NATIONAL BANK OF INDIANAPOLIS CORP - FORM 10-Q

Attached files

file	filename
EX-31.1 - EX-31.1 - NATIONAL BANK OF INDIANAPOLIS CORP	c21011exv31w1.htm
EX-32.2 - EX-32.2 - NATIONAL BANK OF INDIANAPOLIS CORP	c21011exv32w2.htm
EX-31.2 - EX-31.2 - NATIONAL BANK OF INDIANAPOLIS CORP	c21011exv31w2.htm
EXCEL - IDEA: XBRL DOCUMENT - NATIONAL BANK OF INDIANAPOLIS CORP	Financial_Report.xls
EX-32.1 - EX-32.1 - NATIONAL BANK OF INDIANAPOLIS CORP	c21011exv32w1.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q


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

For the quarterly period ended June 30, 2011


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

Commission file number: 000-21671

THE NATIONAL BANK OF INDIANAPOLIS CORPORATION

(Exact name of registrant as specified in its charter)


Indiana		35-1887991
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

107 North Pennsylvania Street
Indianapolis, Indiana		46204
(Address of principal executive offices)		(Zip Code)

(317) 261-9000
(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 þ No o

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

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.


Large accelerated filer o	Accelerated filer þ	Non-accelerated filer o	Smaller reporting company o
		(do not check if a smaller reporting company)

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.


Common Stock		Outstanding at August 5, 2011
Common Stock, no par value per share		2,340,609

Table of Contents
The National Bank of Indianapolis Corporation

Report on Form 10-Q
for Quarter Ended
June 30, 2011


PART I — FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements (Unaudited)

Consolidated Balance Sheets — June 30, 2011 and December 31, 2010			1

Consolidated Statements of Income —

Three Months ended June 30, 2011 and 2010			2

Six Months ended June 30, 2011 and 2010			3

Consolidated Statements of Cash Flows — Six Months ended June 30, 2011 and 2010			4

Consolidated Statements of Shareholders’ Equity — Six Months ended June 30, 2011 and 2010			5

Notes to Consolidated Financial Statements			6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			24

Item 3. Quantitative and Qualitative Disclosures about Market Risk			39

Item 4. Controls and Procedures			40

PART II — OTHER INFORMATION

Item 1. Legal Proceedings			40

Item 1A. Risk Factors			40

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			41

Item 3. Defaults Upon Senior Securities			42

Item 4. (Removed and Reserved)			42

Item 5. Other Information			42

Item 6. Exhibits			42

Signatures			44

EX-31.1
EX-31.2
EX-32.1
EX-32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

Part I — Financial Information


Item 1.		Financial Statements

The National Bank of Indianapolis Corporation

Consolidated Balance Sheets

(Unaudited, Dollars in thousands except share data)


	June 30, 2011			December 31, 2010

Assets
Cash and cash equivalents
Cash and due from banks	$	38,723		$	24,143
Interest bearing due from banks		131,204			252,266
Reverse repurchase agreements		1,000			1,000
Federal funds sold		9,143			16,109

Total cash and cash equivalents		180,070			293,518

Investment securities
Available-for-sale securities		151,769			75,677
Held-to-maturity securities (Fair value of $120,384 at June 30, 2011 and $117,302 at December 31, 2010)		119,364			114,676

Total investment securities		271,133			190,353

Loans held for sale		12,779			1,424
Loans		922,564			900,332
Less: Allowance for loan losses		(16,167	)		(15,134	)

Net loans		906,397			885,198
Bank owned life insurance		12,109			11,938
Other real estate owned		9,240			9,574
Premises and equipment		25,779			24,852
Deferred tax asset		7,494			8,540
Federal Reserve and FHLB stock at cost		2,990			3,065
Accrued interest		4,383			4,216
Other assets		8,933			8,715

Total assets	$	1,441,307		$	1,441,393


Liabilities and shareholders’ equity
Deposits:
Noninterest-bearing demand deposits	$	220,670		$	221,129
Money market and savings deposits		831,649			821,345
Time deposits		184,061			196,366

Total deposits		1,236,380			1,238,840
Repurchase agreements and other secured short term borrowings		91,943			93,523
Short term debt		2,563			2,688
Subordinated debt		5,000			5,000
Junior subordinated debentures owed to unconsolidated subsidiary trust		13,918			13,918
Other liabilities		7,001			8,067

Total liabilities		1,356,805			1,362,036

Shareholders’ equity:
Preferred stock, no par value — authorized 5,000,000 shares	$	—		$	—
Common stock, no par value — authorized 15,000,000 shares issued 2,882,542 shares at June 30, 2011 and 2,866,641 shares at December 31, 2010		35,823			35,269
Treasury stock, at cost; 573,251 shares at June 30, 2011 and 548,891 shares at December 31, 2010		(22,038	)		(20,953	)
Additional paid in capital		14,008			12,866
Retained earnings		54,508			51,853
Accumulated other comprehensive income		2,201			322

Total shareholders’ equity		84,502			79,357

Total liabilities and shareholders’ equity	$	1,441,307		$	1,441,393

See notes to consolidated financial statements.

The National Bank of Indianapolis Corporation

Consolidated Statements of Income

(Unaudited, Dollars in thousands except per share data)


	Three months ended
	June 30,
	2011			2010
Interest income:
Interest and fees on loans	$	10,692		$	10,529
Interest on investment securities taxable		661			536
Interest on investment securities nontaxable		591			527
Interest on federal funds sold		7			4
Interest on due from banks		115			90

Total interest income		12,066			11,686

Interest expense:
Interest on deposits		1,422			1,808
Interest on other short term borrowings		62			73
Interest on short term debt		32			47
Interest on long term debt		388			388

Total interest expense		1,904			2,316

Net interest income		10,162			9,370

Provision for loan losses		989			1,234

Net interest income after provision for loan losses		9,173			8,136

Other operating income:
Wealth management fees		1,704			1,467
Service charges and fees on deposit accounts		745			749
Rental income		57			76
Mortgage banking income		(2	)		268
Interchange income		369			314
Net loss on sale of securities		—			(5	)
Other		593			438

Total other operating income		3,466			3,307

Other operating expenses:
Salaries, wages and employee benefits		6,776			6,179
Occupancy		732			647
Furniture and equipment		283			330
Professional services		534			554
Data processing		878			802
Business development		464			459
FDIC Insurance		244			501
Non performing assets		571			147
Other		977			845

Total other operating expenses		11,459			10,464

Income before tax		1,180			979
Federal and state income tax		142			143

Net income	$	1,038		$	836


Basic earnings per share	$	0.45		$	0.36


Diluted earnings per share	$	0.43		$	0.35

See notes to consolidated financial statements.

The National Bank of Indianapolis Corporation

Consolidated Statements of Income

(Unaudited, Dollars in thousands except per share data)


	Six months ended
	June 30,
	2011		2010

Interest income:
Interest and fees on loans	$	21,263	$	20,986
Interest on investment securities taxable		1,367		1,119
Interest on investment securities nontaxable		1,115		1,015
Interest on federal funds sold		18		5
Interest on due from banks		247		176

Total interest income		24,010		23,301

Interest expense:
Interest on deposits		2,938		3,696
Interest on other short term borrowings		134		144
Interest on short term debt		63		94
Interest on long term debt		776		776

Total interest expense		3,911		4,710

Net interest income		20,099		18,591

Provision for loan losses		2,678		2,469

Net interest income after provision for loan losses		17,421		16,122

Other operating income:
Wealth management fees		3,084		2,671
Service charges and fees on deposit accounts		1,492		1,518
Rental income		99		145
Mortgage banking income		217		480
Interchange income		709		598
Net loss on sale of securities		—		(5	)
Other		1,139		833

Total other operating income		6,740		6,240

Other operating expenses:
Salaries, wages and employee benefits		13,203		12,113
Occupancy		1,376		1,288
Furniture and equipment		582		659
Professional services		1,047		1,143
Data processing		1,671		1,527
Business development		892		890
FDIC Insurance		783		1,035
Non performing assets		832		304
Other		516		1,727

Total other operating expenses		20,902		20,686

Income before tax		3,259		1,676
Federal and state income tax		604		218

Net income	$	2,655	$	1,458


Basic earnings per share	$	1.15	$	0.63


Diluted earnings per share	$	1.09	$	0.62

See notes to consolidated financial statements.

The National Bank of Indianapolis Corporation

Consolidated Statements of Cash Flows

(Unaudited, Dollars in thousands)


	Six months ended
	June 30,
	2011			2010

Operating Activities
Net Income	$	2,655		$	1,458
Adjustments to reconcile net income to net cash provided (used) by operating activities:
Provision for loan losses		2,678			2,469
Proceeds from sale of residential mortgage loans		22,310			18,777
Origination of loans held for sale		(20,886	)		(17,972	)
Depreciation and amortization		765			757
Fair value adjustment on mortgage servicing rights		296			438
Loss on sales of investment securities		—			5
Gain on sale of loans		(276	)		(714	)
Net gain on sales and writedowns of other real estate and repossessions		(43	)		(75	)
Net increase in deferred income taxes		(187	)		(1,031	)
Net increase in bank owned life insurance		(171	)		(194	)
Excess tax benefit from deferred stock compensation		(60	)		(50	)
Net accretion of discounts and amortization of premiums on investments		1,114			568
Compensation expense related to restricted stock and options		1,162			866
Changes in assets and liabilities:
Accrued interest receivable		(167	)		73
Other assets		(439	)		(8	)
Other liabilities		(1,006	)		2,311

Net cash provided by operating activities		7,745			7,678

Investing Activities
Proceeds from maturities of investment securities held to maturity		15,693			13,292
Proceeds from maturities of investment securities available for sale		38,737			5,500
Proceeds from sales of investment securities held to maturity		—			477
Purchases of investment securities held to maturity		(76,455	)		(16,057	)
Purchases of investment securities available for sale		(56,757	)		(12,692	)
Net increase in loans		(46,060	)		(32,321	)
Proceeds from sale of loans		8,448			6,548
Proceeds from sales of other real estate and repossessions		1,609			2,959
Purchases of bank premises and equipment		(1,692	)		(347	)

Net cash used by investing activities		(116,477	)		(32,641	)

Financing Activities
Net increase (decrease) in deposits		(2,460	)		55,136
Net decrease in short term borrowings		(1,580	)		(1,056	)
Net change in revolving line of credit		(125	)		(125	)
Income tax benefit from deferred stock compensation		60			50
Proceeds from issuance of stock		474			492
Repurchase of stock		(1,085	)		(380	)

Net cash provided (used) by financing activities		(4,716	)		54,117


Increase (decrease) in cash and cash equivalents		(113,448	)		29,154

Cash and cash equivalents at beginning of year		293,518			151,617


Cash and cash equivalents at end of year	$	180,070		$	180,771


Supplemental cash flow information
Interest paid	$	3,911		$	4,835
Income taxes paid		1,143			837
Supplemental non cash disclosure
Held to maturity investments transferred to available for sale investments	$	55,429		$	—
Loan balances transferred to foreclosed real estate		1,232			822
Loan balances transferred to loans held for sale		18,436			7,353

See notes to consolidated financial statements.

The National Bank of Indianapolis Corporation

Consolidated Statement of Shareholders’ Equity

(Unaudited, Dollars in thousands except share data)


											Accumulated
						Additional					Other
	Common		Treasury			Paid In			Retained		Comprehensive
	Stock		Stock			Capital			Earnings		Income			TOTAL

Balance at January 1, 2010	$	34,440	$	(20,346	)	$	10,873		$	48,067	$	(3	)	$	73,031

Comprehensive income:
Net income		—		—			—			1,458		—			1,458
Other comprehensive income Net unrealized gain on investments, net of tax of $255		—		—			—			—		388			388

Total comprehensive income															1,846

Income tax benefit from deferred stock compensation		—		—			50			—		—			50
Issuance of stock 18,611 shares of common stock under stock-based compensation plans		581		—			(89	)		—		—			492
Repurchase of stock 9,969 shares of common stock		—		(380	)		—			—		—			(380	)
Stock based compensation earned		—		—			866			—		—			866

Balance at June 30, 2010	$	35,021	$	(20,726	)	$	11,700		$	49,525	$	385		$	75,905


Balance at January 1, 2011	$	35,269	$	(20,953	)	$	12,866		$	51,853	$	322		$	79,357

Comprehensive income:
Net income		—		—			—			2,655		—			2,655
Other comprehensive income Net unrealized gain on investments, net of tax of $1,233		—		—			—			—		1,879			1,879

Total comprehensive income															4,534

Income tax benefit from deferred stock compensation		—		—			60			—		—			60
Issuance of 15,900 shares of common stock under stock-based compensation plans		554		—			(80	)		—		—			474
Repurchase of 24,360 shares of common stock		—		(1,085	)		—			—		—			(1,085	)
Stock based compensation earned		—		—			1,162			—		—			1,162

Balance at June 30, 2011	$	35,823	$	(22,038	)	$	14,008		$	54,508	$	2,201		$	84,502

See notes to consolidated financial statements.

The National Bank of Indianapolis Corporation

Notes to Consolidated Financial Statements
($ in thousands, except share and per share data)

Note 1: Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include the accounts of The National Bank of Indianapolis Corporation (“Corporation”) and its wholly-owned subsidiary, The National Bank of Indianapolis (“Bank”). All intercompany transactions between the Corporation and its subsidiary have been properly eliminated. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six month period ended June 30, 2011, are not necessarily indicative of the results that may be expected for the year ended December 31, 2011. For further information, refer to the consolidated financial statements and footnotes thereto included in the Corporation’s Form 10-K for the year ended December 31, 2010.

