UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended ~~March~~June 3130, 2012

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

For the transition period from _________ to __________

Commission file number 000-09785

TRI CITY BANKSHARES CORPORATION

(Exact name of registrant as specified in its charter)

Wisconsin (State or other jurisdiction of incorporation or organization)	39-1158740 (~~IRS~~I.R.S. Employer Identification No.)
6400 S. 27th Street, Oak Creek, WI (Address of principal executive offices)
53154 (Zip Code)
(414) 761-1610 (Registrant’s telephone number, including area code)

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

YES X NO ___

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

YES X NO ___

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

Large accelerated filer ____ Accelerated filer ____

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

Smaller reporting company X

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

YES ___ NO X

The number of shares outstanding of the registrant’s $1.00 par value common stock as of ~~May~~August 1110 , 2012 was 8,904,915 shares.

PART I - FINANCIAL INFORMATION

ITEM 1 -	FINANCIAL STATEMENTS	3

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

ITEM 3 -	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	42

ITEM 4 -	CONTROLS AND PROCEDURES	42

PART II - OTHER INFORMATION

ITEM 1 -	LEGAL PROCEEDINGS	43

ITEM 1A -	RISK FACTORS	43

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

ITEM 3 -	DEFAULTS UPON SENIOR SECURITIES	44

ITEM 4 -	MINE SAFETY DISCLOSURES	44

ITEM 5 -	OTHER INFORMATION	44

ITEM 6 -	EXHIBITS	44

Signatures		45

Exhibit Index		46

PART I - FINANCIAL INFORMATION
ITEM 1 -	FINANCIAL STATEMENTS	4
ITEM 2 -	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	27
ITEM 3 -	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	38
ITEM 4 -	CONTROLS AND PROCEDURES	38
PART II - OTHER INFORMATION
ITEM 1 -	LEGAL PROCEEDINGS	39
ITEM 1A -	RISK FACTORS	39
ITEM 2 -	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	40
ITEM 3 -	DEFAULTS UPON SENIOR SECURITIES	40
ITEM 4 -	MINE SAFETY DISCLOSURES	40
ITEM 5 -	OTHER INFORMATION	40
ITEM 6 -	EXHIBITS	40

Signatures		41
Exhibit Index		42

PART I - FINANCIAL INFORMATION

ITEM 1 - FINANCIAL STATEMENTS

TRI CITY BANKSHARES CORPORATION

CONSOLIDATED BALANCE SHEETS

	March 31, 2012 (Unaudited)		December 31, 2011
	June 30, 2012 (Unaudited)		December 31, 2011
ASSETS
Cash and due from banks	$	2829,~~707~~523,~~458~~962	$	52,942,095
Federal funds sold		4338,~~524~~198,~~051~~082		55,121,113
Cash and cash equivalents		7267,~~231~~722,~~509~~044		108,063,208
Held to maturity securities, fair value of $398,868,076 and $363,252,684 as of March 31, 2012 and December 31 2011, respectively		397,358,546		360,566,062
Held to maturity securities, fair value of $339,885,266 and $363,252,684 as of June 30, 2012 and December 31 2011, respectively		335,836,897		360,566,062
Loans, less allowance for loan losses of $11,849,317 and $11,012,088 as of March 31, 2012 and December 31, 2011, respectively		686,375,316		696,785,798
Loans, less allowance for loan losses of $11,566,199 and $11,012,088 as of June 30, 2012 and December 31, 2011, respectively		685,517,248		696,785,798
Premises and equipment – net		18,~~889~~779,~~594~~115		19,146,870
Cash surrender value of life insurance		1227,~~610~~821,~~554~~733		12,491,722
Mortgage servicing rights – net		1,~~587~~621,~~287~~170		1,598,802
Core deposit intangible		~~927~~850,~~582~~029		1,005,135
Other real estate owned		67,~~897~~549,~~855~~712		7,350,678
Accrued interest receivable and other assets		87,~~247~~597,~~827~~897		8,134,624
Total Assets	$	1,~~205~~153,~~126~~295,~~070~~845	$	1,215,142,899
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES
Deposits
Demand	$	~~167~~173,~~459~~342,~~471~~552	$	176,767,314
Savings and NOW		~~679~~668,~~921~~779,~~022~~702		714,052,479
Other time		~~186~~182,~~800~~085,~~432~~009		179,660,109
Total Deposits		1,~~034~~024,~~180~~207,~~925~~263		1,070,479,902
Payable for investments purchased		~~43,416,476~~-		17,165,797
Other liabilities		23,~~978~~894,~~371~~253		5,516,471
Total Liabilities		1,~~080~~028,~~575~~101,~~772~~516		1,093,162,170
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY
Cumulative preferred stock, $1 par value, 200,000 shares authorized, no shares issued		-		-
Common stock, $1 par value, 15,000,000 shares authorized, 8,904,915 shares issued and outstanding of March 31, 2012 and December 31, 2011		8,904,915		8,904,915
Common stock, $1 par value, 15,000,000 shares authorized, 8,904,915 shares issued and outstanding of June 30, 2012 and December 31, 2011		8,904,915		8,904,915
Additional paid-in capital		26,543,470		26,543,470
Retained earnings		89,~~101~~745,~~913~~944		86,532,344
Total Stockholders’ Equity		~~124~~125,~~550~~194,~~298~~329		121,980,729
Total Liabilities and Stockholders’ Equity	$	1,~~205~~153,~~126~~295,~~070~~845	$	1,215,142,899

