consolidated financial condition, results of operations or liquidity.

4. Fair Value of Financial Instruments

The accounting guidance for fair value measurements and disclosures establishes a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy favors the transparency of inputs to the valuation of an asset or liability as of the measurement date and thereby favors use of Level 1 if appropriate information is available, and otherwise Level 2 and finally Level 3 if a Level 2 input is not available. The three levels are defined as follows.

Level 1 — Fair value is based upon quoted prices (unadjusted) for identical assets or liabilities in active markets in which the Corporation can participate.

Level 2 — Fair value is based upon quoted prices for similar (i.e., not identical) assets and liabilities in active markets, and other inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

Level 3 — Fair value is based upon financial models using primarily unobservable inputs.

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input within the valuation hierarchy that is significant to the fair value measurement.

The Corporation has an established process for determining fair values. Fair value is based upon quoted market prices, where available. If listed prices or quotes are not available, fair value is based upon internally developed models that use primarily market-based or independently-sourced market parameters, including interest rate yield curves and option volatilities. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments include amounts to reflect counterparty credit quality, creditworthiness, liquidity and unobservable parameters that are applied consistently over time. Any changes to the valuation methodology are reviewed by management to determine appropriateness of the changes. As markets develop and the pricing for certain products becomes more transparent, the Corporation expects to continue to refine its valuation methodologies.

The methods described above may produce a fair value estimate that may not be indicative of net realizable value or reflective of future fair values. Further, while the Corporation believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in different estimates of fair values of the same financial instruments at the reporting date.

The following is a description of the valuation methodologies used by the Corporation to estimate fair value, as well as the general classification of financial instruments pursuant to the valuation hierarchy:

Cash and cash equivalents – Due to their short-term nature, the carrying amount of cash and cash equivalents approximates fair value.

Fed funds sold – Due to their short-term nature, the carrying amount of Fed funds sold approximates fair value.

Held to maturity securities – The fair value is estimated using quoted market prices.

Federal Home Loan Bank Stock – It is not practical to determine the fair value of Federal Home Loan Bank (“FHLB”) Stock due to restrictions placed on its transferability. No secondary market exists for FHLB stock. The stock is bought and sold at par by the FHLB. Management believes the recorded value is the fair value.

Non-marketable equity securities – The fair value is estimated using values of comparable securities.

Loans held for investment - The Bank does not record loans held for investment at fair value on a recurring basis. However, from time to time, a particular loan may be considered impaired and an allowance for loan losses established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment in accordance with relevant accounting guidance. The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value or discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At June30, 2011, substantially all of the impaired loans were evaluated based on the fair value of the collateral. In accordance with relevant accounting guidance, impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, the Bank records the impaired loan as a nonrecurring Level 2 valuation. Valuations based on management estimates are recorded as nonrecurring Level 3. Mortgage loans available for sale and held for investment are valued using fair values attributable to similar mortgage loans. The fair value of the other loans is based on the fair value of obligations with similar credit characteristics.

Cash surrender value of life insurance policies – Fair value is based on the cash surrender value of the individual policies as provided by the insurance agency.

Mortgage servicing rights - The Bank does not record mortgage servicing rights (MSRs) at fair value on a recurring basis. However, from time to time, MSRs may be considered impaired and a valuation allowance is established. MSRs for which amortized cost exceeds fair value are considered impaired. The fair value of MSRs is estimated using third-party information for selected asset price tables for servicing cost and servicing fees applied to the Bank’s portfolio of serviced loans. The Bank records impaired MSRs as a nonrecurring Level 2 valuation.

Other real estate owned - Loans on which the underlying collateral has been repossessed are recorded at the lesser of (i) carrying value or (ii) at fair value less estimated costs to sell upon transfer to other real estate owned (“OREO”). Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, the Bank records the other real estate owned as a nonrecurring Level 2 valuation. Valuations based on management estimates are recorded as nonrecurring Level 3.

Deposit Accounts - The fair value of demand deposits and savings accounts approximates the carrying amount. The fair value of fixed maturity certificates of deposit is estimated using the rates currently offered forcertificates of deposit with similar remaining maturities.

Other borrowings – Other borrowings, including federal funds purchased and repurchase agreements, approximates fair value..

As of June 30, 2011 and December 31, 2010 the Bank did not carry any assets that were measured at fair value on a recurring basis.

Assets measured at fair value on a nonrecurring basis

The Bank has assets that under certain conditions are subject to measurement at fair value on a nonrecurring basis. These include assets that are measured at the lower of cost or market and had a fair value below cost at the end of the period as summarized below.

	Balance at 06/30/11		Level 1		Level 2		Level 3
Loans held for investment	$	9,325,083	$	-	$	-	$	9,325,083
Other real estate owned		8,565,443		-		-		8,565,443
Totals	$	17,890,526	$	-	$	-	$	17,890,526

	Balance at 12/31/10		Level 1		Level 2		Level 3
Loans held for investment	$	12,630,600	$	-	$	-	$	12,630,600
Other real estate owned		5,407,205		-		-		5,407,205
Totals	$	18,037,805	$	-	$	-	$	18,037,805

The estimated fair values of financial instruments at June 30, 2011 and December 31, 2010 are as follows:

	June 30, 2011				December 31, 2010
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
FINANCIAL ASSETS
Cash and due from banks	$	26,412,385	$	26,412,385	$	39,849,020	$	39,849.020
Federal funds sold		3,365,930		3,365,930		88,221,710		88,221,710
Held to maturity securities		314,946,712		317,062,830		227,803,832		227,276,572
Federal reserve stock		322,100		322,100		322,100		322,100
Loans held for investment, net		712,810,148		722,239,434		737,302,103		744,855,523
Cash surrender value of life insurance		12,256,383		12,256,383		12,024,264		12,024,264
Mortgage servicing rights		1,610,009		2,823,505		1,702,696		2,784,581
Accrued interest receivable		4,753,822		4,753,822		4,120,030		4,120,030
FINANCIAL LIABILITIES
Deposits	$	982,973,584	$	981,038,802	$	1,018,447,292	$	1,016,209,456
Other borrowings		2,148,562		2,148,562		4,815,964		4,815,964
Accrued interest payable		304,007		304,007		360,173		360,173

The estimated fair value of fee income on letters of credit outstanding at June 30, 2011 and December 31, 2010 is insignificant. Loan commitments on which the committed interest rate is less than the current market rate are also insignificant at June 30, 2011 and December 31, 2010.

The Bank assumes interest rate risk (the risk that general interest rate levels will change) as part of its normal operations. As a result, fair values of the Bank’s financial instruments will change when interest rate levels change and that change may be either favorable or unfavorable to the Bank. Management attempts to match maturities of assets and liabilities to the extent believed necessary to minimize interest rate risk. However, borrowers with fixed rate obligations are less likely to prepay in a rising rate environment and more likely to prepay in a falling rate environment. Conversely, depositors who are receiving fixed rates are more likely to withdraw funds before maturity in a rising rate environment and less likely to do so in a falling rate environment. Management monitors rates and maturities of assets and liabilities and attempts to minimize interest rate risk by adjusting terms of new loans and deposits and by investing in securities with terms that mitigate the Bank's overall interest rate risk.

5. Held to Maturity Securities

Amortized costs and fair values of held to maturity securities as of June 30, 2011 and December 31, 2010 are summarized as follows:

	June 30, 2011
	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
Obligations of:
States and political subdivisions	$	59,899,145	$	1,242,563	$	(33,759	)	$	61,107,949
U.S. government-sponsored entities		254,947,567		976,314		(69,000	)		255,854,881
Other		100,000		-		-			100,000
Totals	$	314,946,712	$	2,218,877	$	(102,759	)	$	317,062,830

	December 31, 2010
	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
Obligations of:
States and political subdivisions	$	51,315,102	$	843,803	$	(119,745	)	$	52,039,160
U.S. government-sponsored entities		176,388,730		704,904		(1,956,222	)		175,137,412
Other		100,000		-		-			100,000
Totals	$	227,803,832	$	1,548,707	$	(2,075,967	)	$	227,276,572

Obligations of U.S. government-sponsored entities consist of securities issued by the Federal Home Loan Mortgage Corporation and Federal National Mortgage Association.

The amortized cost and fair value of held-to-maturity securities at June 30, 2011 by contractual maturity are shown below. Expected maturities differ from contractual maturities because borrowers or issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Amortized Cost		Fair Value
Due in one year or less	$	32,914,871	$	33,035,827
Due after one year less than 5 years		120,752,229		122,193,158
Due after 5 years less than 10 years		147,384,455		147,849,220
Due in more than 10 years		13,895,157		13,984,625
Totals	$	314,946,712	$	317,062,830

The following table summarizes the portion of the Bank’s held to maturity securities portfolio which has gross unrealized losses, reflecting the length of time that individual securities have been in a continuous unrealized loss position at June 30, 2011 and December 31, 2010.

	June 30, 2011
	Continuous unrealized losses existing for less than 12 months					Continuous unrealized losses existing for more than 12 months				Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Obligations of:
States and political subdivisions	$	8,896,418	$	(33,759	)	$	-	$	-	$	8,896,418	$	(33,759	)
U.S. government-sponsored entities and corporations		20,181,000		(69,000	)		-		-		20,181,000		(69,000	)
Totals	$	29,077,418	$	(102,759	)	$	-	$	-	$	29,077,418	$	(102,759	)

	December 31, 2010
	Continuous unrealized losses existing for less than 12 months				Continuous unrealized losses existing for more than 12 months				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Obligations of:
States and political subdivisions	$	13,884,930	$	115,639	$	508,550	$	4,106	$	14,393,480	$	119,745
U.S. government-sponsored entities and corporations		119,139,262		1,956,222		-		-		119,139,262		1,956,222
Totals	$	133,024,192	$	2,071,861	$	508,550	$	4,106	$	133,532,742	$	2,075,967

Management does not believe any individual unrealized loss as of June 30, 2011 or December 31, 2010 represents other than temporary impairment. At June 30, 2011, the Bank held no investment securities that had unrealized losses existing for greater than 12 months and at December 31, 2010 the Bank held one investment security that had unrealized losses existing for greater than 12 months. Management believes the temporary impairment in fair value was caused by market fluctuations in interest rates and not by a deterioration in credit quality of the underlying portfolio of securities. Since securities are held to maturity, management does not believe that the Bank will experience any losses on these investments.