Note 2: Investment Securities

The following is a summary of available-for-sale and held-to-maturity securities:


			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gain		(Loss)			Value
June 30, 2011
Available-for-sale
U.S. Treasury securities	$	16,502	$	1	$	—		$	16,503
U.S. Government agencies		66,409		512		—			66,921
Municipal securities		65,213		3,175		(43	)		68,345

Total available-for-sale	$	148,124	$	3,688	$	(43	)	$	151,769


			Gross		Gross			Estimated
	Amortized		Unrecognized		Unrecognized			Fair
	Cost		Gain		(Loss)			Value
Held-to-maturity
Collateralized mortgage obligations, residential	$	118,078	$	1,142	$	(152	)	$	119,068
Mortgage backed securities, residential		1,136		30		—			1,166
Other securities		150		—		—			150

Total held-to-maturity	$	119,364	$	1,172	$	(152	)	$	120,384


			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gain		(Loss)			Value
December 31, 2010
Available-for-sale
U.S. Treasury securities	$	8,700	$	—	$	—		$	8,700
U.S. Government agencies		66,444		535		(2	)		66,977

Total available-for-sale	$	75,144	$	535	$	(2	)	$	75,677


			Gross		Gross			Estimated
	Amortized		Unrecognized		Unrecognized			Fair
	Cost		Gain		(Loss)			Value
Held-to-maturity
Municipal securities	$	55,429	$	2,121	$	(115	)	$	57,435
Collateralized mortgage obligations, residential		57,569		714		(139	)		58,144
Mortgage backed securities, residential		1,528		45		—			1,573
Other securities		150		—		—			150

Total held-to-maturity	$	114,676	$	2,880	$	(254	)	$	117,302

Notes to Consolidated Financial Statements
($ in thousands, except share and per share data)

On May 31, 2011, the Corporation transferred the municipal securities, with a net unrecognized gain of $3,478, from held-to-maturity to available-for-sale. This will enable the Corporation to sell a municipal bond if it deems it to be appropriate when there may be an opportunity due to changes in interest rate levels to reposition maturities within the portfolio and the ability to react faster to potential credit problems with non-rated issuers and sell the bond. Since the municipal securities have a longer average life than the remaining securities of the available for sale investment portfolio, it is still the intent of the Corporation to hold the municipal securities until maturity.

There were no sales of securities during the six month period ending June 30, 2011. There was one sale of a held-to maturity municipal security with a net carrying amount of $483 that was sold for a loss of $5 during the six month period ending June 30, 2010. Since the security had a non-rated issuer, a credit review of the municipality was conducted. As a result of the review, it was determined that the investment was no longer considered a pass asset and thus below investment grade. Per investment policy, the Corporation is prohibited from holding any securities below investment grade.

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


	June 30, 2011
	Amortized		Fair
	Cost		Value
Available-for-sale
Due in one year or less	$	50,285	$	50,392
Due from one to five years		42,104		43,135
Due from five to ten years		37,946		39,902
Due after ten years		17,789		18,340

Total	$	148,124	$	151,769


Held-to-maturity
Due in one year or less	$	50	$	50
Due from one to five years		100		100
CMO/Mortgage-backed, residential		119,214		120,234

Total	$	119,364	$	120,384

Investment securities with a carrying value of approximately $110,000 and $103,000 were pledged as collateral for Wealth Management accounts, U.S. Department of Justice for bankruptcy accounts on deposit, and securities sold under agreements to repurchase at June 30, 2011, and December 31, 2010, respectively.

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


	Less Than 12 Months					12 Months or Longer				Total
	Fair		Unrealized			Fair		Unrealized		Fair		Unrealized
	Value		(Loss)			Value		(Loss)		Value		(Loss)
June 30, 2011
Available-for-sale
Municipal securities	$	2,441	$	(43	)	$	—	$	—	$	2,441	$	(43	)

Total available-for-sale	$	2,441	$	(43	)	$	—	$	—	$	2,441	$	(43	)


Held-to-maturity
Collateralized mortgage obligations, residential	$	32,186	$	(152	)	$	—	$	—	$	32,186	$	(152	)

Total Held-to-maturity	$	32,186	$	(152	)	$	—	$	—	$	32,186	$	(152	)

Notes to Consolidated Financial Statements
($ in thousands, except share and per share data)


	Less Than 12 Months					12 Months or Longer				Total
	Fair		Unrealized			Fair		Unrealized		Fair		Unrealized
	Value		(Loss)			Value		(Loss)		Value		(Loss)
December 31, 2010
Available-for-sale
U.S. Government agencies	$	16,070	$	(2	)	$	—	$	—	$	16,070	$	(2	)

Total available-for-sale	$	16,070	$	(2	)	$	—	$	—	$	16,070	$	(2	)


Held-to-maturity
Collateralized mortgage obligations, residential	$	12,744	$	(139	)	$	—	$	—	$	12,744	$	(139	)
Municipal securities		8,358		(115	)		—		—		8,358		(115	)

Total Held-to-maturity	$	21,102	$	(254	)	$	—	$	—	$	21,102	$	(254	)

In determining other-than-temporary-impairment (OTTI) for debt securities, management considers many factors, including: (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the Corporation has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. The assessment of whether an other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.

When OTTI occurs, the amount of the OTTI recognized in earnings depends on whether an entity intends to sell the security or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, less any current-period credit loss. If an entity intends to sell or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, less any current-period credit loss, the OTTI shall be recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date. If an entity does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis less any current-period loss, the OTTI shall be separated into the amount representing the credit loss and the amount related to all other factors. The amount of the total OTTI related to the credit loss is determined based on the present value of cash flows expected to be collected and is recognized in earnings. The amount of the total OTTI related to other factors is recognized in other comprehensive income, net of applicable taxes. The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the investment.

As of June 30, 2011, the Corporation held 15 investments of which the amortized cost was greater than fair value. The Corporation has no securities in which OTTI has been recorded.

The unrealized losses for investments classified as available-for-sale are attributable to changes in interest rates and/or economic environment and individually were 4.30% or less of their respective amortized costs. The unrealized losses are on securities issued by various municipalities and the largest unrealized loss relates to one municipal that was purchased December 1, 2005. The credit rating of the individual municipalities is assessed monthly. As of June 30, 2011, all but four of the municipal debt securities were rated BBB or better (as a result of insurance of the underlying rating on the bond). The four municipal debt securities have no underlying rating. Credit reviews of the municipalities have been conducted. As a result, we have determined that all of our non-rated debt securities would be rated a “pass” asset and thus classified as an investment grade security. All interest payments are current for all municipal securities and management expects all to be collected in accordance with contractual terms.

The unrealized losses for investments classified as held-to-maturity are attributable to changes in interest rates and/or economic environment and individually were 1.27% or less of their respective amortized costs. The unrealized losses relate primarily to residential collateralized mortgage obligations. The residential collateralized mortgage obligations were purchased between October 2010 and May 2011. There has been an increase in long-term interest rates from the time of the investment purchase and June 30, 2011, which affects the fair value of residential collateralized mortgage obligations and prepayment speeds. All residential collateralized mortgage obligations are backed by the U.S. Government and its agencies and represent minimal credit risk at this time.

Notes to Consolidated Financial Statements
($ in thousands, except share and per share data)

Note 3: Loans and Allowance for Loan Losses

Loans, which are principally to borrowers in central Indiana, including unamortized deferred costs net of fees, consist of the following:


	June 30, 2011			December 31, 2010
Residential loans secured by real estate	$	247,347		$	258,483
Commercial loans secured by real estate		299,695			289,286
Construction loans		43,360			44,639
Other commercial and industrial loans		299,295			287,706
Consumer loans		32,518			20,172

Total loans		922,215			900,286
Net deferred loan costs		349			46
Allowance for loan losses		(16,167	)		(15,134	)

Total loans, net	$	906,397		$	885,198

The Corporation periodically sells residential mortgage loans it originates based on the overall loan demand of the Corporation and outstanding balances of the residential mortgage portfolio.

As of June 30, 2011, and December 31, 2010, there was $81,193 and $85,851, of 1-4 family residential mortgage loans, respectively, pledged as collateral for FHLB advances.

There was an aggregate of $265,323 and $297,617 of commercial loans, commercial real estate, and construction loans pledged as collateral at the Federal Reserve Bank Discount Window at June 30, 2011, and December 31, 2010, respectively.

The following table presents the activity in the allowance for loan losses by portfolio segment:


	Three months ended
	June 30, 2011
	Commercial			Residential			Consumer			Unallocated		Total
Beginning balance	$	13,268		$	2,414		$	343		$	17	$	16,042
Loan charge offs		(795	)		(81	)		(137	)		—		(1,013	)
Recoveries		141			4			4			—		149
Provision		545			(643	)		338			749		989

Ending balance	$	13,159		$	1,694		$	548		$	766	$	16,167


	Six months ended
	June 30, 2011
	Commercial			Residential			Consumer			Unallocated			Total
Beginning balance	$	11,715		$	2,400		$	200		$	819		$	15,134
Loan charge offs		(1,606	)		(203	)		(144	)		—			(1,953	)
Recoveries		290			12			6			—			308
Provision		2,760			(515	)		486			(53	)		2,678

Ending balance	$	13,159		$	1,694		$	548		$	766		$	16,167

Notes to Consolidated Financial Statements
($ in thousands, except share and per share data)

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:


	June 30, 2011
	Commercial			Residential			Consumer			Unallocated		Total
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	2,844		$	751		$	2		$	—	$	3,597
Collectively evaluated for impairment		10,315			943			546			766		12,570

Total ending allowance balance	$	13,159		$	1,694		$	548		$	766	$	16,167

Allowance as a % of loans		2.05	%		0.68	%		1.68	%		N/A		1.75	%

Loans:
Loans individually evaluated for impairment	$	12,197		$	5,041		$	2			N/A	$	17,240
Loans collectively evaluated for impairment		629,974			242,808			32,542			N/A		905,324
Accrued interest receivable		1,750			1,297			73			N/A		3,120

Total recorded investment	$	643,921		$	249,146		$	32,617			N/A	$	925,684


	December 31, 2010
	Commercial			Residential			Consumer			Unallocated		Total
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	781		$	801		$	5		$	—	$	1,587
Collectively evaluated for impairment		10,934			1,599			195			819		13,547

Total ending allowance balance	$	11,715		$	2,400		$	200		$	819	$	15,134

Allowance as a % of loans		1.89	%		0.93	%		0.99	%		N/A		1.68	%

Loans:
Loans individually evaluated for impairment	$	6,894		$	4,165		$	111			N/A	$	11,170
Loans collectively evaluated for impairment		614,277			254,798			20,087			N/A		889,162
Accrued interest receivable		1,884			1,188			43			N/A		3,115

Total recorded investment	$	623,055		$	260,151		$	20,241			N/A	$	903,447

The following table presents the activity in the allowance for loan losses:


	Three months ended			Six months ended
	June 30, 2010			June 30, 2010
Beginning balance	$	14,759		$	13,716
Loan charge offs		(509	)		(717	)
Recoveries		39			55
Provision for loan losses		1,234			2,469

Ending balance	$	15,523		$	15,523

Notes to Consolidated Financial Statements
($ in thousands, except share and per share data)

Loans are considered to be impaired when it is determined that the obligor will not pay all contractual principal and interest when due. The following table presents loans individually evaluated for impairment by class:


	June 30, 2011
	Unpaid				Allowance for
	Principal		Recorded		Loan Losses
	Balance		Investment		Allocated
With no related allowance recorded:
Commercial
Commercial & industrial	$	2,298	$	1,788	$	—
Commercial real estate		2,572		1,997		—
Construction		—		—		—
Residential
1-4 family		1,026		668		—
Home equity		2,199		1,994		—
Consumer
Personal		—		—		—
Installment		—		—		—
DDA Overdraft Protection		—		—		—
Credit cards		—		—		—
With an allowance recorded:
Commercial
Commercial & industrial		5,862		5,862		1,891
Commercial real estate		—		—		—
Construction		2,550		2,550		953
Residential
1-4 family		464		462		100
Home equity		1,917		1,917		651
Consumer
Personal		—		—		—
Installment		—		—		—
DDA Overdraft Protection		2		2		2
Credit cards		—		—		—

Total	$	18,890	$	17,240	$	3,597

Notes to Consolidated Financial Statements
($ in thousands, except share and per share data)


	December 31, 2010
	Unpaid				Allowance for
	Principal		Recorded		Loan Losses
	Balance		Investment		Allocated
With no related allowance recorded:
Commercial
Commercial & industrial	$	3,467	$	2,524	$	—
Commercial real estate		2,150		2,076		—
Construction		1,490		1,251		—
Residential
1-4 family		1,080		710		—
Home equity		729		630		—
Consumer
Personal		106		106		—
Installment		—		—		—
DDA Overdraft Protection		—		—		—
Credit cards		—		—		—
With an allowance recorded:
Commercial
Commercial & industrial		1,043		1,043		781
Commercial real estate		—		—		—
Construction		—		—		—
Residential
1-4 family		56		56		20
Home equity		2,769		2,769		781
Consumer
Personal		—		—		—
Installment		—		—		—
DDA Overdraft Protection		—		—		—
Credit cards		5		5		5

Total	$	12,895	$	11,170	$	1,587

The following table presents the average balance of loans individually evaluated for impairment by class:


	Three months ended		Six months ended
	June 30, 2011		June 30, 2011
Commercial
Commercial & industrial	$	4,268	$	4,068
Commercial real estate		2,257		2,302
Construction		2,551		2,280
Residential
1-4 family		1,063		944
Home equity		3,469		3,480
Consumer
Personal		—		53
Installment		—		—
DDA Overdraft Protection		1		—
Credit cards		5		4

Total	$	13,614	$	13,131

The average balance of individually impaired loans for the three and six month period ending June 30, 2010, was $15,184 and $15,199, respectively.