See notes to unaudited consolidated financial statements.

TRI CITY BANKSHARES CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

For Three Months Ended June 30, 2012 and 2011

(Unaudited)

	2012		2011
INTEREST INCOME
Loans	$	10,456,224	$	12,045,919
Investment Securities:
Taxable		1,015,488		1,196,359
Tax exempt		325,705		340,022
Federal funds sold		3,683		2,205
Other		-		9,663
Total Interest Income		11,801,100		13,594,168

INTEREST EXPENSE
Deposits		853,684		1,167,970
Other borrowings		9,717		11,989
Total Interest Expense		863,401		1,179,959
Net interest income before provision for loan losses		10,937,699		12,414,209
Provision for loan losses		1,500,000		1,920,000
Net interest income after provision for loan losses		9,437,699		10,494,209

NONINTEREST INCOME
Service charges on deposits		2,529,108		2,497,717
Loan servicing income		5,836		126,920
Net gain on sale of loans		700,963		88,699
Increase in cash surrender value of life insurance		211,180		117,586
Non-accretable loan discount		1,144,230		715,569
Other income		330,908		157,450
Total Noninterest Income		4,922,225		3,703,941

NONINTEREST EXPENSE
Salaries and employee benefits		5,574,323		5,521,641
Net occupancy costs		910,825		979,184
Furniture and equipment expenses		420,231		397,487
Computer services		975,630		930,323
Advertising and promotional		329,274		306,219
FDIC and other regulatory assessments		324,079		323,696
Office supplies		214,597		196,238
Core deposit intangible amortization		77,553		104,554
Other		1,698,349		1,338,645
Total Noninterest Expense		10,524,861		10,097,987
Income before income taxes		3,835,063		4,100,163
Less: Applicable income taxes		1,321,000		1,447,501
Net Income	$	2,514,063	$	2,652,662
Basic and fully diluted earnings per share	$	0.28	$	0.29
Dividends declared per share	$	0.21	$	-
Weighted average shares outstanding		8,904,915		8,904,915

See notes to unaudited consolidated financial statements.