6. Loans

Major classifications of loans are as follows as of June 30, 2011 and December 31, 2010:

	June 30, 2011			December 31, 2010
Commercial	$	23,501,502		$	25,451,474
Real Estate
Construction		55,857,735			55,974,007
Commercial		284,125,879			285,862,944
Residential		305,567,100			319,789,488
Multifamily		36,968,504			41,073,712
Installment and Consumer		16,663,811			18,677,070
	$	722,684,531		$	746,828,695
Less: Allowance for loan losses		(9,874,383	)		(9,526,592	)
Net Loans	$	712,810,148		$	737,302,103

Credit risk tends to be geographically concentrated in that 96% of the loan customers are located in the local markets serviced by the Bank in Wisconsin. The Bank's extension of credit is governed by its credit risk policy which was established to control the quality of the Bank's loans. This policy is reviewed and approved by the Board of Directors on a regular basis.

Commercial loans - Historically commercial and industrial (“C&I”) lending has been a small part of the Bank’s portfolio which continues to be the case in 2011. C&I balances have decreased during these difficult economic times. Reductions of outstanding balances on lines of credit have occurred as well as the demand for term financing as businesses made little, if any, investment in new equipment. C&I loans are collateralized by general business assets such as accounts receivable, inventory and equipment and have no real estate component. During weak economic periods the Bank can be exposed to heightened risk if a business is out of compliance with debtor covenants supporting C&I loans. The Bank was active in policing such requirements prior to and at the beginning of the 2008 crisis. Nearly three years later these issues have been largely resolved and this segment of loans presents minimal risk going forward.

Real estate construction loans - Loans to residential real estate developers comprise most of the dollars outstanding in real estate construction loans. Historically, real estate construction loans have been made to developers who are well known to the Bank, have prior successful project experience and are well capitalized. Loans are made to customers in the Bank’s Southeastern Wisconsin market with experience and knowledge of the local economy. Real estate construction loans of this type are generally larger in size and involve greater risks than residential mortgage loans because payments depend on the success of the project or in the case of commercial development, successful management of the property. The Bank will generally make credit extensions to borrowers with adequate outside liquidity to support the project in the event the actual performance is less than projected. Developers with which the Bank does business have the ability to service the development debt personally or through their companies, however, these individuals are not immune to a weak economy. The Bank’s remaining real estate development loans are performing even three years into the economic downturn and our borrowers’ inventories are decreasing. The greatest risk to the Bank within this segment is condominium development loans. This group has been most severely affected by the prolonged economic downturn. Risk factors the Bank inherits upon the failure of a developer include the existence and/or control of the condo association, the availability of term financing to initial buyers of units and partial project completion for common use areas. The exposure to the Bank for loans not already moved to OREO, while increased, is limited to one project with loan balances less than $1.0 million. The Bank does have condominium exposure in several other projects with aggregate loan balances of $4.0 million to the second developers following foreclosures. These are the Bank’s customers who were able to buy incomplete developments at deep discounts from other banks that had foreclosed on the original developer. In all cases the selling banks also agreed to fixed-rate mortgage loans to qualified borrowers at prevailing rates to allow the second developer to sell units without the issue of term financing availability. This group of condominium loans presents a much lower risk.

Commercial real estate loans - The Bank’s commercial real estate lending efforts are focused on owner occupied, improved property such as office buildings, warehouses, small manufacturing operations and retail facilities located in its market areas. The most significant risk factor in the third year of the financial crisis is occupancy. The fact that the Bank prefers owner occupied commercial real estate mitigates that risk, provided of course, the owner’s business survives. The Bank’s $18.3 million per-borrower legal lending limit would permit it to compete for activity in the middle market, but management prefers to seek small businesses as its target borrowers. Loans to such businesses are approved based on the creditworthiness, economic feasibility and cash flow abilities of the borrower.

Residential real estate loans - Loans in this segment of the portfolio have historically represented the lowest risk due to the large number of individual loans with relatively small average balances. The Bank considers owner-occupied one-to-four family loans to be low risk because underwriting has always required 20% equity and qualified borrowers with proper debt service coverage ratios. These loans provide a foundation for the sale of all other retail banking products and have always been a staple of the Bank’s portfolio. However, in the acquisition of Bank of Elmwood (the “Acquired Bank”) by the Bank from the FDIC in October 2009 (the “Acquisition”) the Bank acquired a number of residential real estate loans that do not meet the Bank’s underwriting standards and these borrowers were encouraged to bring loans current, pay delinquent taxes, refinance at another financial institution and comply with the Bank’s underwriting standards or face foreclosure. The greatest risks to the Bank in this segment are those one-to-four family residential real estate loans that are not owner occupied. Many of these scattered site owner’s loans were generated by the Acquired Bank through its “Rehab and Go” and “Equity is Cash” programs. Often rehab dollars were not invested in the property, the properties were over-appraised and rental property damage was prevalent but no replacement reserves were required as would be in a commercial real estate loan. The Bank is in the middle of a three year project to eliminate this group of loans acquired in the Acquisition. These loans were deeply discounted in Bank’s bid the FDIC and the Bank believes the credit risk associated with these loans is mitigated by this discount.

Multi-family real estate loans - The loans in this category are collateralized by properties with more than four family dwelling units. The Bank has always been conservative in requiring borrowers to be well-qualified and to provide their personal guaranty, as well as insisting on proper debt service coverage ratios and equity sufficient to sustain reasonable debt service in the event of interest rate pressure. Loans in this category typically have maturities of 3, 4 or 5 years and are amortized over 15 to 20 years. While any loan presents risk to the Bank, loans in this segment are performing quite well in the downturn because of the Bank’s underwriting criteria and with significant foreclosure activity, many former homeowners are back in the rental market.

Installment and other loans - These loans consist of auto loans, mobile home loans and unsecured consumer loans which have been decreasing at the Bank for several years. Auto loan volume decreased as sales of new cars declined drastically in 2009. The Bank has historically limited its exposure to mobile home loans and unsecured consumer loans. However, the Bank acquired a number of such consumer loans in the Acquisition, many of which continue to perform, despite not meeting the Bank’s historical underwriting standards.

The following table presents the contractual aging of the recorded investment in loans as of June 30, 2011 and December 31, 2010:

	As of June 30, 2011
	Current			Days Past Due												Total
	Loans				30-59			60-89		Over 90			Total			Loans
Commercial	$	22,919,051		$	317,668		$	13,365		$	251,418		$	582,451		$	23,501,502
Real estate
Construction		52,741,043			885,261			--			2,231,431			3,116,692			55,857,735
Commercial		277,065,687			1,694,772			948,428			4,416,992			7,060,192			284,125,879
Residential		282,952,179			3,106,538			3,840,009			15,668,374			22,614,921			305,567,100
Multifamily		34,228,943			-			1,438,840			1,300,721			2,739,561			36,968,504
Installment and other		15,739,663			328,998			36,324			558,826			924,148			16,663,811
Total Loans		685,646,566			6,333,237			6,276,966			24,427,762			37,037,965			722,684,531
Purchase Credit- Impaired Loans		(39,631,965	)		(1,012,526	)		(912,917	)		(7,325,931	)		(9,251,374	)		(48,883,339	)
Total loans, excluding Purchase Credit- Impaired Loans	$	646,014,601		$	5,320,711		$	5,364,049		$	17,101,831		$	27,786,591		$	673,801,192

	As of December 31, 2010
	Current			Days Past Due												Total
	Loans				30-59			60-89		Over 90			Total			Loans
Commercial	$	24,972,641		$	220,354		$	200,920		$	57,559		$	478,833		$	25,451,474
Real estate
Construction		53,001,023			47,899			1,362,911			1,562,174			2,972,984			55,974,007
Commercial		270,383,215			4,046,092			434,278			10,999,359			15,479,729			285,862,944
Residential		295,608,455			5,789,198			2,331,859			16,059,976			24,181,033			319,789,488
Multifamily		37,025,673			851,102			-			3,196,937			4,048,039			41,073,712
Installment and other		17,650,012			437,779			131,220			458,059			1,027,058			18,677,070
Total Loans		698,641,019			11,392,424			4,461,188			32,334,064			48,187,676			746,828,695
Purchase Credit- Impaired Loans		(41,308,636	)		(1,808,362	)		(448,907	)		(11,899,509	)		(14,156,778	)		(55,465,415	)
Total loans, excluding Purchase Credit- Impaired Loans	$	657,332,383		$	9,584,062		$	4,012,281		$	20,434,555		$	34,030,898		$	691,363,280

Commercial loans deemed to be inadequately collateralized and past due 90 days or more for principal or interest are placed in a non-accrual status. Residential real estate loans are not subject to these guidelines if well-secured, as deemed by the Senior Loan Committee, and in the process of collection.

The following table presents the recorded investment in nonaccrual loans and loans past due ninety days or more and still accruing by class of loans as of June 30, 2011 and December 31, 2010:

	As of June 30, 2011
	Nonaccrual			Past due 90 days or more and accruing
Commercial	$	169,526		$	87,303
Real estate
Construction		1,563,644			835,305
Commercial		5,676,720			575,723
Residential		16,260,767			1,114,252
Multifamily		1,598,842			-
Installment and other		-			558,826
Total Loans		25,269,499			3,171,409

Purchase Credit Impaired Loans:
Commercial		(5,410	)		-
Real Estate
Construction		-			-
Commercial		(1,736,850	)		-
Residential		(6,023,083	)		(131,537	)
Multifamily		(603,395	)		-
Installment & Other		-			-
Total Purchase Credit-Impaired Loans		(8,368,738	)		(131,537	)
Total loans, excluding Purchase Credit-Impaired Loans	$	16,900,761		$	3,039,872

	As of December 31, 2010
	Nonaccrual			Past due 90 days or more and accruing
Commercial	$	70,042		$	4,339
Real estate
Construction		1,485,837			246,743
Commercial		13,034,876			114,159
Residential		17,147,456			2,732,296
Multifamily		3,196,937			-
Installment and other		80,568			377,491
Total Loans		35,015,716			3,475,028

Purchase Credit Impaired Loans:
Commercial		(16,822	)		-
Real Estate
Construction		(235,598	)		-
Commercial		(4,440,670	)		-
Residential		(6,537,049	)		(2,041,589	)
Multifamily		(603,395	)		-
Installment & Other		-			-
Total Purchase Credit-Impaired Loans		(11,833,534	)		(2,041,589	)
Total loans, excluding Purchase Credit-Impaired Loans	$	23,182,182		$	1,433,439