Notes to Consolidated Financial Statements
($ in thousands, except share and per share data)

There was $1 and $2 in interest income recorded on a cash or accrual basis for all classes of impaired loans for the three and six month period ending June 30, 2011, respectively. There was no interest income recorded on a cash or accrual basis for any class of impaired loans for the three and six month period ending June 30, 2010.

The following table presents the recorded investment in nonaccrual and loans past due over 90 days still accruing by class of loans:


					Loans Past Due
	Nonaccrual				Over 90 Days Still Accruing
	June 30, 2011		December 31, 2010		June 30, 2011		December 31, 2010
Commercial
Commercial & industrial	$	7,650	$	3,567	$	—	$	—
Commercial real estate		1,997		2,076		—		—
Construction		2,551		1,251		—		—
Residential
1-4 family		1,001		766		—		—
Home equity		3,911		3,399		—		—
Consumer
Personal		—		106		—		—
Installment		—		—		—		—
DDA Overdraft Protection		—		—		2		—
Credit cards		—		—		—		5

Total	$	17,110	$	11,165	$	2	$	5

The following table presents the aging of the recorded investment in past due loans, including nonaccrual loans, by class of loans:


	June 30, 2011
	30 - 89			Greater than
	Days			90 Days			Total
	Past Due			Past Due			Past Due
Commercial
Commercial & industrial	$	481		$	872		$	1,353
Commercial real estate		276			1,707			1,983
Construction		2,551			—			2,551
Residential
1-4 family		89			346			435
Home equity		794			1,131			1,925
Consumer
Personal		—			—			—
Installment		16			—			16
DDA Overdraft Protection		—			2			2
Credit cards		51			—			51

Total	$	4,258		$	4,058		$	8,316

Past due as a % of loans		0.43	%		0.44	%		0.87	%

Notes to Consolidated Financial Statements
($ in thousands, except share and per share data)


	December 31, 2010
	30 - 89			Greater than
	Days			90 Days			Total
	Past Due			Past Due			Past Due
Commercial
Commercial & industrial	$	667		$	1,501		$	2,168
Commercial real estate		1,644			1,815			3,459
Construction		205			1,251			1,456
Residential
1-4 family		1,785			289			2,074
Home equity		1,024			430			1,454
Consumer
Personal		850			106			956
Installment		14			—			14
DDA Overdraft Protection		—			—			—
Credit cards		39			5			44

Total	$	6,228		$	5,397		$	11,625

Past due as a % of loans		0.69	%		0.60	%		1.29	%

Troubled Debt Restructurings:

As of June 30, 2011, the Corporation had $7,690 in outstanding balances and had allocated $2,440 of specific reserves to customers whose loan terms have been modified in troubled debt restructurings. Of the total $7,690 in outstanding balances of troubled debt restructurings, $7,561 are non-accrual and have a specific reserve of $2,381 and those balances have been reported as such. As of December 31, 2010, the Corporation had $58 in outstanding balances and had allocated $0 of specific reserves to customers whose loan terms have been modified in troubled debt restructuring. The Corporation has committed to lend an additional $1,983 and $0 to customers with outstanding loans that are classified as troubled debt restructurings as of June 30, 2011, and December 31, 2010, respectively.

Credit Quality Indicators:

The Corporation categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Corporation analyzes certain loans individually by classifying the loans as to credit risk. This analysis includes non-homogeneous loans, such as commercial, commercial real estate, and loans for personal or consumer purpose as warranted. This analysis is performed on a monthly basis. The Corporation uses the following definitions for risk ratings:

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

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

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

Notes to Consolidated Financial Statements
($ in thousands, except share and per share data)

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans. Based on the most recent analysis performed, the risk rating of the loans by class of loans is as follows:


	Not				Special
June 30, 2011	Rated		Pass		Mention		Substandard		Doubtful
Commercial
Commercial & industrial	$	—	$	279,504	$	6,003	$	14,021	$	—
Commercial real estate		—		259,770		17,837		21,727		—
Construction		—		33,251		613		9,445		—

Total	$	—	$	572,525	$	24,453	$	45,193	$	—


	Not				Special
December 31, 2010	Rated		Pass		Mention		Substandard		Doubtful
Commercial
Commercial & industrial	$	—	$	265,528	$	7,893	$	14,122	$	—
Commercial real estate		—		256,866		24,745		7,402		—
Construction		—		31,458		6,499		6,658		—

Total	$	—	$	553,852	$	39,137	$	28,182	$	—

The Corporation considers the performance of the loan portfolio and its impact on the allowance for loan losses. For residential and consumer loan classes, the Corporation also evaluates credit quality based on the aging status of the loan, which are previously presented, and by payment activity. A loan is considered to be nonperforming when one or more of the following conditions exist: past due 90 days or greater, non accruing status, or troubled debt restructurings. The following table presents the recorded investment in residential and consumer loans based on payment activity:


	Consumer								Residential
June 30, 2011	Personal		Installment		Overdraft		Credit cards		1-4 family		Home equity

Performing	$	18,816	$	7,081	$	1,885	$	4,760	$	96,299	$	146,509
Nonperforming		—		—		2		—		1,130		3,911

Total	$	18,816	$	7,081	$	1,887	$	4,760	$	97,429	$	150,420


	Consumer								Residential
December 31, 2010	Personal		Installment		Overdraft		Credit cards		1-4 family		Home equity

Performing	$	14,158	$	885	$	620	$	4,424	$	109,360	$	145,438
Nonperforming		106		—		—		5		766		3,399

Total	$	14,264	$	885	$	620	$	4,429	$	110,126	$	148,837

Note 4: Real Estate Owned

The following table presents the activity in real estate owned:


	Three months ended						Six months ended
	June 30,						June 30,
	2011			2010			2011			2010
Balance at beginning of period	$	9,409		$	6,697		$	9,574		$	8,432
Additions		1,144			710			1,232			822
Write downs		(30	)		(27	)		(232	)		(46	)
Write ups		81			—			81			—
Sales		(1,364	)		(1,010	)		(1,415	)		(2,838	)

Balance at end of period	$	9,240		$	6,370		$	9,240		$	6,370

Notes to Consolidated Financial Statements
($ in thousands, except share and per share data)

The following table presents expenses related to real estate owned:


	Three months ended						Six months ended
	June 30,						June 30,
	2011			2010			2011			2010
Net (gain) loss on sales	$	113		$	(65	)	$	(194	)	$	(121	)
Write downs net of write (ups)		(51	)		27			151			46
Operating expenses, net of rental income		276			159			448			295

	$	338		$	121		$	405		$	220

Note 5: Mortgage Servicing

The unpaid principal balances of mortgage loans serviced for others were $194,957 and $183,171 at June 30, 2011, and December 31, 2010, respectively.

Custodial escrow balances maintained in connection with serviced loans were $666 and $725 at June 30, 2011, and December 31, 2010, respectively.

The following table presents activity for mortgage servicing rights:


	Three months ended						Six months ended
	June 30,						June 30,
	2011			2010			2011			2010
Balance at beginning of period	$	1,751		$	1,459		$	1,624		$	1,459
Plus additions		114			127			274			215
Fair value adjustments		(263	)		(350	)		(296	)		(438	)

Balance at end of period	$	1,602		$	1,236		$	1,602		$	1,236

Mortgage servicing rights are carried at fair value at June 30, 2011, and December 31, 2010. Fair value at June 30, 2011, was determined using discount rates ranging from 10.6% to 15.0%, prepayment speeds ranging from 4.25% to 25.35%, depending on the stratification of the specific right, and a weighted average default rate of 0.38%. Fair value at December 31, 2010, was determined using discount rates ranging from 10.6% to 16.0%, prepayment speeds ranging from 6.39% to 23.08%, depending on the stratification of the specific right, and a weighted average default rate of 0.39%.

Note 6: Stock Based Compensation

During the first quarter of 2011, one officer of the Corporation exercised options to purchase 800 common shares in the aggregate. The weighted average exercise price was $27.75 and the weighted average fair market value of the stock was $41.49.

During the second quarter of 2011, four officers of the Corporation exercised options to purchase 15,100 common shares in the aggregate. The weighted average exercise price was $29.92 and the weighted average fair value of the stock was $44.73.

Due to the exercise of these options for the six months ended June 30, 2011, the Corporation will receive a deduction for tax purposes for the difference between the fair value of the stock at the date of grant and the date of exercise. The Corporation recorded an income tax benefit of $60 thousand as additional paid in capital for the six months ended June 30, 2011, as per guidance issued by the Financial Accounting Standards Board (FASB) on stock compensation.

Notes to Consolidated Financial Statements
($ in thousands, except share and per share data)

Note 7: Earnings per Share

The following table sets forth the computation of basic and diluted earnings per share:


	Three months ended				Six months ended
	June 30,				June 30,
	2011		2010		2011		2010

Basic average shares outstanding		2,314,333		2,311,055		2,316,042		2,309,206


Net income	$	1,038	$	836	$	2,655	$	1,458


Basic net income per common share	$	0.45	$	0.36	$	1.15	$	0.63


Diluted
Average shares outstanding		2,314,333		2,311,055		2,316,042		2,309,206
Nonvested restricted stock		98,183		44,998		90,964		40,168
Net effect of the assumed exercise of stock options		26,289		21,184		21,576		20,713

Diluted average shares		2,438,805		2,377,237		2,428,582		2,370,087


Net income	$	1,038	$	836	$	2,655	$	1,458


Diluted net income per common share	$	0.43	$	0.35	$	1.09	$	0.62

For the three month period ending June 30, 2011, options to purchase 14,600 shares and 0 restricted shares were outstanding but not included in the computation of diluted earnings per share because they were antidilutive.

For the six month period ending June 30, 2011, options to purchase 174,100 shares and 0 restricted shares were outstanding but not included in the computation of diluted earnings per share because they were antidilutive.

For the three month period ending June 30, 2010, options to purchase 183,800 shares and 0 restricted shares were outstanding but not included in the computation of diluted earnings per share because they were antidilutive.

For the six month period ending June 30, 2010, options to purchase 183,800 shares and 4,325 restricted shares were outstanding but not included in the computation of diluted earnings per share because they were antidilutive.

Notes to Consolidated Financial Statements
($ in thousands, except share and per share data)

Note 8: Other Comprehensive Income

Comprehensive income consists of net income and other comprehensive income. Other comprehensive income includes unrealized gains and losses on securities available-for-sale. Following is a summary of other comprehensive income:


	Three months ended						Six months ended
	June 30,						June 30,
	2011			2010			2011			2010
Net income	$	1,038		$	836		$	2,655		$	1,458
Other comprehensive income
Change in securities available-for-sale:
Transfer of securities from held-to-maturity to available for sale		3,478			—			3,478			—
Net unrealized gains (loss) during the period		(285	)		347			(366	)		643
Tax effect		(1,265	)		(138	)		(1,233	)		(255	)

Total other comprehensive income		1,928			209			1,879			388

Comprehensive income	$	2,966		$	1,045		$	4,534		$	1,846

Note 9: Commitments and Contingencies

Some financial instruments, such as loan commitments, credit lines, letters of credit, and overdraft protection are issued to meet customer financing needs. These are agreements to provide credit or to support the credit of others, as long as conditions established in the contract are met, and usually have expiration dates. Commitments may expire without being used. Off-balance sheet risk to credit loss exists up to the face amount of these instruments, although material losses are not anticipated.

The contractual amount of financial instruments with off-balance sheet risk was as follows:


	June 30, 2011		December 31, 2010
Committed, not funded, commercial loans	$	15,000	$	6,500
Committed, not funded, residential loans		14,459		18,037
Unused commercial credit lines		216,058		222,387
Unused revolving home equity and credit card lines		112,079		107,712
Standby letters of credit		7,609		7,712
Demand deposit account lines of credit		2,606		2,596

	$	367,811	$	364,944

The majority of commitments to fund loans are variable rate. The demand deposit account lines of credit are a fixed rate at 18% with no maturity.

The credit risk associated with loan commitments and standby letters of credit is essentially the same as that involved in extending loans to customers and is subject to normal credit policies. Collateral may be obtained based on management’s credit assessment of the customer.

Other than routine litigation incidental to business and based on the information presently available, the Corporation believes that the total amounts, if any, that will ultimately be paid arising from these claims and legal actions are reflected in the consolidated results of operations and financial position.

Note 10: Fair Value

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

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

Notes to Consolidated Financial Statements
($ in thousands, except share and per share data)

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

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

The Corporation used the following methods and significant assumptions to estimate the fair value of each type of asset or liability carried at fair value:

The fair value of available-for-sale securities are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs) or matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on securities’ relationship to other benchmark quoted securities (Level 2 inputs).

The fair value of mortgage servicing rights is based on a valuation model that calculates the present value of estimated net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income. The Corporation is able to compare the valuation model inputs and results to widely available published industry data for reasonableness.

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

Assets and Liabilities Measured on a Recurring Basis

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


			Fair Value Measurements Using:
			Quoted Prices
			in Active Markets		Significant Other		Significant
			for Identical Assets		Observable Inputs		Unobservable Inputs
	Carrying Value		(Level 1)		(Level 2)		(Level 3)
June 30, 2011
Assets:
Available-for-sale securities:
U.S. Treasury securities	$	16,503	$	—	$	16,503	$	—
U.S. Government agencies		66,921		—		66,921		—
Municipal securities		68,345		—		68,345		—
Mortgage servicing rights		1,602		—		1,602		—

December 31, 2010
Assets:
Available-for-sale securities:
U.S. Treasury securities	$	8,700	$	—	$	8,700	$	—
U.S. Government agencies		66,977		—		66,977		—
Mortgage servicing rights		1,624		—		1,624		—

There were no significant transfers between Level 1 and Level 2 during the six month period ending June 30, 2011.