TRI CITY BANKSHARES CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

For ~~Three~~Six Months Ended ~~March~~June 3130, 2012 and 2011

(Unaudited)

	2012		2011
INTEREST INCOME
Loans	$	1021,~~816~~273,~~918~~142	$	1123,~~686~~732,~~922~~841
Investment Securities:
Taxable		12,~~339~~355,~~562~~050		~~812~~2,~~433~~018,455
Tax exempt		~~353~~678,~~070~~775		~~331~~671,~~874~~896
Federal funds sold		1014,~~736~~419		1214,~~000~~205
Total Interest Income		1224,~~520~~321,~~286~~386		1226,~~843~~437,~~229~~397
INTEREST EXPENSE
Deposits		~~909~~1,~~769~~763,453		12,~~327~~495,~~599~~569
Other borrowings		-9,717		~~123~~12,112
Total Interest Expense		~~909~~1,~~769~~773,170		12,~~327~~507,~~722~~681
Net interest income before provision for loan losses		1122,~~610~~548,~~517~~216		1123,~~515~~929,~~507~~716
Provision for loan losses		13,~~500~~000,000		13,~~400~~320,000
Net interest income after provision for loan losses		1019,~~110~~548,~~517~~216		1020,~~115~~609,~~507~~716
NONINTEREST INCOME
Service charges on deposits		24,~~441~~970,~~708~~816		24,~~379~~876,~~090~~807
Loan servicing income		4651,~~096~~932		88214,~~079~~999
Net gain on sale of loans		~~429~~1,~~714~~130,677		~~235~~323,~~263~~962
Increase in cash surrender value of life insurance		~~118~~330,~~832~~012		~~114~~232,~~533~~119
Non-accretable loan discount		~~543~~1,~~078~~687,308		~~381~~1,~~626~~097,195
Other income		~~557~~888,~~538~~446		~~177~~334,~~383~~833
Total Noninterest Income		49,~~136~~059,~~966~~191		37,~~375~~079,~~974~~915
NONINTEREST EXPENSE
Salaries and employee benefits		511,~~692~~266,~~120~~443		511,~~645~~167,~~626~~267
Net occupancy costs		1,~~015~~925,~~002~~827		12,~~117~~096,~~398~~582
Furniture and equipment expenses		~~393~~813,~~298~~529		~~401~~798,~~252~~739
Computer services		~~983~~1,~~266~~958,896		~~892~~1,~~410~~822,733
Advertising and promotional		~~240~~569,~~000~~274		~~255~~561,~~055~~274
FDIC and other regulatory assessments		~~314~~638,~~685~~764		~~393~~717,~~954~~650
Office supplies		~~221~~436,~~771~~368		~~189~~385,~~322~~560
Core deposit intangible amortization		77155,~~553~~106		~~104~~209,~~555~~109
Other		12,~~233~~932,~~878~~227		12,~~331~~670,~~937~~582
Total Noninterest Expense		1020,~~171~~696,~~573~~434		1020,~~331~~429,~~509~~496
Income before income taxes		47,~~075,~~910,973		37,~~159~~260,~~972~~135
Less: Applicable income taxes		12,~~506~~827,345		~~874~~2,~~286~~321,787
Net Income	$	25,~~569~~083,~~565~~628	$	24,~~285~~938,~~686~~348
Basic and fully diluted earnings per share	$	0.2957	$	0.2655
Dividends per share	$	-	$	-
Dividends declared per share	$	0.21	$	-
Weighted average shares outstanding		8,904,915		8,904,915

See notes to unaudited consolidated financial statements.

TRI CITY BANKSHARES CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

For ~~Three~~Six Months Ended ~~March~~June 30, 2012 and 2011

(Unaudited)