Management uses an internal asset classification system as a means of identifying problem and potential problem assets. At the quarterly meetings, the Board of Directors of the Bank reviews trends for loans classified as “Special Mention,” “Substandard” and “Doubtful” for the previous twelve months both as a total dollar volume in each classified category and as the percent of capital each classified category represents. A Special Mention loan has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan at a future date. An asset is classified Substandard if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Substandard assets include those characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Assets classified as Doubtful have all the weaknesses inherent in those classified 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. Assets classified as Loss are those considered uncollectible and viewed as non-bankable assets, worthy of charge-off. Assets that do not currently expose the Bank to sufficient risk to warrant classification in one of the aforementioned categories, but possess weaknesses that may or may not be within the control of the customer are classified as “Pass.” The following tables present the risk category of loans by class of loans based on the most recent analysis performed and the contractual aging as of June 30, 2011 and December 31, 2010:

	As of June 30, 2011
			Special
	Pass		Mention		Substandard		Doubtful		Total
Commercial	$	19,850,723	$	1,783,207	$	1,853,457	$	14,115	$	23,501,502
Real estate
Construction		46,297,218		6,832,224		2,728,293		-,		55,857,735
Commercial		248,838,742		17,871,021		17,416,116		-		284,125,879
Multifamily		32,260,969		1,469,027		3,238,508		-		36,968,504
Total	$	347,247,652	$	27,955,479	$	25,236,374	$	14,115	$	400,453,620

Current	$	343,264,241	$	26,489,178	$	17,201,305	$	-	$	386,954,724
30-59		1,712,666		925,354		259,682		-		2,897,702
60-89		1,797,744		170,619		432,270		-		2,400,633
Over 90		473,001		370,328		7,343,117		14,115		8,200,561
Total	$	347,247,652	$	27,955,479	$	25,236,374	$	14,115	$	400,453,620

	As of December 31, 2010
			Special
	Pass		Mention		Substandard		Doubtful		Total
Commercial	$	23,375,444	$	1,665,817	$	396,098	$	14,115	$	25,451,474
Real estate
Construction		44,791,225		8,293,423		2,889,359		-		55,974,007
Commercial		241,042,464		19,435,523		25,254,718		130,239		285,862,944
Multifamily		36,404,929		1,003,816		3,664,967		-		41,073,712
Total	$	345,614,062	$	30,398,579	$	32,205,142	$	144,354	$	408,362,137

Current	$	342,900,085	$	28,567,600	$	13,914,866	$	-	$	385,382,551
30-59		2,037,955		468,067		2,659,426		-		5,165,448
60-89		522,361		1,362,912		112,836		-		1,998,109
Over 90		153,661		-		15,518,014		144,354		15,816,029
Total	$	345,614,062	$	30,398,579	$	32,205,142	$	144,354	$	408,362,137

Excluding purchased credit-impaired loans, approximately $16.8 million of the Substandard and Doubtful loans were nonperforming as of June 30, 2011.

For residential real estate and installment loan classes, the Bank 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 those loan classes based on payment activity as of June 30, 2011 and December 31, 2010:

	As of June 30, 2011
	Performing		Nonperforming		Total
Residential Real Estate	$	288,192,081	$	17,375,019	$	305,567,100
Installment & Other		16,104,985		558,826		16,663,811
Total	$	304,297,066	$	17,933,845	$	322,230,911

	As of December 31, 2010
	Performing		Nonperforming		Total
Residential Real Estate	$	299,909,738	$	19,879,750	$	319,789,488
Installment & Other		18,219,011		458,059		18,677,070
Total	$	318,128,749	$	20,337,809	$	338,466,558

At June 30, 2011, the Corporation has identified $41.9 million of loans as impaired, including performing troubled debt restructurings. A loan is identified as impaired when, based on current information and events, it is probable that the Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement. A summary of the details regarding impaired loans follows:

	June 30, 2011		December 31, 2010
Loans for which there was a related allowance for loan loss	$	13,197,951	$	16,617,148
Impaired loans with no related allowance		28,739,637		16,112,165
Total Impaired Loans	$	41,937,588	$	32,729,313

Average quarterly balance of impaired loans	$	46,270,490	$	24,470,966
Related allowance for loan losses		3,872,868		3,986,548

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

	As of June 30, 2011
	Unpaid Principal		Partial Charge-		Allowance For Loan Losses		Recorded
	Balance		offs		Allocation		Investment
Loans with no related allowance recorded:
Commercial	$	157,912	$	2,502	$	-	$	155,410
Real estate
Construction		665,591		12,449		-		653,142
Commercial		9,712,485		1,137,235		-		8,575,250
Residential		18,859,998		286,898		-		18,573,100
Multifamily		734,274		2,181		-		732,093
Installment & Other		50,642		-		-		50,642
Total		30,180,902		1,441,265		-		28,739,637


Loans with a related allowance recorded:
Commercial		14,115		-		14,115		-
Real estate
Construction		997,059		7,391		323,865		655,803
Commercial		5,678,643		180,348		956,362		4,541,933
Residential		5,962,591		133,466		2,279,430		3,549,695
Multifamily		884,440		17,692		299,096		567,652
Installment & Other		-		-		-		-
Total		13,536,848		338,897		3,872,868		9,325,083
Total Impaired Loans	$	43,717,750	$	1,780,162	$	3,872,868	$	38,064,720

	As of December 31, 2010
					Allowance
	Unpaid Principal		Partial Charge-		For Loan Losses		Recorded
	Balance		offs		Allocation		Investment
Loans with no related allowance recorded:
Commercial	$	-	$	-	$	-	$	-
Real estate
Construction		2,005,213		-		-		2,005,213
Commercial		6,497,934		-		-		6,497,934
Residential		7,478,138		-		-		7,478,138
Multifamily		130,880		-		-		130,880
Installment & Other		-		-		-		-
Total		16,112,165		-		-		16,112,165


Loans with a related allowance recorded:
Commercial		14,115		-		14,115		-
Real estate
Construction		1,002,247		-		113,964		888,283
Commercial		7,653,948		175,000		1,211,358		6,267,590
Residential		8,098,270		606,300		2,406,059		5,085,911
Multifamily		549,300		-		222,483		326,817
Installment & Other		80,568		-		18,569		62,000
Total		17,398,448		781,300		3,986,548		12,630,601
Total Impaired Loans	$	33,510,613	$	781,300	$	3,986,548	$	28,742,766

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:

	For the Six Months Ended June 30, 2011
									Commercial				Residential
	Commercial				Construction				Real Estate				Real Estate				Multifamily				Consumer				Total
Allowance for loan losses:
Beginning balance		$	412,745			$	447,955			$	2,819,054			$	4,593,811			$	1,010,978			$	242,049			$	9,526,592
Charge-offs			(52,937	)			(18,004	)			(923,097	)			(1,823,057	)			(117,115	)			(117,313	)			(3,051,523	)
Recoveries			1,577				380				31,964				30,909				-				14,484				79,314
Provision			(132,645	)			329,813				1,509,108				1,872,101				(274,133	)			15,756				3,320,000
Ending balance		$	228,740			$	760,144			$	3,437,029			$	4,673,764			$	619,730			$	154,976			$	9,874,383

	As of June 30, 2011
										Commercial				Residential
		Commercial				Construction				Real Estate				Real Estate				Multifamily				Consumer				Total
Loans:
Ending balance		$	23,501,502			$	55,857,735			$	284,125,879			$	305,567,100			$	36,968,504			$	16,663,810			$	722,684,531
ALL
Individually evaluated			14,115				323,865				956,362				1,952,398				299,096				-				3,545,836
Collectively evaluated			214,625				436,279				2,480,667				2,394,334				320,634				154,976				6,001,515
Acquired			-				-				-				327,032				-				-				327,032
Total ALL			228,740				760,144				3,437,029				4,673,764				619,730				154,976				9,874,383
Recorded Investment		$	23,272,762			$	55,097,591			$	280,688,850			$	300,893,336			$	36,348,774			$	16,508,834			$	712,810,148

Ending Balance:
Individually evaluated		$	169,526			$	1,642,810			$	14,073,544			$	24,402,224			$	1,598,841			$	50,642			$	41,937,587
Collectively evaluated			23,009,103				46,771,659				265,942,169				256,686,542				34,375,103				16,613,168				643,397,745
Acquired			322,873				7,443,266				4,110,166				24,478,334				994,560				-				37,349,199
Total ending balance		$	23,501,502			$	55,857,735			$	284,125,879			$	305,567,100			$	36,968,504			$	16,663,810			$	722,684,531

	As of December 31, 2010
					Commercial		Residential
	Commercial		Construction		Real Estate		Real Estate		Multifamily		Consumer		Total
Loans:
Ending balance	$	25,451,474	$	55,974,007	$	285,862,944	$	319,789,488	$	41,073,712	$	18,677,070	$	746,828,695
ALL
Individually evaluated		14,115		113,964		1,211,358		2,406,059		222,483		18,568		3,986,547
Collectively evaluated		398,630		333,991		1,607,696		1,458,116		788,495		223,481		4,810,409
Acquired		-		-		-		729,636		-		-		729,636
Total ALL		412,745		447,955		2,819,054		4,593,811		1,010,978		242,049		9,526,592
Recorded Investment	$	25,038,729	$	55,526,052	$	283,043,890	$	315,195,677	$	40,062,734	$	18,435,021	$	737,302,103

Ending Balance:
Individually evaluated	$	14,115	$	3,007,460	$	13,976,882	$	14,970,108	$	680,180	$	80,568	$	32,729,313
Collectively evaluated		24,892,894		44,664,827		263,312,796		273,659,587		38,576,591		18,596,502		663,703,197
Acquired		544,465		8,301,720		8,573,266		31,159,793		1,816,941		-		50,396,185
Total ending balance	$	25,451,474	$	55,974,007	$	285,862,944	$	319,789,488	$	41,073,712	$	18,677,070	$	746,828,695

The Corporation continues to evaluate loans purchased in conjunction with the Acquisition for impairment in accordance GAAP. The purchased loans were considered impaired at the Acquisition date if there was evidence of deterioration since origination and if it was probable that not all contractually required principal and interest payments would be collected. The following table reflects the carrying value of all purchased loans as of June 30, 2011 and December 31, 2010.