Notes to Consolidated Financial Statements
($ in thousands, except share and per share data)

Assets and Liabilities Measured on a Non-Recurring Basis

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


			Fair Value Measurements Using:
			Quoted Prices
			in Active Markets		Significant Other		Significant
			for Identical Assets		Observable Inputs		Unobservable Inputs
	Carrying Value		(Level 1)		(Level 2)		(Level 3)
June 30, 2011
Assets:
Impaired loans
Commercial	$	5,568	$	—	$	—	$	5,568
Residential		1,627		—		—		1,627
Consumer		2		—		—		2
Other real estate
Commercial		4,139		—		—		4,139
Residential		129		—		—		129
Consumer		—		—		—		—

December 31, 2010
Assets:
Impaired loans
Commercial	$	262	$	—	$	—	$	262
Residential		2,024		—		—		2,024
Consumer		—		—		—		—
Other real estate
Commercial		4,826		—		—		4,826
Residential		97		—		—		97
Consumer		—		—		—		—

The following represent impairment charges recognized during the period:

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $10,794, with a valuation allowance of $3,597, at June 30, 2011. This resulted in an additional provision for loan losses of $1,466 and $2,391 for the three and six month period ending June 30, 2011, respectively. At December 31, 2010, impaired loans had a carrying amount of $3,873, with a valuation allowance of $1,587. There was an additional provision for loan losses of $1,196 and $1,252 for the three and six month period ending June 30, 2010, respectively.

Other real estate that has been written down to fair value less costs to sell subsequent to being transferred to other real estate had a carrying amount of $4,268 at June 30, 2011. There was a charge to earnings through non performing asset expense of ($51) and $151 for the three and six month period ending June 30, 2011, respectively. At December 31, 2010, other real estate that has been written down to fair value less costs to sell subsequent to being transferred to other real estate had a carrying amount of $4,923. There was a charge to earnings through non performing asset expense of $27 and $46 for the three and six month period ending June 30, 2010, respectively.

Notes to Consolidated Financial Statements
($ in thousands, except share and per share data)

The estimated fair value of the Corporation’s financial instruments is as follows:


	June 30, 2011				December 31, 2010
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
Assets
Cash and due from banks	$	169,927	$	169,927	$	276,409	$	276,409
Federal funds sold		9,143		9,143		16,109		16,109
Reverse repurchase agreements		1,000		1,000		1,000		1,000
Investment securities available-for-sale		151,769		151,769		75,677		75,677
Investment securities held-to-maturity		119,364		120,384		114,676		117,302
Loans held for sale		12,779		12,779		1,424		1,424
Net loans		906,397		917,992		885,198		893,665
Federal Reserve and FHLB stock		2,990		N/A		3,065		N/A
Accrued interest receivable		4,383		4,383		4,216		4,216

Liabilities
Deposits		1,236,380		1,236,376		1,238,840		1,238,175
Repurchase agreements and other secured short-term borrowings		91,943		91,977		93,523		93,554
Short-term debt		2,563		2,563		2,688		2,688
Subordinated debt		5,000		5,000		5,000		5,000
Junior subordinated debt		13,918		10,316		13,918		10,245
Accrued interest payable		1,498		1,498		1,498		1,498

The following methods and assumptions, not previously presented, were used by the Corporation in estimating its fair value disclosures for financial instruments not recorded at fair value.

Carrying amount is the estimated fair value for cash and short-term investments, interest bearing deposits, accrued interest receivable and payable, demand deposits, borrowings under repurchase agreements, short-term debt, variable rate loans or deposits that reprice frequently and fully. For fixed rate loans, deposits, or other secured short-term borrowings or for variable rate loans or deposits with infrequent pricing or repricing limits, fair value is based on discounted cash flows using current market rates applied to the estimated life and adjusted for allowance for loan losses. It was not practicable to determine the fair value of Federal Reserve and FHLB stock due to restrictions placed on its transferability. The fair value of the subordinated debt and junior subordinated debentures are based upon discounted cash flows using rates for similar securities with the same maturities. The fair value of off-balance-sheet items is not considered material.

Note 11: Adoption of New Accounting Standards

In January 2011, the FASB deferred the effective date of Disclosures relating to Troubled Debt Restructurings (“TDRs”). This delay was intended to allow the Board time to complete deliberations on what constitutes a TDR. The effective date of the new disclosures regarding TDRs for public entities and the guidelines for determining what constitutes a troubled debt restructuring will be effective upon issuance. The adoption of this standard is not expected to have a material effect on the Corporation’s results of operations or financial position.

In April 2011, the FASB issued updated guidance for determining whether a restructuring is a troubled debt restructuring. In determining whether a restructuring of a financing receivable is a troubled debt restructuring, the creditor must separately conclude that both the restructuring of the debt constitutes a concession and the debtor is experiencing financial difficulties.

When evaluating whether a concession has been made, the creditor must determine if the debtor has access to funds at a market rate for debt with similar risk characteristics as the restructured debt. If not, the restructuring would be considered to be a below-market rate, which may indicate that the creditor has been granted a concession. Further, a temporary or permanent increase in the contractual interest as a result of a restructuring does not preclude the restructuring from being considered a concession since the new contractual interest rate on the restructured debt could still be below the market interest rate for new debt with similar risk characteristics.

Notes to Consolidated Financial Statements
($ in thousands, except share and per share data)

Once it has been determined that a debtor has been given a concession, the creditor must then determine if the debtor is experiencing financial difficulties. The update provides guidance on a creditor’s evaluation of whether a debtor is experiencing financial difficulties by requiring the creditor to consider whether it is probable that the debtor would be in payment default on any of its debt in the foreseeable future without a modification.

In addition, the update clarifies that the creditor is precluded from using the effective interest rate test in the debtor’s guidance on restricting of payable when evaluating whether a restructuring constitutes a troubled debt restructuring.

The updated guidance is effective for public entities beginning with the first interim or annual period on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. As a result of applying these amendments, an entity may identify receivables that are newly considered impaired and for those receivables, the entity should apply the amendments prospectively for the first interim or annual period beginning on or after June 15, 2011. Early adoption is permitted. Management believes the adoption of this standard will not have a material impact on the Corporation’s financial statements.

In April 2011, the FASB issued updated guidance on Transfers and Servicing. The update to the guidance is to improve the accounting for repurchase agreements (repos) and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity if all of the following conditions are met: the assets to be repurchased or redeemed are the same or substantially the same as those transferred; the agreement to repurchase or redeem them before maturity, at a fixed or determinable price; the agreement is entered into contemporaneously with, or in contemplation of, the transfer. This update removes the assessment of effective control the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee, and the collateral maintenance implementation guidance related to that criterion. This updated guidance is effective for the first interim or annual period beginning on or after December 15, 2011. The guidance should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. Early adoption is not permitted. Management continues to evaluate the impact of the adoption of this update, but does not anticipate it to have a material impact on the Corporation’s financial statements.

In May 2011, the FASB issued updated guidance on Fair Value Measurement. The amendments in this update result in common fair value measurement and disclosure requirements in U.S. GAAP and IFRS. The amendments change the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. The amendments are to clarify the Board’s intent regarding the application of existing fair value measurement requirements. The updated guidance is effective during interim and annual periods beginning after December 15, 2011, for public entities. The updates to this guidance are to be applied prospectively. Management continues to evaluate the impact of the adoption of this update, but does not anticipate it to have a material impact on the Corporation’s financial statements.

In June 2011, the FASB issued updated guidance on the presentation of Comprehensive Income in an entity’s financial statements. Currently U.S. GAAP provides entities three alternatives for presenting other comprehensive income and its components in financial statements. The update eliminates presenting the components of other comprehensive income as part of the statement of changes in the stockholders’ equity.

The update does provide two options to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. Regardless of the presentation the entity chooses, the entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income.

Notes to Consolidated Financial Statements
($ in thousands, except share and per share data)

In a single continuous statement, the entity is required to present the components of net income and total net income, the components of other comprehensive income and a total of other comprehensive income along with the total of comprehensive income in that statement. In the two statement option, an entity is required to present components of net income and total net income in the statement of income. The statement of other comprehensive income should immediately follow the statement of net income and include components of other comprehensive income a total for other comprehensive income, along with a total comprehensive income. In either presentation the entity is required to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement(s) where the components of net income and the components of other comprehensive income are presented.

The updated guidance is effective for public entities for fiscal years, and interim periods within those years, beginning after December 15, 2011. Early adoption is permitted, because compliance with the amendments is already permitted. The amendments do not require any transition disclosures. Management does not anticipate it to have a material impact on the Corporation’s financial statements.


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

Corporation Overview

The National Bank of Indianapolis Corporation (the “Corporation”) is a one-bank holding company formed in 1993 which owns all of the outstanding stock of The National Bank of Indianapolis (the “Bank”). The Bank, a national banking association, was formed in 1993 and is headquartered in Indianapolis, Indiana. The primary business activity of the Corporation is providing financial services through the Bank’s twelve banking offices in Marion, Johnson, and Hamilton County, Indiana.

The primary source of the Corporation’s revenue is net interest income from loans and deposits and fees from financial services provided to customers. Overall economic factors including market interest rates, business spending, and consumer confidence, as well as competitive conditions within the marketplace tend to influence business volumes.

The Corporation recorded net income of $1,038 or $0.43 per diluted share for the three month period ending June 30, 2011, as compared to $836 or $0.35 per diluted share for the three month period ending June 30, 2010. Net income increased for the three month period ending June 30, 2011, as compared to the three month period ending June 30, 2010, primarily due to an increase in net interest income and a decrease in the provision for loan losses. The increase is partially offset by an increase in salary and non-performing assets expense.

The Corporation recorded net income of $2,655 or $1.09 per diluted share for the six month period ending June 30, 2011, as compared to $1,458 or $0.62 per diluted share for the six month period ending June 30, 2010. Net income increased for the six month period ending June 30, 2011, as compared to six month period ending June 30, 2010, primarily due to an increase in net interest income and Wealth management fees and a decrease in other expenses. The increase is partially offset by an increase in salary and non-performing assets expense for the six month period ending June 30, 2011, as compared to the six month period ending June 30, 2010.

The risks and challenges that management believes will be important for the remainder of 2011 are price competition for loans and deposits by competitors, marketplace credit effects, continued spread compression, a slow recovery of the local economy that could adversely impact the ability of borrowers to repay outstanding loans or the value of the collateral securing these loans, and the lingering effects from the financial crisis in the U.S. market and foreign markets.

The Corporation has determined that it has one reportable segment, banking services. The Bank provides a full range of deposit, credit, and money management services to its target markets, which are small to medium size businesses, affluent executive and professional individuals, and not-for-profit organizations in the Indianapolis Metropolitan Statistical Area of Indiana.

Forward-Looking Information

This section contains forward-looking statements. Forward-looking statements give current expectations or forecasts of future events and are not guarantees of future performance. The forward-looking statements are based on management’s expectations and are subject to a number of risks and uncertainties. Although management believes the expectations reflected in such forward-looking statements are reasonable, actual results may differ materially from those expressed or implied in such statements. Risks and uncertainties that could cause actual results to differ materially include, without limitation, the Corporation’s ability to execute its business plans; changes in general economic and financial market conditions; changes in interest rates; changes in competitive conditions; continuing consolidation in the financial services industry; new litigation or changes in existing litigation; losses, customer bankruptcy, claims and assessments; changes in banking regulations or other regulatory or legislative requirements that impact the Corporation’s business; and changes in accounting policies and procedures as may be required by the Financial Accounting Standards Board or other regulatory agencies. Additional information concerning factors that could cause actual results to differ materially from those expressed or implied in the forward-looking statements is available in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2010.

Critical Accounting Policies

The Corporation’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States and follow general practices within the industries in which it operates. Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions, and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements could reflect different estimates, assumptions, and judgments. Certain policies inherently have a greater reliance on the use of estimates, assumptions, and judgments and as such have a greater possibility of producing results that could be materially different than originally reported. Estimates, assumptions, and judgments are necessary when assets and liabilities are required to be recorded at fair value, when a decline in the value of an asset not carried on the financial statements at fair value warrants an impairment write-down or valuation reserve to be established, or when an asset or liability needs to be recorded contingent upon a future event. Carrying assets and liabilities at fair value inherently results in more financial statement volatility. The fair values and the information used to record valuation adjustments for certain assets are based either on quoted market prices or are provided by other third-party sources, when available. When third-party information is not available, valuation adjustments are estimated in good faith by management primarily through the use of internal cash flow modeling techniques.

Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, management has identified the valuation of the mortgage servicing asset, the valuation of investment securities, foreclosed assets, and the determination of the allowance for loan losses to be the accounting areas that require the most subjective or complex judgments, and as such could be most subject to revision as new information becomes available.

Investment Securities Valuation

When the Corporation classifies debt securities as held-to-maturity, it has the positive intent and ability to hold the securities to maturity. Held-to-maturity securities are stated at amortized cost. Debt securities not classified as held-to-maturity are classified as available-for-sale. Available-for-sale securities are stated at fair value, with the unrealized gains and losses, net of tax, reported as a component of other comprehensive income. Interest income includes amortization of purchase premium or discount. Premiums and discounts on securities are amortized on the level-yield method without anticipating prepayments, except for mortgage backed securities where prepayments are anticipated. Gains and losses on sales are recorded on the trade date and determined using the specific identification method.