	2012			2011
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income	$	25,~~569~~083,~~565~~628		$	24,~~285~~938,~~686~~348
Adjustments to reconcile net income to net cash flows provided by operating activities:
Adjustments to reconcile net income to net cash flows (used in) provided by operating activities:
Depreciation		~~502~~1,~~190~~004,380			~~539~~1,~~853~~079,702
Amortization of servicing rights, premiums and discounts –net		(~~836~~1,~~424~~012,802	)		(12,~~087~~951,~~914~~454	)
Net gain on sale of loans		(~~429~~1,~~714~~130,677	)		(~~235~~323,~~263~~962	)
Amortization of core deposit intangible		77155,~~553~~106			~~104~~209,~~555~~109
Provision for loan losses		13,~~500~~000,000			13,~~400~~320,000
Proceeds from sales of loans held for sale		1949,~~447~~107,~~019~~898			1016,~~982~~020,~~248~~441
Originations of loans held for sale		(1948,~~155~~335,~~123~~869	)		(1015,~~815~~799,~~291~~066	)
Increase in cash surrender value of life insurance		(~~118~~330,~~832~~012	)		(~~114~~232,~~533~~119	)
Gain on disposal of fixed assets		-			(~~500~~5,550	)
Gain on sale of other real estate owned		(~~228~~293,~~347~~303	)		(~~187~~460,~~469~~034	)
Net change in:
Accrued interest receivable and other assets		~~(113~~536,~~203~~727	)		(~~133~~579,~~132~~990	)
Payable for investments purchased		26(17,~~250~~165,~~679~~797	)		-
Accrued interest payable and other liabilities		~~(669~~247,~~307~~811	)		~~(644~~573,~~950~~459	)
Net Cash Flows Provided by Operating Activities		28,796,056			2,093,290
Net Cash Flows (Used in) Provided by Operating Activities		(9,132,910	)		5,788,884
CASH FLOWS FROM INVESTING ACTIVITIES
Activity in held to maturity securities:
Maturities, prepayments and calls		~~160~~238,~~417~~812,~~493~~774			1149,~~366~~068,~~542~~685
Purchases		(~~198~~216,~~121~~956,~~630~~635	)		(90136,~~783~~768,~~506~~094	)
Net decrease in loans		98,~~765~~301,~~763~~027			1017,~~174~~333,~~531~~004
Purchases of premises and equipment –net		(244,914	)		(301,530	)
Purchase of life insurance		(15,000,000	)		-
Proceeds from sale of other real estate owned		1,723,300			1,878,450
Purchases of premises and equipment –net		(636,625	)		(427,740	)
Net Cash Flows Used In Investing Activities		(26,459,988	)		(67,665,513	)
Proceeds from sales of premises and equipment		-			9,952
Proceeds from sale of other real estate owned		4,283,900			4,844,004
Net Cash Flows Provided by (Used in) Investing Activities		18,804,441			(65,940,189	)
CASH FLOWS FROM FINANCING ACTIVITIES
Net decrease in deposits		(3646,~~298~~272,~~977~~639	)		(1635,~~402~~473,~~148~~708	)
Net change in other borrowings		-			(3,211,217	)
Net change in federal funds purchased and securities sold under repurchase agreements		-			1,026,327
Dividends paid		(1,868,790	)		-
Net change in other borrowings		-			(3,693,729	)
Net Cash Flows Used in Financing Activities		(38,167,767	)		(19,613,365	)
Dividends paid		(3,740,056	)		-
Net Change in Cash and Cash Equivalents		(35,831,699	)		(85,185,588	)
Net Cash Flows Used in Financing Activities		(50,012,695	)		(38,141,110	)
Net Change in Cash and Cash Equivalents		(40,341,164	)		(98,292,415	)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD		108,063,208			128,070,730
CASH AND CASH EQUIVALENTS - END OF PERIOD	$	7267,~~231~~722,~~509~~044		$	4229,~~885~~778,~~142~~315
Non Cash Transactions:
Loans receivable transferred to other real estate owned	$	14,~~042~~189,~~130~~631		$	17,~~852~~542,~~112~~207
Mortgage servicing rights resulting from sale of loans	$	~~137~~358,~~818~~648		$	68102,~~306~~587
Supplemental Cash Flow Disclosures:		-
Cash paid for interest	$	~~936~~1,~~165~~808,830		$	12,~~373~~563,~~713~~847
Cash paid for income taxes	$	23,~~200~~175,000		$	12,~~355~~630,000

See notes to unaudited consolidated financial statements.

TRI CITY BANKSHARES CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation

The accompanying unaudited consolidated financial statements of Tri City Bankshares Corporation (“Tri City” or the “Corporation”) have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2011 (the “2011 Form 10-K”). The December 31, 2011 financial information included herein is derived from the December 31, 2011 Consolidated Balance Sheet of Tri City, which is included in the 2011 Form 10-K.