	As of June 30, 2011
	Contractually Required Payments Receivable
	Credit Impaired		Non-Credit Impaired		Carrying Value of Purchased Loans
Commercial	$	901,871	$	2,228,468	$	2,198,121
Real Estate
Construction		12,488,514		520,837		7,906,599
Commercial		12,546,290		14,151,989		17,971,920
Residential		56,781,898		63,940,422		90,123,315
Multifamily		2,314,746		418,933		1,933,267
Installment and Consumer		6,342		4,199,575		2,365,406
Total	$	85,039,661	$	85,460,224	$	122,498,628

	As of December 31, 2010
	Contractually Required Payments Receivable
	Credit Impaired		Non-Credit Impaired		Carrying Value of Purchased Loans
Commercial	$	1,163,657	$	3,374,952	$	3,431,480
Real Estate
Construction		13,895,239		357,379		8,605,686
Commercial		17,679,889		16,580,216		22,774,024
Residential		62,201,020		72,406,187		99,498,903
Multifamily		2,644,213		422,239		2,154,090
Installment and Consumer		6,836		5,213,526		2,879,377
Total	$	97,590,854	$	98,354,499	$	139,343,560

As of June 30, 2011 the estimated contractually-required payments receivable on credit impaired and non-credit impaired loans was $85.0 million and $85.5 million, respectively. The cash flows expected to be collected related to principal as of June 30, 2011 on all purchased loans is $122.5 million. These amounts are based upon the estimated fair values of the underlying collateral or discounted cash flows at June 30, 2011. The difference between the contractually required payments at Acquisition and the cash flow expected to be collected at Acquisition is referred to as the non-accretable difference. Subsequent decreases to the expected cash flows will generally result in a provision for loan losses. Subsequent increases in cash flows will result in a reversal of the provision for loan losses charged to earnings to the extent of prior charges or a reclassification of the difference from non-accretable discount to accretable discount with a positive impact on interest income. Further, any excess of cash flows expected over the estimated fair value is referred to as the accretable yield and is recognized in interest income over the remaining life of the loan when there is a reasonable expectation about the amount and timing of such cash flows.

The change in the carrying amount of accretable yield for purchased loans was as follows for the three months ended June 30, 2011.

ACCRETABLE YIELD

	For Three Months Ended June 30,
	2011		2010
Beginning Balance	$	13,318,897	$	20,749,412
Accretion (1)		1,510,635		2,349.153
Ending Balance	$	11,808,262	$	18,400,259

	For Six Months Ended June 30,
	2011		2010
Beginning Balance	$	14,414,324	$	23,859,358
Accretion (1)		2,606,062		5,459,099
Ending Balance	$	11,808,262	$	18,400,259

(1) Accretable yield is recognized as the purchased loans pay down, mature, renew or pay off.

Contractual maturities of loans with accretable yield range from 1 year to 30 years. Actual maturities may differ from contractual maturities because borrowers have the right to prepay or renew their loan prior to maturity or the loan may be charged off.

7. Allowance for Loan Losses

The allowance for loan losses reflected in the accompanying consolidated financial statements represents the allowance available to absorb probable losses inherent in the loan portfolio. An analysis of changes in the allowance is presented in the following table:

ALLOWANCE FOR LOAN LOSSES

	For Three Months Ended June 30,
	2011			2010
Balance at beginning of period	$	9,870,254		$	7,567,806
Charge-offs		(1,968,395	)		(1,103,748	)
Recoveries		52,524			862,170
Net loans charged-off		(1,915,871	)		(241,578	)
Additions to allowance charged to expense		1,920,000			950,000
Balance at end of period	$	9,874,383		$	8,276,228

	For Six Months Ended June 30,
	2011			2010
Balance at beginning of period	$	9,526,592		$	6,034,187
Charge-offs		(3,051,523	)		(1,463,834	)
Recoveries		79,314			975,875
Net loans charged-off		(2,972,209	)		(487,959	)
Additions to allowance charged to expense		3,320,000			2,730,000
Balance at end of period	$	9,874,383		$	8,276,228

The allowance for loan losses includes $5.3 million related to the purchased loans as of June 30, 2011, of which $1.5 million is specifically allocated to impaired loans. As of December 31, 2010, the allowance for loan losses included $4.6 million related to purchased loans of which $1.7 million was specifically allocated to impaired loans.

Consistent with regulatory guidance, charge-offs are taken when specific loans, or portions thereof, are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. The Bank’s policy is to promptly charge these loans off in the period the uncollectible loss amount is reasonably determined. The Bank promptly charges-off commercial and real estate loans, or portions thereof, when available information confirms that specific loans are uncollectible based on information that includes, but is not limited to, (1) the deteriorating financial condition of the borrower, (2) declining collateral values, and/or (3) legal action, including bankruptcy, that impairs the borrower’s ability to adequately meet its obligations. All consumer loans 120 days past due and all other loans with principal and interest 180 days or more past due will be reviewed for potential charge-off at least quarterly.

8. Other Real Estate Owned

Real estate acquired by foreclosure or by deed in lieu of foreclosure is held for sale and is initially recorded at the lesser of carrying value or fair value at the date of foreclosure less estimated selling expenses, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed and any excess of carrying value over fair value is recorded as a valuation allowance. At the date of foreclosure any write down to fair value less estimated selling costs is charged to the allowance for loan losses. Costs relating to the development and improvement of the property may be capitalized; holding period costs and subsequent changes to the valuation allowance are charged to expense.

A summary of the activity in OREO is as follows:

	Six Months Ended June 30, 2011			Year Ended December 31, 2010
Beginning Balance	$	5,407,205		$	4,681,481
Additions		7,542,207			8,667,614
Valuation Adjustments		-			-
Gain on Sale		460,034			1,375,932
Sales		(4,844,003	)		(9,317,822	)
Ending Balance	$	8,565,443		$	5,407,205

9. Troubled Debt Restructuring

A troubled debt restructuring (“TDR”) includes a loan modification where a borrower is experiencing financial difficulty and the Bank grants a concession to that borrower that the Bank would not otherwise consider except for the borrower’s financial difficulties. A TDR may be either on accrual or nonaccrual status based upon the performance of the borrower and management’s assessment of collectability. If a TDR is placed on nonaccrual status, it remains there until it performs under the restructured terms for six consecutive months at which time it is returned to accrual status.

	As of June 30, 2011
						Commercial			Residential
	Commercial		Construction			Real Estate			Real Estate			Multifamily			Consumer		Total
Accruing
December 31, 2010	$	-	$	2,005,213		$	11,510,812		$	4,747,253		$	-		$	-	$	18,263,278
Principal payments		-		-			(21,150	)		(56,931	)		-			-		(78,081	)
Charge-offs		-		-			-			-			-			-		-
Advances		-		-			413,880			24,737			-			-		438,617
New restructured		-		-			--			3,862,526			-			50,642		3,913,168
Class transfers		-		(1,926,048	)		(3,506,718	)		(605,460	)		-			-		(6,038,226	)
Transfers from
nonaccrual		-		-			-			169,332			-			-		169,332

June 30, 2011	$	-	$	79,165		$	8,396,824		$	8,141,457		$	-		$	50,642	$	16,668,088

Nonaccrual
December 31, 2010	$	-	$	-		$	-		$	2,730,885		$	130,880		$	-	$	2,861,765
Principal payments		-		-			-			(26,083	)		(2,181	)		-		(28,264	)
Charge-offs		-		-			-			-			-			-		-
Advances		-		-			-			60,781			-			-		60,781
New restructured		-		-			-			770,940			-			-		770,940
Class transfers		-		-			--			-			-			-		-
Transfers from
nonaccrual		-		-			-			(169,332	)		-			-		(169,332	)

Ending balance	$	-	$	-		$	-		$	3,367,191		$	128,699		$	-	$	3,495,890

Totals
December 31, 2010	$	-	$	2,005,213		$	11,510,812		$	7,478,138		$	130,880		$	-	$	21,125,043
Principal payments		-		-			(21,150	)		(83,014	)		-(2,181	)		-		(106,345	)
Charge-offs		-		-			-			-			-			-		-
Advances		-		-			413,880			85,518			-			-		499,398
New restructured		-		-			-			4,633,466			-			50,642		4,684,108
Class transfers		-		(1,926,048	)		(3,506,718	)		(605,460	)		-			-		(6,038,226	)
Transfers from
nonaccrual		-		-			-			-			-			-		-

June 30, 2011	$	-	$	79,165		$	8,396,824		$	11,508,648		$	128,699		$	50,642	$	20,163,978

A summary of troubled debt restructurings as of June 30, 2011 and December 31, 2010 is as follows:

	June 30, 2011				December 31, 2010
	Number of		Recorded		Number of		Recorded
	Modifications		Investment		Modifications		Investment
Commercial		-	$	-		-	$	-
Real estate
Construction		1		79,165		3		2,005,213
Commercial		16		8,396,824		19		11,510,812
Residential		61		11,508,648		42		7,478,138
Multifamily		1		128,699		1		130,880
Installment and other		5		50,642		-		-
Total Loans		84	$	20,163,978		65	$	21,125,043

10. Regulatory Capital Requirements

As of June 30, 2011, the most recent notification from the regulatory agencies categorized the Bank as well-capitalized under the regulatory framework for prompt corrective action. To be categorized as well-capitalized, an institution must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the following table:

													To Be Well Capitalized
							For Capital						Under Prompt Corrective
	Actual						Adequacy Purposes						Action Provisions
	Amount			Ratio			Amount			Ratio			Amount			Ratio
As of June 30, 2011
Total capital (to risk weighted assets)		$	122,846,000		16.4	%		$	59,828,000		8.0	%		$	74,785,000		10.0	%
Tier 1 capital (to risk weighted assets)			113,496,000		15.2	%			29,914,000		4.0	%			44,871,000		6.0	%
Tier 1 capital (to average assets)			113,496,000		10.2	%			44,621,000		4.0	%			55,776,000		5.0	%

As of December 31, 2010
Total capital (to risk weighted assets)		$	117,822,000		15.2	%		$	62,011,000		8.0	%		$	77,514,000		10.0	%
Tier 1 capital (to risk weighted assets)			108,295,000		14.0	%			31,006,000		4.0	%			46,509,000		6.0	%
Tier 1 capital (to average assets)			108,295,000		10.0	%			43,298,000		4.0	%			54,122,000		5.0	%

ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

This report contains statements that may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, such as statements other than historical facts contained or incorporated by reference in this report. These statements speak of the Corporation’s plans, goals, beliefs or expectations, refer to estimates or use similar terms. Forward-looking statements are identified generally by statements containing words and phrases such as “may,” “project,” “are confident,” “should be,” “predict,” “believe,” “plan,” “expect,” “estimate,” “anticipate” and similar expressions. Future filings by the Corporation with the Securities and Exchange Commission, and statements other than historical facts contained in this report and in any written material, press releases and oral statements issued by, or on behalf of the Corporation may also constitute forward-looking statements.