The Corporation obtains fair values from a third party on a monthly basis in order to adjust the available-for-sale securities to fair value. Equity securities that do not have readily determinable fair values are carried at cost. When other-than-temporary-impairment (“OTTI”) occurs, the amount of the OTTI recognized in earnings depends on whether an entity intends to sell the security or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, less any current-period credit loss. If an entity intends to sell or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, less any current-period credit loss, the OTTI shall be recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date. If an entity does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis less any current-period loss, the OTTI shall be separated into the amount representing the credit loss and the amount related to all other factors. The amount of the total OTTI related to the credit loss is determined based on the present value of cash flows expected to be collected and is recognized in earnings. The amount of the total OTTI related to other factors is recognized in other comprehensive income, net of applicable taxes. The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the investment. In determining whether a market value decline is other-than-temporary, management considers the reason for the decline, the extent of the decline and the duration of the decline. Management evaluates securities for OTTI at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation.

Loans

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of deferred loan fees and costs. Interest income on commercial, mortgage, and consumer loans is accrued on the principal amount of such loans outstanding and is recognized when earned. Loan origination fees and certain direct origination costs are deferred and recognized in interest income using the level-yield method without anticipating prepayments. The recorded investment in loans includes accrued interest receivable.

All loan classes, except overdraft protection lines of credit and credit cards, are typically placed on non-accrual when they become 90 days past due, unless the loan is well secured and in the process of collection, or it is determined that the obligor will not pay all contractual principal and interest due. Unless there is a significant reason to the contrary, overdraft protection lines of credit and credit cards are charged off when deemed uncollectible, but generally no later than when they become 150 days past due. Any accrued interest is charged against interest income. Interest continues to legally accrue on these non-accrual loans, but no income is recognized for financial statement purposes. Both principal and interest payments received on non-accrual loans are applied to the outstanding principal balance, until the remaining balance is considered collectible, at which time interest income may be recognized when received.

Loan Commitments and Related Financial Instruments

Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded.

Allowance for Loan Losses

The allowance for loan losses is a valuation allowance for probable incurred credit losses. The allowance for loan losses is established through provisions for loan losses charged against income. Loans deemed to be uncollectible are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance for loan losses.

Management estimates the allowance balance required for each loan portfolio segment by using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged off.

Within the allowance, there are specific and general loss components. The specific loss component is assessed for non-homogeneous loans that management believes to be impaired. All loan classes are considered to be impaired when it is determined that the obligor will not pay all contractual principal and interest due or they become 90 days past due, unless the loan is both well secured and in the process of collection. For loans determined to be impaired, the loan’s carrying value is compared to its fair value using one of the following fair value measurement techniques: present value of expected future cash flows, observable market price, or fair value of the associated collateral less costs to sell. An allowance is established when the fair value is lower than the carrying value of that loan. The general component covers non-impaired loans and is based on a three-year historical loss experience supplemented with other economic factors based on the risks present for each portfolio segment. These economic factors include consideration of the following: changes in lending policies and procedures; effects of changes in risk selection and underwriting standards; national and local economic trends and conditions; trends in nature, volume, and growth rate of loans; experience, ability, and depth of lending management and other relevant staff; levels of and trends in past due and classified loans; collateral valuations in the market for collateral dependent loans; effects of changes in credit concentrations; and competition, legal, and regulatory factors. These loans are segregated by loan class and/or risk grade with an estimated loss ratio applied against each loan class and/or risk grade.

Loans for which the terms have been modified resulting in concessions and for which the borrower is experiencing financial difficulties are considered troubled debt restructuring and are classified as impaired. Troubled debt restructurings are separately identified for impairment disclosures and are measured at the present value of estimated future cash flows using the loan’s effective rate at inception. If a troubled debt restructuring is considered to be a collateral dependent loan, the loan is reported, net, at the fair value of the collateral. For troubled debt restructurings that subsequently default, the Corporation determines the amount of the reserve in accordance with the accounting policy for the allowance for loan losses.

The following portfolio segments have been identified: commercial, residential, and consumer. Commercial credits and personal lines of credit are subject to the assignment of individual risk grades in accordance with the Corporation’s Loan Risk Rating Guidelines. These loans are individually graded as Pass, Special Mention, Substandard or Doubtful, with the “Pass” rating further subdivided into risk gradients. Residential loans (including home equity lines of credit) and consumer loans (excluding aforementioned personal lines of credit) are not generally individually graded; rather, these loans are treated as homogenous pools within each category. When included in these pools, these loans are assigned a “Pass” Risk Rating. These loans may be or may become individually graded based on a pledge of liquid collateral, delinquency status, identified changes in the borrower’s repayment capacity, or as a result of legal action.

It is the policy of the Corporation to promptly charge off any loan, or portion thereof, which is deemed to be uncollectible. This includes, but is not limited to, any loan rated “Loss” by the regulatory authorities. All impaired loan classes are considered on a case-by-case basis.

An assessment of the adequacy of the allowance is performed on a quarterly basis. Management believes the allowance for loan losses is maintained at a level that is adequate to absorb probable losses inherent in the loan portfolio.

Foreclosed Assets

Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. Any excess recorded investment over the fair value of the property received is charged to the allowance for loan losses. The fair value of foreclosed assets is subject to fluctuations in appraised values which are affected by the local and national economy. If fair value declines subsequent to foreclosure, a valuation allowance is recorded through non performing assets expense.

When the Corporation owns and operates these assets, it is exposed to risks inherent in the ownership of real estate. In addition to declines in the value of the property, there are expenditures associated with the ownership of real estate which are expensed after the Corporation acquires the property. These expenditures primarily include real estate taxes, insurance, and maintenance costs. These expenses may adversely affect the income since they may exceed the amount of rental income collected.

Mortgage Servicing Assets

Mortgage servicing rights are recognized separately when they are acquired through sales of loans. Capitalized mortgage servicing rights are reported in other assets. When mortgage loans are sold, servicing rights are initially recorded at fair value with the income statement effect recorded in gains on sales of loans. Fair value is based on a valuation model that calculates the present value of estimated future net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as the cost to service, the discount rate, the custodial earnings rate, an inflation rate, ancillary income, prepayment speeds and default rates and losses. The Corporation obtains fair value estimates from an independent third party and compares significant valuation model inputs to published industry data in order to validate the model assumptions and results.

Under the fair value measurement method, the Corporation measures servicing rights at fair value at each reporting date and reports changes in fair value of servicing assets in earnings in the period in which the changes occur, and these changes are included in mortgage banking income on the income statement. The fair values of servicing rights are subject to significant fluctuations as a result of changes in estimated and actual prepayment speeds and default rates and losses.

Results of Operations

Net Interest Income

The Corporation’s results of operations depend primarily on the level of its net interest income, its non-interest income and its operating expenses. Net interest income depends on the volume of and rates associated with interest earning assets and interest bearing liabilities which results in the net interest spread. The Corporation had net interest income fully taxable equivalent (“FTE”) of $21,003 for the six month period ending June 30, 2011, as compared to net interest income FTE of $19,280 for the six month period ending June 30, 2010. The increase in net interest income FTE is due to an increase in total earning assets of $186,499 for the six month period ending June 30, 2011, as compared to the six month period ending June 30, 2010. Additionally, total interest bearing liabilities increased $155,044 for the six month period ending June 30, 2011, as compared to the six month period ending June 30, 2010. The net interest income spread FTE decreased 0.16% to 2.96% for the six month period ending June 30, 2011, from 3.12% for the six month period ending June 30, 2010. The contribution of non-interest bearing funds decreased 0.03% to 0.11% from 0.14% for the six month period ending June 30, 2011 and 2010, respectively, resulting in an overall decrease to the net interest margin FTE to 3.07% from 3.26% for the six month period ending June 30, 2011 and 2010, respectively.

The following table details average balances, interest income/expense average rates/yields for the Corporation’s earning assets and interest bearing liabilities at the dates indicated.


	Six months ended
	June 30,
	2011							2010
			Interest		Average					Interest		Average
	Average		Income/		Rate/			Average		Income/		Rate/
	Balance		Expense		Yield			Balance		Expense		Yield
Assets:
Interest bearing due from banks	$	197,558	$	247		0.25	%	$	140,487	$	176		0.25	%
Reverse repurchase agreements		1,000		—		0.01	%		1,000		—		0.01	%
Federal funds		14,906		18		0.24	%		4,447		5		0.22	%
Non taxable investment securities — FTE		60,904		1,727		5.67	%		55,314		1,568		5.67	%
Taxable investment securities		177,716		1,367		1.54	%		107,397		1,119		2.08	%
Loans (gross) — FTE		917,068		21,555		4.70	%		874,008		21,122		4.83	%

Total earning assets	$	1,369,152	$	24,914		3.64	%	$	1,182,653	$	23,990		4.06	%
Non-earning assets		92,486							90,131

Total assets	$	1,461,638						$	1,272,784


Liabilities:
Interest bearing DDA	$	205,222	$	155		0.15	%	$	196,968	$	261		0.27	%
Savings		642,241		1,423		0.44	%		485,740		1,448		0.60	%
CD’s under $100		69,923		466		1.33	%		61,602		596		1.94	%
CD’s over $100		95,402		704		1.48	%		125,280		1,147		1.83	%
Individual retirement accounts		22,129		190		1.72	%		22,668		244		2.15	%
Repurchase agreements and other secured short term borrowings		97,510		134		0.27	%		83,674		144		0.34	%
Short-term debt		2,655		63		4.75	%		4,106		94		4.58	%
Subordinated debt		5,000		38		1.52	%		5,000		38		1.52	%
Long term debt		13,918		738		10.60	%		13,918		738		10.60	%

Total interest bearing liabilities	$	1,154,000	$	3,911		0.68	%	$	998,956	$	4,710		0.94	%
Non-interest bearing liabilities		219,151							194,035
Other liabilities		6,298							5,116

Total liabilities	$	1,379,449						$	1,198,107
Equity		82,189							74,677

Total liabilities & equity	$	1,461,638						$	1,272,784


Recap:
Interest income — FTE			$	24,914		3.64	%			$	23,990		4.06	%
Interest expense				3,911		0.68	%			$	4,710		0.94	%

Net interest income/spread — FTE			$	21,003		2.96	%			$	19,280		3.12	%


Contribution of non-interest bearing funds						0.11	%						0.14	%

Net interest margin — FTE						3.07	%						3.26	%

Notes to the average balance and interest rate tables:

•

Average balances are computed using daily actual balances.

•

The average loan balance includes loans held for sale, non-accrual loans and the interest recognized prior to becoming non-accrual is reflected in the interest income for loans.

•

Interest income on loans includes loan costs net of loan fees, of $351 thousand and $295 thousand, for the six month period ending June 30, 2011 and 2010, respectively.

•

Net interest income on a fully taxable equivalent basis, the most significant component of the Corporation’s earnings, is total interest income on a fully taxable equivalent basis less total interest expense. The level of net interest income on a fully taxable equivalent basis is determined by the mix and volume of interest earning assets, interest bearing deposits and borrowed funds, and changes in interest rates.

•

Net interest spread on a fully taxable equivalent is the difference between the fully taxable equivalent rate earned on interest earning assets less the rate expensed on interest bearing liabilities.

•

Net interest margin represents net interest income on a fully taxable equivalent basis as a percentage of average interest earning assets. Net interest margin is affected by both the interest rate spread and the level of non-interest bearing sources of funds, primarily consisting of demand deposits and shareholders’ equity.

•

Interest income on a fully taxable equivalent basis includes the additional amount of interest income that would have been earned on tax exempt loans and if investments in certain tax-exempt interest earning assets had been made in assets subject to federal taxes yielding the same after-tax income. Interest income on tax exempt loans and municipal securities has been calculated on a fully taxable equivalent basis using a federal and state income tax blended rate of 40%. The appropriate tax equivalent adjustments to interest income on loans was $292 thousand and $136 thousand for the six month period ending June 30, 2011 and 2010, respectively. The appropriate tax equivalent adjustments to interest income on municipal securities was $612 thousand and $553 thousand for the six month period ending June 30, 2011 and 2010, respectively.

•

Management believes the disclosure of the fully taxable equivalent net interest income information improves the clarity of financial analysis, and is particularly useful to investors in understanding and evaluating the changes and trends in the Corporation’s results of operations. This adjustment is considered helpful in the comparison of one financial institution’s net interest income to that of another institution, as each will have a different proportion of tax-exempt interest from their earning asset portfolios.

Provision for Loan Losses

The amount charged to the provision for loan losses by the Bank is based on management’s evaluation as to the amounts required to maintain an allowance adequate to provide for probable incurred losses inherent in the loan portfolio. The provision for loan losses made was at a level deemed necessary by management to absorb estimated, probable incurred losses in the loan portfolio. A detailed evaluation of the adequacy of the allowance for loan losses is completed quarterly by management, the results of which are used to determine provision for loan losses. The level of this allowance is dependent upon the total amount of past due and non-performing loans, general economic conditions and management’s assessment of probable incurred losses based upon internal credit evaluations of loan portfolios and particular loans.