Forward-looking statements are subject to significant risks and uncertainties and the Corporation’s actual results may differ materially from the results discussed in such forward-looking statements. Factors that might cause actual results to differ from the results discussed in forward-looking statements include, but are not limited to, the factors set forth in Item 1A of the 2010 Form 10-K, which item is incorporated herein by reference, and any other risks identified in Part II, Item 1A and elsewhere in this report.

All forward-looking statements contained in this report or which may be contained in future statements made for or on behalf of the Corporation are based upon information available at the time the statement is made and the Corporation assumes no obligation to update any forward-looking statement.

The Dodd-Frank Wall Street Reform and Consumer Protection Act

On July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) into law. The Dodd-Frank Act makes extensive changes to the laws regulating financial services firms and requires significant rule-making. In addition, the legislation mandates multiple studies, which could result in additional legislative or regulatory action. While the full effects of the Dodd-Frank Act on the Corporation and the Bank cannot yet be determined, this legislation is generally perceived as negatively impacting the banking industry. The Dodd-Frank Act may result in higher compliance and other costs, reduced revenues and higher capital and liquidity requirements, among other things, which could adversely affect the business of the Corporation and the Bank, perhaps materially.

Critical Accounting Policies

In the course of the Corporation’s normal business activity, management must select and apply many accounting policies and methodologies that lead to the financial results presented in the Corporation’s consolidated financial statements. The following is a summary of what management believes are the Corporation’s critical accounting policies.

Loans Acquired Through Transfer

Loans acquired through the completion of a transfer, including loans that have evidence of deterioration of credit quality since origination and for which it is probable, at acquisition, that the Bank will be unable to collect all contractually- required payments receivable, are initially recorded at fair value with no valuation allowance. Loans are evaluated individually at the date of transfer to determine if there is evidence of deterioration of credit quality since origination. Loans where there is evidence of deterioration of credit quality since origination may be aggregated and accounted for as a pool of loans if the loans being aggregated have common risk characteristics. Contractually-required payments for interest and principal that exceed the undiscounted cash flows expected at acquisition, or the “nonaccretable difference,” are not recognized as a yield adjustment or as a loss accrual or a valuation allowance. The difference between the undiscounted cash flows expected at acquisition and the investment in the loan, or the “accretable yield,” is recognized as interest income on a level-yield method over the life of the loan. Increases in expected cash flows subsequent to the initial investment are recognized prospectively through adjustment of the yield on the loan over its remaining life. Decreases in expected cash flows are recognized as impairment. If the Bank does not have the information necessary to reasonably estimate expected cash flows, it may use the cost recovery method or cash basis method of income recognition. Valuation allowances on these impaired loans reflect only losses incurred after the acquisition (meaning the present value of all cash flows expected at acquisition that ultimately are not to be received).

Allowance for Loan Losses

The Bank’s allowance for loan losses (“ALL”) is composed of specific and general valuation allowances. The Bank establishes specific valuation allowances on loans considered impaired. A loan is identified as impaired when, based on current information and events, it is probable that the Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement. General valuation allowances are based on an evaluation of the various risk components that are inherent in the loan portfolio. The risk components that are evaluated include past loan loss experience; the level of nonperforming and classified assets; current economic conditions; volume, growth and composition of the loan portfolio; adverse situations that may affect the borrower's ability to repay; the estimated value of any underlying collateral; peer group comparisons; regulatory guidance; and other relevant factors.

The ALL is increased by provisions charged to earnings and reduced by charge-offs, net of recoveries. The adequacy of the ALL is reviewed and approved by the Bank's Board of Directors. The ALL reflects management's best estimate of the probable and inherent losses on loans, and is based on a risk model developed and implemented by management and approved by the Bank's Board of Directors.

In addition, various regulatory agencies periodically review the ALL. These agencies may suggest additions to the ALL based on their judgments of collectability taking into consideration information available to them at the time of their examination.

Other Real Estate Owned

OREO comprises real estate acquired in partial or full satisfaction of loans and is recorded as a separate line item on the consolidated balance sheet. OREO is recorded at the lower of (i) carrying value or (ii) at its estimated fair value less estimated selling costs at the date of transfer, with any excess of the related loan balance over the fair value less expected selling costs charged to the allowance for loan losses. Properties are subsequently evaluated and any additional declines in value are charged to current period earnings. The amount the Corporation ultimately recovers on OREO may differ substantially from the net carrying value of those assets because of future market factors beyond the Corporation’s control.

Financial Condition

Total Assets

The Corporation’s total assets decreased $32.6 million, or 2.9%, from $1,141.7 million at December 31, 2010 to $1,109.1 million at June 30, 2011.

Cash and Cash Equivalents

Cash and cash equivalents, including federal funds sold, decreased $98.3 million or 76.7%, since December 31, 2010. Cash and due from banks decreased $13.4 million while federal funds sold decreased $84.9 million. The decrease in both cash and due from banks as well as federal funds sold is partially due to the short-term increase in deposits at year-end associated with municipal deposits from the collection of property taxes and with commercial deposits resulting from holiday spending. These deposits typically run off during the year. In addition, management reinvested the excess funds into suitable investment securities during the first six months of 2011 given the continued low interest rate environment.

Investment Securities

Investment securities increased $87.1 million, or 38.3%, during the first six months of 2011 to $314.9 million. During the first six months of 2011 $136.6 million of investment securities were purchased, $19.4 million of investment securities were called and $29.5 million of investment securities matured. U.S Government sponsored entities accounted for $123.8 million of the purchases of which $66.8 million have step-up features in which the yields are scheduled to increase in future periods. The remaining $12.8 million of purchases were of securities issued by states and political subdivisions. The initial yield on the investments purchased was 2.56%. Management continues to follow its practice of holding the securities in the investment portfolio to maturity.

Loans

Total loans decreased $24.1 million or 3.2% during the first six months of 2011 from $746.8 million at December 31, 2010 to $722.7 million at June 30, 2011. The decrease in total loans outstanding was partially due to the continued aggressive management of the loans acquired in the Acquisition in line with the Bank’s historical underwriting standards, which in some cases resulted in the borrower refinancing elsewhere. In addition, management continues to focus on credit quality resulting in continued scrutiny of equity, cash flow and borrower character for new loan opportunities created as borrowers refinance their credits with competing banks. The Bank does not make “subprime” or so-called “Alt-A” loans (alternative documentation loans with lower approval standards) and does not hold any such loans in its portfolio.

	LOAN PORTFOLIO ANALYSIS
	(Dollars in Thousands)

	June 30, 2011					December 31, 2010
	Loan Balance		Percent of Loans in each Category			Loan Balance		Percent of Loans in each Category
Commercial	$	23,502		3.25	%	$	25,451		3.41	%
Real Estate
Construction		55,858		7.73	%		55,974		7.49	%
Commercial		284,126		39.32	%		285,863		38.28	%
Residential		305,567		42.28	%		319,789		42.82	%
Multi-Family		36,969		5.12	%		41,074		5.50	%
Installment and Consumer		16,663		2.30	%		18,678		2.50	%
Total	$	722,685		100.00	%	$	746,829		100.00	%

Accrued Interest Receivable and Other Assets

Accrued interest receivable and other assets increased $0.6 million or 7.6% to $8.2 million during the first six months of 2011.

Total Deposits and Borrowings

Deposits at the Bank decreased $35.5 million, or 3.5%, from $1,018.4 million at December 31, 2010 to $983.0 million at June 30, 2011. Demand deposits decreased $1.4 million, savings and NOW accounts decreased $19.8 million, and time deposits decreased $14.3 million. The decrease in savings and NOW accounts was driven by a decrease of $57.0 million in municipal deposits, which was partially offset by significant growth in both money market and savings accounts as many customers shifted from certificates of deposit into money market accounts in order to keep their funds more liquid in the current low interest rate environment. The decrease in municipal deposits during the first six months is typical due to the increase in municipal deposits from the receipt of property tax payments in December of each year. A portion of these deposits tend to be transferred to the State of Wisconsin investment fund after the first of the year with the remaining balances declining throughout the year as funds are spent on operating activities.

Total borrowings decreased $2.7 million or 55.4% during the first six months of 2011. The Bank adjusts its level of daily borrowing and short term daily investment depending upon its needs each day. Excess funds or funding requirements are addressed at the close of each business day. Funding needs are met through the Bank’s federal funds facility with its primary correspondent bank.

Accrued Interest Payable and Other Liabilities

Accrued interest payable and other liabilities increased $0.6 million or 14.0% to $4.7 million during the first six months of 2011.

Capital Resources

Total stockholders’ equity increased $4.9 million, or 4.3%, during the first six months of 2011, which was equal to the Corporation’s net income of $4.9 million for the period as no dividends were declared during the period. During the fourth quarter of 2010, the Board declared a special dividend of $1.20 per share paid on December 10, 2010 to shareholders of record on November 30, 2010. This dividend was intended to prepay 2011 dividends due to the possibility of less favorable tax treatment of dividend income in 2011. As a result of the dividend paid in December of 2010, the Board intends to significantly reduce or eliminate dividend payments during 2011. The Board intends to resume quarterly dividend payments after 2011, however there can be no assurance that they will do so or, if so, in what amounts. The Board will review earnings, monitor regulatory developments and consider other appropriate factors at that time relative to declaring future dividends.

Federal banking regulatory agencies have established capital adequacy rules applicable to banks that take into account risk attributable to balance sheet assets and off-balance-sheet activities. As of June 30, 2011 the Bank’s Tier 1 leverage ratio was 10.2% compared to 10.0% at December 31, 2010. Tier 1 risk-based capital ratios were 15.2% at June 30, 2011 and 14.0% at December 31, 2010. The increase in the Tier 1 risk-based capital ratio was due to both a decrease in total risk-based assets and an increase in capital through retained earnings. As of June 30, 2011, the Bank’s total risk based capital ratio was 16.4% compared to 15.2% at December 31, 2010. The increase in the total risk-based capital ratio was due to a decrease in total risk-based assets as well as an increase in total capital through both retained earnings and a higher ALL.