Due to the imprecise nature of estimating the allowance for loan losses, the allowance for loan losses includes a minor unallocated component. The unallocated component of the allowance for loan losses incorporates the management’s judgmental determination of inherent losses that may not be fully reflected in other allocations, including factors such as economic uncertainties, industry trends impacting specific portfolio segments, and broad portfolio quality trends. Therefore, the ratio of allocated to unallocated components within the total allowance may fluctuate from period to period. For the three months ended June 30, 2011, the unallocated component of the allowance increased $749. This is due to loans which were downgraded to impaired and required less allocation under the specific allocation approach than the general allocation approach. Since there was no material improvement in overall asset quality this quarter to a point that would support a decrease in the allowance for loan losses to total loans ratio, management left the unallocated component in place. For the six months ended June 30, 2011, the unallocated component of the allowance decreased $53.

The provision for loan losses was $989 and $1,234, for the three month period ending June 30, 2011 and 2010, respectively. The provision for loan losses was $2,678 for the six month period ending June 30, 2011, compared to a provision for loan losses of $2,469 for the six month period ending June 30, 2010. The provision is affected by net chargeoffs on loans and changes in specific and general allocations of the allowance.

Other Operating Income

The following table details the components of other operating income for the three months ended June 30:


							$			%
	2011			2010			Change			Change
Wealth management fees	$	1,704		$	1,467		$	237			16.2	%
Service charges and fees on deposit accounts		745			749			(4	)		-0.5	%
Rental income		57			76			(19	)		-25.0	%
Mortgage banking income		(2	)		268			(270	)		-100.7	%
Interchange income		369			314			55			17.5	%
Net loss on sale of securities		—			(5	)		5			100.0	%
Other		593			438			155			35.4	%

Total other operating income	$	3,466		$	3,307		$	159			4.8	%

Total other operating income for the three month period ending June 30, 2011, increased as compared to the three month period ending June 30, 2010.

Wealth management fees increased for the three month period ending June 30, 2011, as compared to the three month period ending June 30, 2010. The increase in wealth management fees is attributable to an increase in estate fees, Irrevocable Life Insurance Trust (“ILIT”) fees, tax preparation fees, and an overall increase in the stock market.

Service charges and fees on deposit accounts decreased for the three month period ending June 30, 2011, as compared to the three month period ending June 30, 2010. The decrease is primarily attributable to a decrease in overdraft and NSF fees. The decrease is partially offset by an increase in wire transfer fees.

Rental income decreased for the three month period ending June 30, 2011, as compared to the three month period ending June 30, 2010. The decrease was primarily due to the Bank occupying more space at the 4930 North Pennsylvania Street and 107 North Pennsylvania Street locations thus reducing the space available for tenants.

Mortgage banking income decreased for the three month period ending June 30, 2011, as compared to the three month period ending June 30, 2010. The decrease for the three month period ending June 30, 2011, as compared to the three month period ending June 30, 2010, is due to a decrease in the net gain on the sale of mortgage loans. A net gain on the sale of mortgage loans of $140 was recorded for the three month period ending June 30, 2011, as compared to a net gain on the sale of mortgage loans of $513 for the three month period ending June 30, 2010. Offsetting this decrease was a decrease in the write down of the fair value of mortgage servicing rights (“MSRs”) of $263 for the three month period ending June 30, 2011, as compared to a write down of $349 for the three month period ending June 30, 2010.

When mortgage loans are sold and the MSRs are retained, the MSRs are recorded as an asset on the balance sheet. The value of the MSRs is sensitive to changes in interest rates. In a declining interest rate environment, mortgage loan refinancings generally increase, causing actual and expected loan prepayments to increase, which decreases the value of existing MSRs. Conversely, as interest rates rise, mortgage loan refinancings generally decline, causing actual and expected loan prepayments to decrease, which increases the value of the MSRs.

Interchange income increased for the three month period ending June 30, 2011, as compared to the three month period ending June 30, 2010. The increase is attributable to higher transaction volumes for debit cards and credit cards during the three month period ending June 30, 2011, as compared to the three month period ending June 30, 2010. The increase is partially offset by an increase in cash back rewards expense for the three month period ending June 30, 2011, as compared to the three month period ending June 30, 2010.

Net loss on sale of securities decreased for the three month period ending June 30, 2011, as compared to the three month period ending June 30, 2010. There was one sale of a held-to-maturity municipal during the three month period ending June 30, 2010. Since the security had a non-rated issuer, a credit review of the municipality was conducted. As a result of the review, it was determined that the investment was no longer considered a pass asset and thus below investment grade. Per investment policy, the Corporation is prohibited from holding any securities below investment grade.

Other income increased for the three month period ending June 30, 2011, as compared to the three month period ending June 30, 2010. The increase is primarily due to an increase in other real estate rental income and on fees collected for loan covenant waivers. The increase is partially offset by a decrease in prepayment penalties collected, application fees, bank owned life insurance income, Dreyfus money market funds sweep fees, and late fee income.

The following table details the components of other operating income for the six months ended June 30:


						$			%
	2011		2010			Change			Change
Wealth management fees	$	3,084	$	2,671		$	413			15.5	%
Service charges and fees on deposit accounts		1,492		1,518			(26	)		-1.7	%
Rental income		99		145			(46	)		-31.7	%
Mortgage banking income		217		480			(263	)		-54.8	%
Interchange income		709		598			111			18.6	%
Net loss on sale of securities		—		(5	)		5			100.0	%
Other		1,139		833			306			36.7	%

Total other operating income	$	6,740	$	6,240		$	500			8.0	%

Total other operating income for the six month period ending June 30, 2011, increased as compared to the six month period ending June 30, 2010.

Wealth management fees increased for the six month period ending June 30, 2011, as compared to the six month period ending June 30, 2010. The increase in wealth management fees is attributable to an increase in estate fees, ILIT fees, tax preparation fees, and an overall increase in the stock market.

Service charges and fees on deposit accounts decreased for the six month period ending June 30, 2011, as compared to the six month period ending June 30, 2010. The decrease is primarily attributable to a decrease in service charges collected for checking accounts and overdraft and NSF fees. The decrease is partially offset by an increase in wire transfer fees.

Rental income decreased for the six month period ending June 30, 2011, as compared to the six month period ending June 30, 2010. This was due to the bank occupying more space at the 4930 North Pennsylvania Street and 107 North Pennsylvania Street locations thus reducing the space available for tenants.

Mortgage banking income decreased for the six month period ending June 30, 2011, as compared to the six month period ending June 30, 2010. The decrease for the six month period ending June 30, 2011, as compared to the six month period ending June 30, 2010, is due to a decrease in the net gain on the sale of mortgage loans. A net gain on the sale of mortgage loans of $276 was recorded for the six month period ending June 30, 2011, as compared to a net gain on the sale of mortgage loans of $713 for the six month period ending June 30, 2010. Offsetting this decrease was a decrease in the write down of the fair value of mortgage servicing rights of $296 for the six period ending June 30, 2011, as compared to a write down of $438 for the six month period ending June 30, 2010.

Interchange income increased for the six month period ending June 30, 2011, as compared to the six month period ending June 30, 2010. The increase is attributable to higher transaction volumes for debit cards and credit cards during the six month period ending June 30, 2011, as compared to the six month period ending June 30, 2010. The increase is partially offset by an increase in cash back rewards expense for the six months ended June 30, 2011, as compared to the six months ended June 30, 2010.

Net loss on sale of securities decreased for the six month period ending June 30, 2011, as compared the six month period ending June 30, 2010. There was one sale of a held-to-maturity municipal security during the six month period ending June 30, 2011. Since the security had a non-rated issuer, a credit review of the municipality was conducted. As a result of the review, it was determined that the investment was no longer considered a pass asset and thus below investment grade. Per investment policy, the Corporation is prohibited from holding any securities below investment grade.

Other income increased for the six month period ending June 30, 2011, as compared to the six month period ending June 30, 2010. The increase is primarily due to an increase in other real estate rental income and on fees collected for loan covenant waivers. The increase is partially offset by a decrease in bank owned life insurance income, letter of credit fees, Dreyfus money market funds sweep fees, late fee income, application fees, and prepayment penalties collected.

Other Operating Expenses

The following table details the components of other operating expense for the three months ended June 30:


					$			%
	2011		2010		Change			Change
Salaries, wages and employee benefits	$	6,776	$	6,179	$	597			9.7	%
Occupancy		732		647		85			13.1	%
Furniture and equipment		283		330		(47	)		-14.2	%
Professional services		534		554		(20	)		-3.6	%
Data processing		878		802		76			9.5	%
Business development		464		459		5			1.1	%
FDIC Insurance		244		501		(257	)		-51.3	%
Non performing assets		571		147		424			288.4	%
Other		977		845		132			15.6	%

Total other operating expenses	$	11,459	$	10,464	$	995			9.5	%

Total other operating expenses for the three month period ending June 30, 2011, increased as compared to the three month period ending June 30, 2010.

Salaries, wages, and employee benefits increased for the three month period ending June 30, 2011, as compared to the three month period ending June 30, 2010. The increase is the result of increased salary expense, employer FICA expense, state unemployment tax expense, group medical benefits, 401K expense, deferred compensation, and direct loan origination costs. The increase is partially offset by a decrease in performance bonus expense.

Occupancy expense increased for the three month period ending June 30, 2011, as compared to the three month period ending June 30, 2010. The increase is due to an increase in real estate taxes, building operating costs, building and improvements depreciation expense, lawn maintenance, and utilities expense. The increase is partially offset by a decrease in building and property repair expense and building cleaning and supplies.

Furniture and equipment expense decreased for the three month period ending June 30, 2011, as compared to the three month period ending June 30, 2010. This decrease is due to a decrease in furniture, fixture, and equipment purchased for less than $500 and expensed and maintenance contracts. The decrease is partially offset by an increase in furniture, fixture, and equipment repair expense.

Professional services expense decreased for the three month period ending June 30, 2011, as compared to the three month period ending June 30, 2010. The decrease is due to a decrease in consulting fees, advertising agency fees, design services, and courier service. The decrease is partially offset by an increase in extended audit services, attorney fees, and accounting fees.

Data processing expenses increased for the three month period ending June 30, 2011, as compared to the three month period ending June 30, 2010. The increase is due to an increase in bill payment services, ATM/debit cards, credit cards, fiduciary income tax preparation for Wealth Management accounts, transaction processing fees and mutual fund expense for Wealth Management accounts, remote deposit capture fees, computer software amortization, and software maintenance. The increase is partially offset by a decrease in service bureau fees of the Bank.

Business development expenses increased for the three month period ending June 30, 2011, as compared to the three period ending June 30, 2010. The increase is due to an increase in customer entertainment. The increase is partially offset by a decrease in customer promotions and direct mail campaign.

FDIC insurance expense decreased for the three month period ending June 30, 2011, as compared to the three month period ending June 30, 2010. The decrease is due to the new rate schedule adopted by the FDIC effective April 1, 2011. In addition, effective January 1, 2011, the FDIC changed the Temporary Liquidity Guarantee Program and the Corporation is no longer required to pay for this program. The decrease is partially offset by an increase in the FDIC assessment because of higher deposits period over period

Nonperforming assets expenses increased for the three month period ending June 30, 2011, as compared to the three month period ending June 30, 2010. This increase is due to an increase in real estate taxes, lawn maintenance, and appraisal fees related to other real estate owned by the Corporation. Also contributing to the increase is a net loss on the sale of the other real estate. The increase is partially offset by a net write up of the carrying value of other real estate owned period over period.

Other expenses increased for the three month period ending June 30, 2011, as compared to the three period ending June 30, 2010. The increase is due to an increase in office supplies, computer license fees, dues, conferences and continuing education, employment agency fees, Comptroller of the Currency assessment, credit card fees, and Wealth management client adjustments.

The following table details the components of other operating expense for the six months ended June 30:


					$			%
	2011		2010		Change			Change
Salaries, wages and employee benefits	$	13,203	$	12,113	$	1,090			9.0	%
Occupancy		1,376		1,288		88			6.8	%
Furniture and equipment		582		659		(77	)		-11.7	%
Professional services		1,047		1,143		(96	)		-8.4	%
Data processing		1,671		1,527		144			9.4	%
Business development		892		890		2			0.2	%
FDIC Insurance		783		1,035		(252	)		-24.3	%
Non performing assets		832		304		528			173.7	%
Other		516		1,727		(1,211	)		-70.1	%

Total other operating expenses	$	20,902	$	20,686	$	216			1.0	%

Total other operating expenses for the six month period ending June 30, 2011, increased as compared to the six month period ending June 30, 2010.

Salaries, wages, and employee benefits increased for the six month period ending June 30, 2011, as compared to the six month period ending June 30, 2010. The increase is the result of increased salary expense, employer FICA expense, federal and state unemployment tax expense, contract labor, group medical benefits, 401K expense, and deferred compensation. The increase is partially offset by a decrease in direct loan origination costs and performance bonus expense.

Occupancy expense increased for the six month period ending June 30, 2011, as compared to the six month period ending June 30, 2010. The increase is due to an increase in real estate taxes, building and improvements depreciation expense, lawn maintenance, building operating costs, and utilities expense. The increase is partially offset by a decrease in building and property repair expense, land and leasehold improvements depreciation expense, snow removal, management fees, building cleaning and supplies, and building maintenance.

Furniture and equipment expense decreased for the six month period ending June 30, 2011, as compared to the six month period ending June 30, 2010. This decrease is due to a decrease in furniture, fixture, and equipment purchased for less than $500 and expensed and maintenance contracts. The decrease is partially offset by an increase in furniture, fixture, and equipment repair expense.

Professional services expense decreased for the six month period ending June 30, 2011, as compared to the six month period ending June 30, 2010. The decrease is due to a decrease in consulting fees, advertising agency fees, design services, and courier service. The decrease is partially offset by an increase in extended audit services and attorney fees.