All of the Bank’s capital ratios at June 30, 2011 were significantly in excess of minimum regulatory requirements. A bank is “well capitalized” if it maintains a minimum Tier 1 leverage ratio of 5.0%, a minimum Tier 1 risk based capital ratio of 6.0% and a minimum total risk based capital ratio of 10.0%. Earnings continue to be stable and provide sufficient capital retention for anticipated growth. Management believes that the Bank has a strong capital position and is positioned to take advantage of opportunities for profitable geographic and product expansion, and to provide depositor and investor confidence. Management actively reviews capital strategies for the Bank in light of perceived business risks, future growth opportunities, industry standards and regulatory requirements.

Nonperforming Assets and ALL

Nonperforming loans, excluding purchased credit-impaired loans, were $19.9 million at June 30, 2011 compared to $24.6 million at December 31, 2010. There continued to be significant activity in the Bank’s nonperforming loans as many of those loans move through the foreclosure process and end up in OREO. Total interest income that was accrued but not recorded as income on non-accrual loans was $2.5 million at June 30, 2011 and $3.2 million at December 31, 2010.

The carrying value of OREO was $8.6 million at June 30, 2011 compared to $5.4 million at December 31, 2010. The increase is due to one large commercial property that was added to OREO during the second quarter of 2011, representing $3.7 million of the total carrying value. There has been significant activity in the number of properties in OREO as there have been 62 properties added to OREO and 59 OREO properties sold during the first six months of 2011. As of June 30, 2011, the Bank had 52 total properties in OREO. The elevated carrying value of OREO and the increased number of properties in OREO is due to the Acquisition, as well as the continued depressed state of the economy and real estate markets over the past several years. The Bank’s goal is to minimize the delay in liquidation of OREO properties. As a result of the Acquisition, management estimates it will continue to foreclose and liquidate a significant number of properties in 2011. Management expects that the fair values recorded in the Acquisition accounting will be sufficient to cover any necessary write downs and realized losses on such liquidations.

The ALL increased $0.3 million or 3.7% to $9.9 million during the first six months of 2011. A $3.3 million provision for loan loss was charged to earnings for the six months ended June 30, 2011. In addition, a total of $3.1 million of loans were charged-off during the first six months of 2011, which was partially offset by $0.1 million of recoveries during the period on loans that had been previously charged-off. The Bank’s charge-offs and the corresponding provision for loan losses reflect activity on acquired loans as well as the adverse effects of the continuing difficult economic conditions.

The ALL represents management’s estimate of the amount necessary to provide for probable and inherent credit losses in the loan portfolio. To assess the adequacy of the ALL, management uses significant judgment, focusing on specific allocations applied to loans that are identified for evaluation on an individual loan basis. In addition, loans are analyzed on a group basis using risk characteristics that are common to groups of similar loans. Factors that are considered include changes in the size and character of the loan portfolio, changes in the levels of impaired and nonperforming loans, historical losses in each category, the risk inherent in specific loans, concentrations of loans to specific borrowers or industries, existing economic conditions, and the fair value of underlying collateral, as well as changes to the fair value of underlying collateral in the continued recessionary environment.

SUMMARY OF ALLOWANCE FOR LOAN LOSSES

(Dollars in Thousands)

	June 30, 2011			December 31, 2010
Balance of ALL at beginning of period	$	9,527		$	6,034
Total loans charged-off		(3,052	)		(4,551	)
Total recoveries		79			1,114
Net loans charged-off		(2,973	)		(3,437	)
Additions to allowance charged to expense		3,320			6,930
Balance of ALL at end of period	$	9,874		$	9,527

Nonaccrual loans	$	13,405		$	20,452
Troubled debt restructurings – nonaccrual		3,496			2,731
Loans past due 90 days or more		3,040			1,433
Total nonperforming loans (1)		19,941			24,616
Other real estate owned		8,565			5,407
Total nonperforming assets	$	28,506		$	30,023


Ratio of nonperforming loans to total loans		2.76	%		3.30	%
Ratio of nonperforming asset to total assets		2.57	%		2.63	%
Ratio of ALL to total nonperforming loans		49.52	%		38.70	%
Ratio of net loans charged-off during the period to average loans outstanding (2)		0.81	%		0.45	%
Ratio of ALL to total loans		1.37	%		1.28	%

(1)	This amount excludes purchased credit-impaired loans. Purchased credit-impaired loans had evidence of deterioration in credit quality prior to the Acquisition. Fair value of these loans as of October 23, 2009, the date of the Acquisition, includes estimates of credit losses.

(2)	Net loans charged-off for the quarter ended June 30, 2011have been annualized.

Liquidity

The ability to provide the necessary funds for the Bank’s day-to-day operations depends on a sound liquidity position. Management monitors the Bank’s liquidity by reviewing the maturity distribution between interest-earning assets and interest-bearing liabilities. Fluctuations in interest rates can be the primary cause for the flow of funds into or out of a financial institution. The Bank continues to offer products that are competitive and encourages depositors to invest their funds in these products. Management believes that these efforts will help the Bank to not only retain these deposits, but to encourage continued deposit growth. The Bank has the ability to borrow up to $50.0 million in federal funds purchased, the ability to borrow up to $50 million through repurchase agreements and has an additional $87.3 million available for short-term liquidity through the Federal Reserve Bank Discount window.

During the year, the Bank manages its overall liquidity, taking into consideration funded and unfunded commitments as a percentage of its liquidity sources. The Bank’s liquidity sources have been and are expected to continue to be sufficient to meet the cash requirements of its lending activities.

Off-Balance Sheet Arrangements

The Bank’s obligations also include off-balance sheet arrangements consisting of loan-related commitments, of which only a portion are expected to be funded. At June 30, 2011, the Bank’s loan-related commitments, including standby letters of credit and financial guarantees, totaled $ 102.7 million.

Results of Operations

Comparison of the Three Months Ended June 30, 2011 and June 30, 2010.

The following table sets forth the Corporation’s consolidated results of operations and related summary information for the three-month periods ended June 30, 2011 and June 30, 2010.

SUMMARY RESULTS OF OPERATIONS
(Dollar amounts in thousands, except per share data)

	Three months ended
	June 30,
	2011			2010
Net income	$	2,653		$	4,178
Earnings per share	$	0.29		$	0.47
Cash dividends per share	$	-		$	0.30

Return on average assets		0.95	%		1.54	%
Return on average equity		9.15	%		13.69	%
Efficiency ratio, as reported (1)		62.65	%		59.17	%

(1)	Non-interest expense divided by the sum of net interest income plus non-interest income. A lower ratio indicates greater efficiency.

The Corporation posted net income of $2.7 million for the second quarter of 2011, a decrease of $1.5 million, or 36.5%, from the second quarter of 2010. Earnings per share decreased to $0.29 for the three months ended June 30, 2011 compared to $0.47 for the same period in 2010.

The decrease in earnings was primarily due to a $2.3 million decrease in net interest income, which resulted from both lower interest rates on earning assets and a volume shift from loans to lower-yielding investment securities. The decrease attributable to lower interest rates on earning assets was $2.2 million. The decrease attributable to the volume shift of earning assets was $0.3 million and was partially offset by a $0.2 million reduction in interest expense as a result of lower interest rates. The decrease in loan balances is primarily due to a reduction in substandard loans acquired from the FDIC in October 2009 at a pace faster than new business is achieved. This necessitated redeployment of those funds to investment securities. Reinvestment in today’s rate environment produces relatively low-yielding investments which also negatively impacts the net interest margin. The decrease in earnings was also negatively impacted by a $0.9 million increase in the provision for loan losses, which was offset by a $0.9 million decrease in noninterest expense. Operating earnings during the second quarter of 2011 were also negatively affected by a decrease in Acquisition-related purchase accounting income. These items, which totaled $2.1 million in 2011 compared to $2.9 million in 2010, impacted the net interest margin, other income and other operating expenses.

Interest Income

Total interest income on loans decreased $2.4 million, or 16.7%, in the second quarter of 2011 compared to the second quarter of 2010. The decrease was due to a reduction in Acquisition-related purchase accounting income, reduced loan volume and the prolonged low interest rate environment. The purchase accounting income related to the Acquisition included $1.5 million in loan discount accretion during the second quarter of 2011 compared to $2.3 million during the same period in 2010. Loan discount accretion peaked in 2010 and management expects it to decline in future years as loans in the Acquired Bank’s loan portfolio continue to amortize, mature or pay off. Interest income on loans for the second quarter of 2011, excluding loan discount accretion, decreased by $1.6 million compared to same period in 2010. A portion of the decrease was due to lower loan volumes, as average loans decreased $51.5 million, or 6.6%, for the quarter ended June 30, 2011 compared to the second quarter of 2010 due primarily to the run-off of the acquired loans. In addition to lower loan volume, loan yields decreased 44 basis points to 5.80% for the second quarter of 2011 compared to 6.23% for the second quarter of 2010, as new and renewed loans were booked at lower interest rates than the existing portfolio. Including the interest income related to the loan accretion discount, loan yields decreased 81 basis points to 6.63% for the second quarter of 2011 compared to 7.44% for the second quarter of 2010.

Interest income on investment securities on a tax-equivalent basis decreased $0.1 million, or 5.6%, for the second quarter of 2011 compared to the second quarter of 2010. This change reflects a decrease of 91 basis points in the average tax equivalent yield on the investment securities to 2.13% during the second quarter of 2011 compared to 3.04% in the same period of 2010. The decrease in yield was partially offset by an $83.5 million increase in the average amount of U. S. government-sponsored agency, municipal security investments and fed funds sold to $323.9 million for the three months ended June 30, 2011.