Data processing expenses increased for the six month period ending June 30, 2011, as compared to the six month period ending June 30, 2010. The increase is due to an increase in bill payment services, ATM/debit cards, credit cards, fiduciary income tax preparation for Wealth Management accounts, transaction processing fees and mutual fund expense for Wealth Management accounts, computer software amortization, and software maintenance. The increase is partially offset by a decrease in service bureau fees of the Bank.

Business development expenses increased for the six month period ending June 30, 2011, as compared to the six period ending June 30, 2010. The increase is due to an increase in public relations, market research, customer entertainment, and customer relations. The increase is partially offset by a decrease in customer promotions and direct mail campaign.

FDIC insurance expense decreased for the six month period ending June 30, 2011, as compared to the six month period ending June 30, 2010. The decrease is due to the new rate schedule adopted by the FDIC effective April 1, 2011. In addition, effective January 1, 2011, the FDIC changed the Temporary Liquidity Guarantee Program and the Corporation is no longer required to pay for this program. The decrease is partially offset by an increase in the FDIC assessment because of higher deposits period over period.

Nonperforming assets expenses increased for the six month period ending June 30, 2011, as compared to the six month period ending June 30, 2010. This increase is due to an increase in the write down of the carrying value of other real estate owned. Also contributing to the increase is an increase in real estate taxes, lawn maintenance, and appraisal fees related to other real estate owned by the Corporation. The increase is partially offset by net gains on the sale of other real estate and a decrease in classified loan expense.

Other expenses decreased for the six month period ending June 30, 2011, as compared to the six period ending June 30, 2010. The decrease is due to a reversal of $1,000 accrual established by the Corporation in 2008 relating to a certain deposit account. In addition, the Corporation recovered $395 related to a wire transfer inadvertently sent to the wrong beneficiary in 2010. The decrease is partially offset by an increase in office supplies, dues, conferences and continuing education, employment agency fees, personal property taxes, Comptroller of the Currency assessment, credit card fees, and Wealth management client adjustments.

Federal and State Income Tax

The following table presents the statutory rate reconciliation:


	Three months ended						Six months ended
	June 30,						June 30,
	2011			2010			2011			2010

Income before federal and state income tax	$	1,180		$	979		$	3,259		$	1,676


Tax expense at federal statutory rate		401			333			1,108		$	570

Increase (decrease) in taxes resulting from:
State income tax		45			29			122		$	51
Tax exempt interest		(303	)		(217	)		(581	)	$	(395	)
Bank owned life insurance		(28	)		(33	)		(58	)	$	(66	)
Customer entertainment		28			26			46		$	45
Other		(1	)		5			(33	)	$	13

Total income tax	$	142		$	143		$	604		$	218

Financial Condition

Total assets decreased $86 from $1,441,393 at December 31, 2010, to $1,441,307 at June 30, 2011. The decrease is the result of a decrease in cash and cash equivalents of $113,448 and a decrease in deposits of $2,460 from $1,238,840 at December 31, 2010, to $1,236,380 at June 30, 2011 which were offset by an increase of $80,780 in investment securities and an increase of $22,232 in loans. The decrease in cash and cash equivalents funded the increase in loans as well as the purchase of investments securities.

Liquidity and Interest Rate Sensitivity

The Corporation must maintain an adequate liquidity position in order to respond to the short-term demand for funds caused by withdrawals from deposit accounts, extensions of credit and for the payment of operating expenses. Maintaining an adequate liquidity position is accomplished through the management of the liquid assets — those which can be converted into cash — and access to additional sources of funds. The Corporation must monitor its liquidity ratios as established by the Asset Liability Committee (“ALCO”). In addition, the Corporation has established a contingency funding plan to address liquidity needs in the event of depressed economic or market conditions, unexpected events, and/or situations beyond the Corporation’s control. The liquidity position is continually monitored and reviewed by ALCO.

The Corporation has many sources of funds available, they include: cash and due from Federal Reserve, overnight federal funds sold, investments available for sale, maturity of investments held for sale, deposits, Federal Home Loan Bank (“FHLB”) advances, and issuance of debt. Proceeds from maturities of investment securities held to maturity and available for sale were the most significant funding source and purchases of investment securities held to maturity and available for sale were the most significant use of funds during the six month period ending June 30, 2011. Deposits were the most significant funding source and loans were the most significant use of funds during the six month period ending June 30, 2010.

The Corporation has entered into a $2,000 revolving line of credit with U.S. Bank which matures on August 31, 2011. Under the terms of the revolving line of credit, the Corporation pays prime plus 1.25% which equated to 4.50% at June 30, 2011. In addition, the Corporation pays a 0.25% fee on the unused portion of the revolving line of credit. As of June 30, 2011, the outstanding balance of the revolving line of credit was $0.

The Corporation also has a $3,000 one-year term facility with U.S. Bank which matures on August 31, 2011. Under the terms of the one-year term facility, the Corporation pays prime plus 1.25% which equated to 4.50% at June 30, 2011. In addition to quarterly interest payments, the Corporation makes quarterly principal payments of $62.5. As of June 30, 2011, the outstanding balance of the term facility was $2,563.

All of the U.S. Bank agreements contain various financial and non-financial covenants. One of the covenants requires the Bank to maintain a loan loss reserve to non-performing loans at a minimum of 95%. The Bank was in violation of this covenant as of June 30, 2011, as the loan loss reserve to non-performing loans was 93.78%

At this time, U.S. Bank has not indicated an intention to exercise any of its remedies available under the credit facility as a result of the Corporation’s covenant violation. The remedies available to U.S. Bank are: make the note immediately due and payable; termination of the obligation to extend further credit; and/or invoke default interest rate of 3.0% over current interest rate. Management does not believe the impact of any of these remedies would have a material impact on the Corporation’s results of operation or financial position and is currently discussing a waiver for these covenant violations with U.S. Bank.

Primary liquid assets of the Corporation are cash and due from banks, federal funds sold, investments held as available for sale, and maturing loans. Interest bearing due from banks represented the Corporation’s primary source of immediate liquidity and averaged $197,558 and $140,487 for the six month period ending June 30, 2011, and June 30, 2010, respectively. The Corporation believes these balances are maintained at a level adequate to meet immediate needs. Reverse repurchase agreements may serve as a source of liquidity, but are primarily used as collateral for customer balances in overnight repurchase agreements. Maturities in the Corporation’s loan and investment portfolios are monitored regularly to avoid matching short-term deposits with long-term loans and investments. Other assets and liabilities are also monitored to provide the proper balance between liquidity, safety, and profitability. This monitoring process must be continuous due to the constant flow of cash which is inherent in a financial institution.

The Corporation’s management believes its liquidity sources are adequate to meet its operating needs and does not know of any trends, events or uncertainties that may result in a significant adverse effect on the Corporation’s liquidity position.

The Corporation actively manages its interest rate sensitive assets and liabilities to reduce the impact of interest rate fluctuations. At June 30, 2011, the Corporation’s rate sensitive liabilities exceeded rate sensitive assets due within one year by $169,974.

As part of managing liquidity, the Corporation monitors its loan to deposit ratio on a monthly basis. At June 30, 2011, the ratio was 74.6%. This is well within the board approved policy.

The Corporation experienced a decrease in cash and cash equivalents, another primary source of liquidity, of $113,448 during the six month period ending June 30, 2011. Proceeds from the maturity of investment securities provided cash of $54,505. Lending activities used cash of $46,060 and purchases of investment securities used cash of $133,212.

The purpose of the Bank’s Investment Committee is to manage and balance interest rate risk of the investment portfolio, to provide a readily available source of liquidity to cover deposit runoff and loan growth, and to provide a portfolio of safe, secure assets of high quality that generate a supplemental source of income in concert with the overall asset/liability policies and strategies of the Bank.

Capital Resources

The Corporation has a $2,000 revolving line of credit and a $3,000 one-year term loan with U.S. Bank. See “Liquidity and Interest Rate Sensitivity” section of this report for further discussion.

On June 29, 2007, the Bank entered into a Subordinated Debenture Purchase Agreement with U.S. Bank in the amount of $5,000, which will mature on June 28, 2017. Under the terms of the Subordinated Debenture Purchase Agreement, the Bank pays 3-month London Interbank Offered Rate (LIBOR) plus 1.20% which equated to 1.45% at June 30, 2011. Interest payments are due quarterly.

In September 2000, the Trust, which is wholly owned by the Corporation, issued $13,500 of company obligated mandatorily redeemable capital securities. The proceeds from the issuance of the capital securities and the proceeds from the issuance of the common securities of $418 were used by the Trust to purchase from the Corporation $13,918 fixed rate junior subordinated debentures. The capital securities mature September 7, 2030, or upon earlier redemption as provided by the Indenture. The Corporation has the right to redeem the capital securities, in whole or in part, but in all cases in a principal amount with integral multiples of a thousand dollars on any March 7 or September 7 on or after September 7, 2010, at a premium of 105.3%, declining ratably to par on September 7, 2020. The capital securities and the debentures have a fixed interest rate of 10.60% and are guaranteed by the Bank. The net proceeds received by the Corporation from the sale of capital securities were used for general corporate purposes.

There were no FHLB advances outstanding as of June 30, 2011, or 2010.

The Bank may add indebtedness of this nature in the future if determined to be in the best interest of the Bank.

Capital for the Bank is at or above the well capitalized regulatory requirements at June 30, 2011. Pertinent capital ratios for the Bank as of June 30, 2011, are as follows:


				Well			Adequately
	Actual			Capitalized			Capitalized
Tier 1 risk-based capital ratio		9.3	%		6.0	%		4.0	%
Total risk-based capital ratio		11.1	%		10.0	%		8.0	%
Leverage ratio		6.4	%		5.0	%		4.0	%

Dividends from the Bank to the Corporation may not exceed the net undivided profits of the Bank (included in consolidated retained earnings) for the current calendar year and the two previous calendar years without prior approval from the Office of the Comptroller of the Currency. In addition, Federal banking laws limit the amount of loans the Bank may make to the Corporation, subject to certain collateral requirements. No loans were made by the Bank to the Corporation during the six month period ending June 30, 2011 or 2010. A dividend of $712 and $743 was declared and paid by the Bank to the Corporation during the six month period ending June 30, 2011 and 2010, respectively.

On November 20, 2008, the Board of Directors adopted a new three-year stock repurchase program for directors and employees. Under the stock repurchase program, the Corporation may repurchase shares in individually negotiated transactions from time to time as such shares become available and spend up to $8 million to repurchase such shares over the three-year term. Subject to the $8 million limitation, the Corporation intends to purchase shares recently acquired by the selling shareholder pursuant to the exercise of stock options or the vesting of restricted stock, and limit its acquisition of shares which were not recently acquired by the selling shareholder pursuant to the exercise of stock options or the vesting of shares of restricted stock to no more than 10,000 shares per year.

On February 18, 2011, the Corporation amended its stock repurchase program. Under the amended repurchase program, the Corporation may repurchase up to 15,000 shares from outside shareholders in addition to the previously approved employee and director repurchase plan. The Corporation anticipates that it will fund purchases under the repurchase program from available working capital.

Under the amended repurchase plan, the Corporation purchased 24,360 shares during the six month period ending June 30, 2011, and $4,213,000 is still available under the new repurchase plan as of June 30, 2011. The stock repurchase program does not require the Corporation to acquire any specific number of shares and may be modified, suspended, extended or terminated by the Corporation at any time without prior notice. The repurchase program will terminate on December 31, 2011, unless earlier suspended or discontinued by the Corporation.

Recent Accounting Pronouncements and Developments

Note 11 to the Consolidated Financial Statements under Item 1 discusses new accounting policies adopted by the Corporation during the second quarter of 2011 and the expected impact of the adoption of the new accounting policies.


Item 3.		Quantitative and Qualitative Disclosures about Market Risk

Market risk is the risk of loss due to adverse changes in market prices and rates. The Corporation’s market risk arises primarily from interest rate risk inherent in its lending and deposit taking activities. Management actively monitors and manages its interest rate exposure and makes monthly reports to ALCO. ALCO is responsible for reviewing the interest rate sensitivity position and establishing policies to monitor and limit exposure to interest rate risk. The guidelines established by ALCO are reviewed by the ALCO/Investment Committee of the Corporation’s Board of Directors.

The Corporation’s profitability is affected by fluctuations in interest rates. A sudden and substantial increase in interest rates may adversely impact the Corporation’s earnings to the extent that the interest rates earned by assets and paid on liabilities do not change at the same speed, to the same extent, or on the same basis. The Corporation monitors the impact of changes in interest rates on its net interest income. The Corporation attempts to maintain a relatively neutral gap between earning assets and liabilities at various time intervals to minimize the effects of interest rate risk.

One of the primary goals of asset/liability management is to maximize net interest income and the net value of future cash flows within authorized risk limits. Net interest income is affected by changes in the absolute level of interest rates. Net interest income is also subject to changes in the shape of the yield curve. In general, a flattening of the yield curve would result in a decline in earnings due to the compression of earning asset yields and funding rates, while a steepening would result in increased earnings as investment margins widen. Earnings are also affected by changes in spread relationships between certain rate indices, such as prime rate.

At June 30, 2011, the interest rate risk position of the Corporation was liability sensitive, meaning net income should decrease as rates rise and increase as rates fall. The Corporation performs a 200 basis point upward and downward interest rate shock to determine whether there would be an adverse impact on its annual net income and that it is within the established policy limits. A downward interest rate shock scenario was not performed due to the low level of current interest rates. The earnings simulation model as of June 30, 2011, projects an approximate decrease of 27.6% in net income in a 200 basis point upward interest rate shock. The Corporation was in violation of its policy limits established by the ALCO policy at June 30, 2011. Management believes there is a 0.00% probability that interest rates would rise 200 basis points immediately. Management performs additional interest rate scenarios that have higher probabilities of occurrence. In these rate scenarios, the change to net income is within established limits.