Interest Expense

Interest expense for the three months ended June 30, 2011 decreased $0.2, million or 14.0%, compared to the same period in 2010. Interest expense in the second quarter of 2010 was reduced by $0.5 million of deposit premium amortization due to the purchase accounting related to the Acquisition. The deposit premium was fully amortized in the fourth quarter of 2010 and therefore had no impact on interest expense during the second quarter of 2011. Excluding the premium amortization, interest expense would have decreased by $0.7 million due to declining interest rates which was partially offset by core deposit growth. The average yield on interest bearing liabilities decreased 35 basis points to 0.56% during the second quarter of 2011 compared to 0.91% in the second quarter of 2010. Including the $0.5 million of premium amortization during the second quarter of 2010, the average yield on interest-bearing liabilities decreased 13 basis points to 0.56% during the second quarter of 2011 from 0.69% in the same period of 2010. The decrease in average yields was partially offset by an increase in average interest-bearing liabilities of $38.1 million to $838.9 million for the second quarter of 2011 from $800.8 million for the second quarter of 2010, primarily to due an increase in core deposits.

Net Interest Margin

The tax-equivalent net interest margin for the three months ended June 30, 2011 was 4.80% compared to 5.86% for the three months ended June 30, 2010. Excluding the purchase accounting related to the Acquisition the tax-equivalent net interest margin for the three months ended June 30, 2011 would have been 4.22% compared to 4.76% for the three months ended June 30, 2010.

NET INTEREST INCOME ANALYSIS ON A TAX-EQUIVALENT BASIS

(Dollars in Thousands)

	Three months ended June 30, 2011							Three months ended June 30, 2010
	Average Balance		Interest Income/ Expense		Average Yield/ Rate			Average Balance		Interest Income/ Expense		Average Yield/ Rate
ASSETS
Interest-earning assets:
Loans (1)	$	726,290	$	12,046		6.63	%	$	777,755	$	14,461		7.44	%
Taxable investment securities		270,594		1,207		1.78	%		177,947		1,234		2.77	%
Non-taxable investment
securities (2)		45,787		515		4.50	%		46,837		586		5.00	%
Federal funds sold		7,472		2		0.11	%		15,576		6		0.15	%
Total interest earning assets	$	1,050,143	$	13,770		5.24	%	$	1,018,115	$	16,287		6.40	%
Noninterest earning assets:
Other assets		66,590							66,817

TOTAL ASSETS	$	1,116,733						$	1,084,932

LIABILITIES AND EQUITY
Interest-earning liabilities:
Transaction accounts	$	253,830	$	111	0.17	%	$	247,715	$	212	0.34	%
Money market		198,938		248	0.50	%		150,013		318	0.85	%
Savings deposits		181,509		99	0.22	%		165,365		133	0.32	%
Other time deposits		196,650		710	1.44	%		235,760		708	1.20	%
Short-term borrowings		7,965		12	0.60	%		1.903		1	0.21	%
Total interest-bearing liabilities		838,892		1,180	0.56	%		800,756		1,372	0.69	%
Noninterest bearing liabilities:
Demand deposits		156,394						152,694
Other		5,520						9,424
Stockholders’ equity		115,927						122,058
Total liabilities and
stockholders’ equity	$	1,116,733					$	1,084,932
Net interest earnings and interest
rate spread (3)			$	12,590	4.68	%			$	14,915	5.71	%

Net interest margin (4)					4.80	%					5.86	%

(1)	The average loan balances and rates include non-accrual loans.

(2)	The interest income on tax exempt securities is computed on a tax-equivalent basis using a tax rate of 34% for all periods presented.

(3)	Interest rate spread represents the difference between the average yield earned on average interest-earning assets for the period and the average rate of interest accrued on average interest-bearing liabilities for the period and is represented on a tax-equivalent basis.

(4)	Net interest margin represents net interest income for a period divided by average interest-earning assets for the period and is represented on a tax-equivalent basis.

The following table sets forth, for the periods indicated, a summary of the changes in interest earned on a tax-equivalent basis and interest paid resulting from changes in volume and rates:

	For the three months ended
	June, 2011 and 2010
	Increase (Decrease) Due to
Interest earned on:	Volume			Rate (1)			Net
Loans	$	(957	)	$	(1,458	)	$	(2,415	)
Taxable investment securities		643			(670	)		(27	)
Nontaxable investment securities		(13	)		(58	)		(71	)
Federal funds sold		(4	)		(1	)		(5	)

Total interest-earning assets	$	(331	)	$	(2,187	)	$	(2,518	)

Interest paid on:
Transaction accounts	$	5		$	(106	)	$	(101	)
Money market		104			(174	)		(70	)
Savings		13			(47	)		(34	)
Other time		(118	)		120			2
Short-term borrowings		3			8			11

Total interest-bearing liabilities	$	7		$	(199	)	$	(192	)

Decrease in net interest income							$	(2,326	)

(1) The change in interest due to both rate and volume has been allocated to rate changes.

Provision for Loan Losses

The Bank recorded a provision for loan losses (“PLL”) of $1.9 million during the three months ended June 30, 2011 compared to $1.0 million during the same period in 2010. The increase in the PLL during the period was primarily due to an increase in charge-offs, partially offset by recoveries during the period.

Noninterest Income

Noninterest income for the three months ended June 30, 2011 decreased $0.2 million, or 5.3%, compared to the same period in 2010. The decrease was due to a decrease in other income of $0.4 million, a decrease in service charges on deposits of $0.1 million and a decrease on the net gain on the sale of mortgage loans of $0.1 million. The decrease in other income was primarily due to losses, including expenses, on the sale of OREO properties. The decrease in noninterest income for the second quarter of 2011 compared to the same period in 2010 was partially offset by an increase of $0.5 million in non-accretable discount recorded to income as part of the purchase accounting related to the Acquisition. This is income related to loans acquired in the Acquisition that were specifically identified as credit-impaired loans pursuant to applicable guidance for accounting for acquired loans, but which were repaid or charged off during the quarter. The non-accretable discount recorded to income represents the excess of net amounts received over the recorded fair value of such loans. In future periods, non-accretable income could vary significantly as it is dependent on the difference between expected future cash flows received and the Acquisition accounting fair value discounts applied to the loans specifically impaired.

Noninterest Expense

Noninterest expense decreased $0.9 million, or 8.4%, during the three months ended June 30, 2011 compared to the same period in 2010. Normal increases in salary and benefits, occupancy costs and computer services was offset by decreased regulatory agency assessments of $0.9 million and Acquisition expenses of $0.1 million incurred during the second quarter of 2010. The core deposit intangible amortization expense remained at $0.1 million and is recognized as part of the purchase accounting related to the Acquisition. The core deposit intangible will continue to be amortized over the next seven years.

Income Taxes

Income tax expense for the second quarter of 2011 was $1.4 million compared to $2.5 million for the second quarter of 2010. The Corporation’s effective tax rate (income tax expense divided by income before income taxes) was 35.3% for the second quarter of 2011 compared to 37.2% during the second quarter of 2010. The decrease in the effective tax rate was due to a decrease in pre-tax income, which increases the effect of permanent non-taxable items on the effective tax rate.

Comparison of the Six Months Ended June 30, 2011 and June 30, 2010.

The following table sets forth the Corporation’s consolidated results of operations and related summary information for the six-month periods ended June 30, 2011 and June 30, 2010.

SUMMARY RESULTS OF OPERATIONS
(Dollar amounts in thousands, except per share data)

	Six months ended
	June 30,
	2011			2010
Net income	$	4,938		$	8,875
Earnings per share	$	0.55		$	1.00
Cash dividends per share	$	-		$	0.60

Return on average assets		0.89	%		1.64	%
Return on average equity		8.58	%		14.56	%
Efficiency ratio, as reported (1)		65.88	%		55.50	%

(1)	Non-interest expense divided by the sum of net interest income plus non-interest income. A lower ratio indicates greater efficiency.

The Corporation posted net income of $4.9 million for the first six months of 2011, a decrease of $3.9 million, or 44.4%, from the first six months of 2010. Earnings per share decreased to $0.55 for the six months ended June 30, 2011 compared to $1.00 for the same period in 2010.

The decrease in earnings was primarily due to a $5.8 million decrease in net interest income which resulted from both lower interest rates on earning assets and a volume shift from loans to lower-yielding investment securities. The decrease attributable to lower interest rates on earning assets was $5.6 million. The decrease attributable to the volume shift of earning assets was $0.6 million and was partially offset by a $0.4 million reduction in interest expense as a result of lower interest rates. The decrease in loan balances is primarily due to a reduction in substandard loans acquired from the FDIC in October 2009 at a pace faster than new business is achieved. This necessitated redeployment of those funds to investment securities. Reinvestment in today’s rate environment produces relatively low-yielding investments which also negatively impacts the net interest margin. The decrease in earnings was also negatively impacted by a $0.6 million increase in the provision for loan losses and a $1.3 million decrease in noninterest income which was partially offset by a $0.7 million decrease in noninterest expense. Operating earnings during the second quarter of 2011 were also negatively affected by a decrease in Acquisition-related purchase accounting income. These items, which totaled $3.5 million in 2011 compared to $7.4 million in 2010, impacted the net interest margin, other income and other operating expenses.

Interest Income

Total interest income on loans decreased $5.7 million, or 19.5%, in the first six months of 2011 compared to the first six months of 2010. The decrease was due to a reduction in Acquisition-related purchase accounting income, reduced loan volume and the prolonged low interest rate environment. The purchase accounting income related to the Acquisition included $2.6 million in loan discount accretion during the first six months of 2011 compared to $5.5 million during the same period in 2010. Loan discount accretion peaked in 2010 and management expects it to decline in future years as loans in the Acquired Bank’s loan portfolio continue to amortize, mature or pay off. Interest income on loans for the first six months of 2011, excluding loan discount accretion, decreased by $2.9 million compared to same period in 2010. A portion of the decrease was due to lower loan volumes, as average loans decreased $49.2 million, or 6.3%, for the six months ended June 30, 2011 compared to average loans during the first six months of 2010 resulting from the run-off of the acquired loans. In addition to lower loan volume, loan yields decreased 37 basis points to 5.78% for the first six months of 2011 compared to 6.15% for the first six months of 2010, as new and renewed loans were booked at lower interest rates than the existing portfolio. Including the interest income related to the loan accretion discount, loan yields decreased 106 basis points to 6.49% for the first six months of 2011 compared to 7.55% for the same period in 2010.

Interest income on investment securities on a tax-equivalent basis decreased $0.5 million, or 14.3%, for the first six months of 2011 compared to the first six months of 2010. This change reflects a decrease of 113 basis points in the average tax equivalent yield on the investment securities to 1.94% during the second quarter of 2011 compared to 3.07% in the same period of 2010. The decrease in yield was partially offset by an $83.5 million increase in the average amount of U. S. government-sponsored agency, municipal security investments and fed funds sold to $315.3 million for the six months ended June 30, 2011.

Interest Expense

Interest expense for the six months ended June 30, 2011 decreased $0.4 million or 14.3%, compared to the same period in 2010. Interest expense for the six months ended June 30, 2010 was reduced by $0.9 million of deposit premium amortization due to the purchase accounting related to the Acquisition. The deposit premium was fully amortized in the fourth quarter of 2010 and therefore had no impact on interest expense during the first half of 2011. Excluding the premium amortization, interest expense would have decreased by $1.3 million due to declining interest rates which was partially offset by core deposit growth. The average yield on interest bearing liabilities decreased 35 basis points to 0.60% during the first six months of 2011 compared to 0.95% in the same period of 2010. Including the $0.5 million of premium amortization during the first six months of 2010, the average yield on interest-bearing liabilities decreased 13 basis points to 0.60% during the first six months of 2011 from 0.73% in the same period of 2010. The decrease in average yields was partially offset by an increase in average interest-bearing liabilities of $33.5 million to $837.4 million for the first six months of 2011 from $803.9 million for the first six months of 2010, primarily to due an increase in core deposits.

Net Interest Margin

The tax-equivalent net interest margin for the six months ended June 30, 2011 was 4.52% compared to 5.80% for the six months ended June 30, 2010. Excluding the purchase accounting related to the Acquisition the tax-equivalent net interest margin for the six months ended June 30, 2011 would have been 4.02% compared to 4.50% for the six months ended June 30, 2010.

NET INTEREST INCOME ANALYSIS ON A TAX-EQUIVALENT BASIS

(Dollars in Thousands)

	Six months ended June 30, 2011							Six months ended June 30, 2010
	Average Balance		Interest Income/ Expense		Average Yield/ Rate			Average Balance		Interest Income/ Expense		Average Yield/ Rate
ASSETS
Interest-earning assets:
Loans (1)	$	731,270	$	23,733		6.49	%	$	780,498	$	29,471		7.55	%
Taxable investment securities		249,888		2,019		1.62	%		162,506		2,386		2.94	%
Non-taxable investment
securities (2)		44,452		1,018		4.58	%		45,275		1,153		5.09	%
Federal funds sold		20,972		14		0.13	%		23,982		20		0.17	%
Total Interest Earning Assets	$	1,046,582	$	26,784		5.12	%	$	1,012,261	$	33,030		6.53	%
Noninterest earning assets:
Other assets		66,386							73,131

TOTAL ASSETS	$	1,112,968						$	1,085,392

LIABILITIES AND EQUITY
Interest-earning liabilities:
Transaction accounts	$	266,857	$	292	0.22	%	$	263,398	$	473	0.36	%
Money market		190,547		526	0.55	%		142,850		667	0.93	%
Savings deposits		174,473		199	0.23	%		160,729		261	0.32	%
Other time deposits		200,873		1,479	1.47	%		235,168		1,522	1.29	%
Short-term borrowings		4,697		12	0.51	%		1,757		1	0.11	%
Total interest-bearing liabilities		837,447		2,508	0.60	%		803,902		2,924	0.73	%
Noninterest bearing liabilities:
Demand deposits		155,612						149,941
Other		4,759						9,652
Stockholders’ equity		115,150						121,897
Total liabilities and
stockholders’ equity	$	1,112,968					$	1,085,392
Net interest earnings and interest
rate spread (3)			$	24,276	4.52	%			$	30,106	5.80	%

Net interest margin (4)					4.64	%					5.95	%

(1)	The average loan balances and rates include non-accrual loans.

(2)	The interest income on tax exempt securities is computed on a tax-equivalent basis using a tax rate of 34% for all periods presented.

(3)	Interest rate spread represents the difference between the average yield earned on average interest-earning assets for the period and the average rate of interest accrued on average interest-bearing liabilities for the period and is represented on a tax-equivalent basis.

(4)	Net interest margin represents net interest income for a period divided by average interest-earning assets for the period and is represented on a tax-equivalent basis.

The following table sets forth, for the periods indicated, a summary of the changes in interest earned on a tax-equivalent basis and interest paid resulting from changes in volume and rates:

	For the six months ended
	June, 2011 and 2010
	Increase (Decrease) Due to
Interest earned on:	Volume			Rate (1)			Net
Loans	$	(1,859	)	$	(3,879	)	$	(5,738	)
Taxable investment securities		1,283			(1,650	)		(367	)
Nontaxable investment securities		(21	)		(114	)		(135	)
Federal funds sold		(3	)		(4	)		(6	)

Total interest-earning assets	$	(600	)	$	(5,647	)	$	(6,246	)

Interest paid on:
Transaction accounts	$	6		$	(187	)	$	(181	)
Money market		223			(364	)		(141	)
Savings		23			(85	)		(62	)
Other time		(222	)		179			(43	)
Short-term borrowings		1			10			11
Total interest-bearing liabilities	$	31		$	(447	)	$	(416	)

Decrease in net interest income							$	(5,830	)

(1) The change in interest due to both rate and volume has been allocated to rate changes.

Provision for Loan Losses

The Bank recorded a PLL of $3.3 million during the six months ended June 30, 2011 compared to $2.7 million during the same period in 2010. The increase in the PLL during the period was primarily due to an increase in charge-offs, partially offset by recoveries during the period.

Noninterest Income

Noninterest income for the six months ended June 30, 2011 decreased $1.3 million, or 15.1%, compared to the same period in 2010. The decrease was due to a decrease in other income of $0.8 million, a decrease of $0.3 million in non-accretable discount recorded to income as part of the purchase accounting related to the Acquisition and a decrease in service charges on deposits of $0.2 million. The decrease in other income was primarily due to losses, including expenses, on the sale of OREO properties. The decrease in non-accretable discount recorded as income is related to loans acquired in the Acquisition that were specifically identified as credit-impaired loans pursuant to applicable guidance for accounting for acquired loans, but which were repaid or charged off during the quarter. The non-accretable discount recorded to income represents the excess of net amounts received over the recorded fair value of such loans. In future periods, non-accretable income could vary significantly as it is dependent on the difference between expected future cash flows received and the Acquisition accounting fair value discounts applied to the loans specifically impaired.

Noninterest Expense

Noninterest expense decreased $0.7 million, or 3.3%, during the six months ended June 30, 2011 compared to the same period in 2010. Normal increases in salary and benefits, occupancy costs and computer services was offset by decreased regulatory agency assessments of $0.9 million and Acquisition expenses of $0.4 million incurred during the first six months of 2010. The core deposit intangible amortization expense decreased by $0.1 million to $0.2 million for the first six month of 2011 compared with the same period in 2010 and is recognized as part of the purchase accounting related to the Acquisition. The core deposit intangible will continue to be amortized over the next seven years.

Income Taxes

Income tax expense for the first six months of 2011 was $2.3 million compared to $5.3 million for the first six months of 2010. The Corporation’s effective tax rate (income tax expense divided by income before income taxes) was 32.0% for the first six months of 2011 compared to 37.5% during the same period in 2010. The decrease in the effective tax rate was due to both a true-up of taxes from prior years, as well as a decrease in pre-tax income, which increases the effect of permanent non-taxable items on the effective tax rate.

ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The 2010 Form 10-K contains certain disclosures about market risks affecting the Corporation. There have been no material changes to the information provided which would require additional disclosures as of the date of this filing.

ITEM 4 - CONTROLS AND PROCEDURES

The Corporation maintains a set of disclosure controls and procedures that are designed to ensure that information required to be disclosed by it in the reports filed by it under the Securities Exchange Act of 1934, as amended (“Exchange Act”), is recorded and processed, summarized and reported within the time periods specified in the SEC’s rules and forms. As of June 30, 2011 the Corporation carried out an evaluation, under the supervision and with the participation of management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Corporation’s disclosure controls and procedures pursuant to Rule 13a-15(e) and 15d-15(e) of the Exchange Act. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer of the Corporation concluded that the Corporation’s disclosure controls and procedures are effective as of the end of the period covered by this report.

There have been no changes in the Corporation’s internal control over financial reporting identified in connection with the evaluation discussed above that occurred during the quarter ended June 30, 2011 that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1 - LEGAL PROCEEDINGS

There have been no material changes to the discussion in response to Item 3 of Part I of the 2010 Form 10-K.

ITEM 1A - RISK FACTORS

There have been no material changes to the risk factors previously disclosed in response to Item 1A to Part I of the 2010 Form 10-K.

ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Not applicable.

ITEM 3 - DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 5 - OTHER INFORMATION

Not applicable

ITEM 6 – EXHIBITS

31.1

Certification of Ronald K. Puetz, Chief Executive Officer, under Rule 13a-14(a)/15d-14(a)

31.2

Certification of Frederick R. Klug, Chief Financial Officer, under Rule 13a-14(a)/15d-14(a)

32.1

Certification of Ronald K. Puetz, Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2

Certification of Frederick R. Klug, Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS**

XBRL Instance

101.SCH**

XBRL Taxonomy Extension Schema

101.CAL**

XBRL Taxonomy Extension Calculation

101.DEF**

XBRL Taxonomy Extension Definition

101.LAB**

XBRL Taxonomy Extension Labels

101.PRE**

XBRL Taxonomy Extension Presentation

** XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

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.

TRI CITY BANKSHARES CORPORATION



DATE: August 5, 2011		/s/ Ronald K. Puetz
Ronald K. Puetz
President, Chief Executive Officer
(Principal Executive Officer)



DATE: August 5, 2011		/s/ Frederick R. Klug
Frederick R. Klug
Senior Vice President
(Chief Financial Officer)

Tri City Bankshares Corporation

Index of Exhibits

Exhibit No.

31.1

Certification of Ronald K. Puetz, Chief Executive Officer, under Rule 13a 14(a)/15d-14(a)

31.2

Certification of Frederick R. Klug, Chief Financial Officer, under Rule 13a 14(a)/15d-14(a)

32.1

Certification of Ronald K. Puetz, Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2

Certification of Frederick R. Klug, Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS**

XBRL Instance

101.SCH**

XBRL Taxonomy Extension Schema

101.CAL**

XBRL Taxonomy Extension Calculation

101.DEF**

XBRL Taxonomy Extension Definition

101.LAB**

XBRL Taxonomy Extension Labels

101.PRE**

XBRL Taxonomy Extension Presentation

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