See “Liquidity and Interest Rate Sensitivity” section of this report for further discussion.

There have been no material changes in the quantitative analysis used by the Corporation since filing the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2010, (the “2010 Form 10-K”); for further discussion of the quantitative analysis used by the Corporation refer to page 48 of the 2010 Form 10-K filed with the U.S. Securities and Exchange Commission on March 11, 2011.


Item 4.		Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Corporation’s management is responsible for establishing and maintaining effective disclosure controls and procedures, as defined under Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934. As of June 30, 2011, an evaluation was performed under the supervision and with the participation of management, including the principal executive officer and principal financial officer, of the effectiveness of the design and operation of the Corporation’s disclosure controls and procedures. Based on that evaluation, the principal executive officer and principal financial officer concluded that the Corporation’s disclosure controls and procedures as of June 30, 2011, were effective in ensuring information required to be disclosed in this Quarterly Report on Form 10-Q was recorded, processed, summarized, and reported on a timely basis.

Changes in Internal Control Over Financial Reporting

There have been no changes in internal control over financial reporting 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.

Limitations on the Effectiveness of Controls

The Corporation’s management, including its principal executive officer and principal financial officer, does not expect that the Corporation’s disclosure controls and procedures and other internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Corporation have been detected. These inherent limitations include the realities that judgments in decision making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control.

The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can only be reasonable assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost effective control system, misstatements due to error or fraud may occur and not be detected.

Part II — Other Information.


Item 1.		Legal Proceedings

Neither the Corporation nor its subsidiaries are involved in any pending material legal proceedings at this time, other than routine litigation incidental to their business.

Item 1A. Risk Factors

The repeal of Regulation Q may increase competition for deposits and increase our interest expense.

On July 18, 2011, the Board of Governors of the Federal Reserve System published a final rule repealing Regulation Q, which prohibits the payment of interest on demand deposits by institutions that are member banks of the Federal Reserve System. The rule implements Section 627 of the Dodd-Frank Wall Street Reform and Consumer Protection Act signed by President Obama on July 21, 2010, which repealed Section 19(i) of the Federal Reserve Act in its entirety effective July 21, 2011. As a result, banks and thrifts may now offer interest-bearing demand deposit accounts to commercial customers, which were previously forbidden under Regulation Q. The repeal of Regulation Q may cause increased competition from other financial institutions for these deposits. If the Bank decides to pay interest on demand accounts, it would expect interest expense to increase.

Other than as set forth above, there have been no material changes to the risk factors disclosed in the Corporation’s Form 10-K for the year ended December 31, 2010, as filed with the SEC on March 11, 2011.


Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds

(a)

On May 4, 2011, the Corporation sold a total of 4,000 shares of common stock for proceeds of $100,000 to one officer of the Corporation pursuant to the exercise of stock options by the officer.

On May 12, 2011, the Corporation sold a total of 800 shares of common stock for proceeds of $22,200 to one officer of the Corporation pursuant to the exercise of stock options by the officer.

On May 30, 2011, the Corporation sold a total of 7,500 shares of common stock for proceeds of $208,125 to one officer of the Corporation pursuant to the exercise of stock options by the officer.

On June 24, 2011, the Corporation sold a total of 2,800 shares of common stock for proceeds of $121,464 to one officer of the Corporation pursuant to the exercise of stock options by the officer.

These sales were made pursuant to an exemption from registration under Sections 3(a)(11) and 4(2) of the Securities Act of 1933, as amended.

(b)

Not applicable.

(c)

The following table sets forth the issuer repurchases of equity securities that are registered by the Corporation pursuant to Section 12 of the Securities Exchange Act of 1934 during the second quarter of 2011.

Maximum

Number (or

Approximate

Total

Dollar Value)

Number of

of Shares that

May Yet Be

Purchased as

Purchased

Part of

Under the

Total

Publicly

Plans or

Number of

Average

Announced

Programs

Price Paid

Plans or

(Dollars in

Period

Purchased

per Share

Programs**

thousands)

April 1 - April 30, 2011

3,000

44.62

3,000

5,131

May 1 - May 31, 2011

14,110

44.22

14,110

4,507

June 1 - June 30, 2011

6,450

45.66

6,450

4,213

Total

23,560


*		The weighted average price per share for the period April 2011 through June 2011 was $44.56.

**		All shares repurchased by the Corporation during 2011 were completed pursuant to the repurchase program.

On November 20, 2008, the Board of Directors adopted a new three-year stock repurchase program for directors and employees. Under the stock repurchase program, the Corporation may repurchase shares in individually negotiated transactions from time to time as such shares become available and spend up to $8 million to repurchase such shares over the three-year term. Subject to the $8 million limitation, the Corporation intends to purchase shares recently acquired by the selling shareholder pursuant to the exercise of stock options or the vesting of restricted stock and limit its acquisition of shares which were not recently acquired by the selling shareholder pursuant to the exercise of stock options or the vesting of shares of restricted stock to no more than 10,000 shares per year.


Item 3.		Defaults on Senior Securities

Not applicable.


Item 4.		(Removed and Reserved)


Item 5.		Other Information

Not applicable.


Item 6.		Exhibits


3.01		Articles of Incorporation of the Corporation, filed as Exhibit 3(i) to the Corporation’s Form 10-QSB as of September 30, 1995, are incorporated by reference and Articles of Amendment filed as Exhibit 3(i) to the Form 10-K for the fiscal year ended December 31, 2001.

3.02		Bylaws of the Corporation, filed as Exhibit 3(ii) to the Corporation’s Form 8-K filed July 30, 2009, are incorporated by reference.

10.01	*	1993 Key Employees’ Stock Option Plan of the Corporation, as amended, filed as Exhibit 10(a) to the Form 10-K for the fiscal year ended December 31, 2004, is incorporated by reference.

10.02	*	1993 Directors’ Stock Option Plan of the Corporation, as amended, filed as Exhibit 10(b) to the Corporation’s Form 10-Q as of June 30, 2001, is incorporated by reference.

10.03	*	1993 Restricted Stock Plan of the Corporation, as amended, filed as Exhibit 10(c) to the Form 10-K for the fiscal year ended December 31, 2004, is incorporated by reference.


10.04	*	Form of agreement under the 1993 Key Employees Stock Option Plan, filed as Exhibit 10(d) to the Form 10-K for the fiscal year ended December 31, 2004, is incorporated by reference.

10.05	*	Form of agreement under the 1993 Restricted Stock Plan, filed as Exhibit 10(e) to the Form 10-K for the fiscal year ended December 31, 2004, is incorporated by reference.

10.06	*	Schedule of Directors Compensation Arrangements, filed as part of the Corporation’s Form 8-K dated March 17, 2010, is incorporated by reference.

10.07	*	Schedule of Named Executive Officers Compensation Arrangements, filed as Exhibit 10.07 to the Corporation’s Form 8-K dated May 18, 2006, is incorporated by reference, as amended by the Corporation’s Form 8-K filed January 6, 2011 and April 21, 2011.

10.08	*	The National Bank of Indianapolis Corporation Amended and Restated 2005 Equity Incentive Plan, filed as Exhibit 10.01 to the Corporation’s Form 8-K dated June 23, 2010, is incorporated by reference.

10.09	*	Form of Restricted Stock Award Agreement for The National Bank of Indianapolis Corporation 2005 Equity Incentive Plan, filed as Exhibit 10.02 to the Corporation’s Form 8-K dated June 22, 2005, is incorporated by reference.

10.10	*	Form of Stock Option Award Agreement for The National Bank of Indianapolis Corporation 2005 Equity Incentive Plan, filed as Exhibit 10.03 to the Corporation’s Form 8-K dated June 22, 2005, is incorporated by reference.

10.11	*	Employment Agreement dated December 15, 2005, between Morris L. Maurer and the Corporation, filed as Exhibit 10.06 to the Corporation’s Form 8-K dated December 21, 2005, and as amended by Exhibit 10.06 to the Corporation’s Form 8-K dated November 26, 2008, is incorporated by reference.

10.13	*	The National Bank of Indianapolis Corporation Executive’s Deferred Compensation Plan, filed as Exhibit 10.08 to the Corporation’s Form 8-K dated December 21, 2005, and as amended by Exhibit 10.08 to the Corporation’s Form 8-K dated November 26, 2008, is incorporated by reference.

10.14	*	The National Bank of Indianapolis Corporation 401(k) Savings Plan (as amended and restated generally effective January 1, 2006), filed as Exhibit 10.14 to the Corporation’s Form 10-K dated December 31, 2005, is incorporated by reference.

31.1		Certificate of Chief Executive Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.

31.2		Certificate of Chief Financial Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.

32.1		Chief Executive Officer Certification pursuant to 18 U.S.C. Section 1350.

32.2		Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350.

101.		The following material from The National Bank of Indianapolis Corporation’s Form 10-Q Report for the quarterly period ended June 30, 2011, formatted in XBRL pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Cash Flows, (iv) the Consolidated Statements of Shareholders’ Equity, and (v) the Notes to Consolidated Financial Statements.**


*		Management contract or compensatory plan or arrangement.

**		Furnished, not filed, for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934.

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.


		Date: August 5, 2011

		THE NATIONAL BANK OF INDIANAPOLIS CORPORATION

		/s/ Debra L. Ross Debra L. Ross
		Chief Financial Officer

EXHIBIT INDEX


3.01		Articles of Incorporation of the Corporation, filed as Exhibit 3(i) to the Corporation’s Form 10-QSB as of September 30, 1995, are incorporated by reference and Articles of Amendment filed as Exhibit 3(i) to the Form 10-K for the fiscal year ended December 31, 2001.

3.02		Bylaws of the Corporation, filed as Exhibit 3(ii) to the Corporation’s Form 8-K filed July 30, 2009, are incorporated by reference.

10.01	*	1993 Key Employees’ Stock Option Plan of the Corporation, as amended, filed as Exhibit 10(a) to the Form 10-K for the fiscal year ended December 31, 2004, is incorporated by reference.

10.02	*	1993 Directors’ Stock Option Plan of the Corporation, as amended, filed as Exhibit 10(b) to the Corporation’s Form 10-Q as of June 30, 2001, is incorporated by reference.

10.03	*	1993 Restricted Stock Plan of the Corporation, as amended, filed as Exhibit 10(c) to the Form 10-K for the fiscal year ended December 31, 2004, is incorporated by reference.

10.04	*	Form of agreement under the 1993 Key Employees Stock Option Plan, filed as Exhibit 10(d) to the Form 10-K for the fiscal year ended December 31, 2004, is incorporated by reference.

10.05	*	Form of agreement under the 1993 Restricted Stock Plan, filed as Exhibit 10(e) to the Form 10-K for the fiscal year ended December 31, 2004, is incorporated by reference.

10.06	*	Schedule of Directors Compensation Arrangements, filed as part of the Corporation’s Form 8-K dated March 17, 2010, is incorporated by reference.

10.07	*	Schedule of Named Executive Officers Compensation Arrangements, filed as Exhibit 10.07 to the Corporation’s Form 8-K dated May 18, 2006, is incorporated by reference, as amended by the Corporation’s Form 8-K filed January 6, 2011 and April 21, 2011.

10.08	*	The National Bank of Indianapolis Corporation Amended and Restated 2005 Equity Incentive Plan, filed as Exhibit 10.01 to the Corporation’s Form 8-K dated June 23, 2010, is incorporated by reference.

10.09	*	Form of Restricted Stock Award Agreement for The National Bank of Indianapolis Corporation 2005 Equity Incentive Plan, filed as Exhibit 10.02 to the Corporation’s Form 8-K dated June 22, 2005, is incorporated by reference.

10.10	*	Form of Stock Option Award Agreement for The National Bank of Indianapolis Corporation 2005 Equity Incentive Plan, filed as Exhibit 10.03 to the Corporation’s Form 8-K dated June 22, 2005, is incorporated by reference.

10.11	*	Employment Agreement dated December 15, 2005, between Morris L. Maurer and the Corporation, filed as Exhibit 10.06 to the Corporation’s Form 8-K dated December 21, 2005, and as amended by Exhibit 10.06 to the Corporation’s Form 8-K dated November 26, 2008, is incorporated by reference.


10.13	*	The National Bank of Indianapolis Corporation Executive’s Deferred Compensation Plan, filed as Exhibit 10.08 to the Corporation’s Form 8-K dated December 21, 2005, and as amended by Exhibit 10.08 to the Corporation’s Form 8-K dated November 26, 2008, is incorporated by reference.

10.14	*	The National Bank of Indianapolis Corporation 401(k) Savings Plan (as amended and restated generally effective January 1, 2006), filed as Exhibit 10.14 to the Corporation’s Form 10-K dated December 31, 2005, is incorporated by reference.

31.1		Certificate of Chief Executive Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.

31.2		Certificate of Chief Financial Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.

32.1		Chief Executive Officer Certification pursuant to 18 U.S.C. Section 1350.

32.2		Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350.

101.		The following material from The National Bank of Indianapolis Corporation’s Form 10-Q Report for the quarterly period ended June 30, 2011, formatted in XBRL pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Cash Flows, (iv) the Consolidated Statements of Shareholders’ Equity, and (v) the Notes to Consolidated Financial Statements.**


*		Management contract or compensatory plan or arrangement.

**		Furnished, not filed, for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934.

NATIONAL BANK OF INDIANAPOLIS CORP - FORM 10-Q - August 5, 2011

Attached files

NATIONAL BANK OF INDIANAPOLIS CORP Reports