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

In the opinion of management, the accompanying unaudited consolidated financial statements contain all interim adjustments, consisting of normal recurring accruals, for a fair presentation of the results for the interim periods presented. The operating results for the ~~first~~ three and six months of 2012 are not necessarily indicative of the results that may be expected for the entire 2012 fiscal year. Tri City has evaluated the consolidated financial statements for subsequent events through the date of the filing of this Form 10-Q.

2. Use of Estimates

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

3. Recent Accounting Pronouncements

In ~~April~~May 2011, the ~~Financial Accounting Standards Board (“~~FASB”) issued ~~Accounting Standards Update (“~~ASU”) No. 2011-0203, ~~Receivables~~Transfers and Servicing (Topic ~~310~~860): Reconsideration ~~A Creditor’s Determination~~ of ~~Whether~~Effective aControl ~~Restructuring~~for IsRepurchase ~~a Troubled Debt Restructuring~~Agreements. The ASU ~~will~~is intended to improve financial reporting byof ~~creating~~repurchase ~~greater~~agreements ~~consistency~~(“repos”) inand ~~the~~other ~~way~~agreements ~~GAAP~~that isboth ~~applied~~entitle ~~for~~and ~~various~~obligate ~~types~~a oftransferor ~~debt~~to ~~restructurings. The~~repurchase ~~ASU~~or ~~clarifies~~redeem ~~which~~financial ~~loan~~assets ~~modifications~~before ~~constitute~~their ~~troubled debt restructurings~~maturity. ItThe isamendments ~~intended~~ to ~~assist~~the ~~creditors~~codification in ~~determining~~this ~~whether~~ASU aare ~~modification~~intended ofto improve the ~~terms~~accounting offor athese ~~receivable~~transactions ~~meets~~by ~~the~~removing ~~criteria~~from tothe beassessment ~~considered~~of aeffective ~~troubled~~control ~~debt~~the ~~restructuring,~~criterion ~~both~~requiring ~~for~~the ~~purposes~~transferor ofto ~~recording~~have anthe ~~impairment~~ability ~~loss~~to ~~and~~repurchase ~~for~~or ~~disclosure~~redeem ofthe ~~troubled~~financial ~~debt restructurings~~assets. The ~~new~~ guidance in the ASU was effective for the first interim ~~and~~or annual ~~periods~~period beginning on or after ~~June~~December 15, 2011~~, and applies retrospectively to restructurings occurring on or after the beginning of the fiscal year of adoption~~. The provisions of this guidance did not have aany ~~significant~~ impact on the Corporation’s consolidated financial condition, results of operations or liquidity.

In May 2011, the FASB issued ASU No. 2011-03, Transfers and Servicing (Topic 860): Reconsideration of Effective Control for Repurchase Agreements. The ASU is intended to improve financial reporting of repurchase agreements (“repos”) and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. The amendments to the codification in this ASU are intended to improve the accounting for these transactions by removing from the assessment of effective control the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets. The guidance in the ASU is effective for the first interim or annual period beginning on or after December 15, 2011. The provisions of this guidance did not have any significant impact on the Corporation’s consolidated financial condition, results of operations or liquidity.

In June 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. This ASU represents the converged guidance of the FASB and the International Accounting Standards Board (“IASB” and, together with the FASB, the “Boards”) on fair value measurement. The collective efforts of the Boards and their staffs, reflected in ASU 2011-04, have resulted in common requirements for measuring fair value and for disclosing information about fair value measurements, including a consistent meaning of the term “fair value.” The Boards have concluded the common requirements will result in greater comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and IFRSs. The amendments to the FASB Accounting Standards Codification (“Codification”) in this ASU are to be applied prospectively. For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011. Early application by public entities is not permitted. The provisions of this guidance did not have any significant impact on the Corporation’s consolidated financial condition, results of operations or liquidity.

4. Fair Value of Financial Instruments

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

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

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

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

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

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

Loans held for investment - The Bank does not record loans held for investment at fair value on a recurring basis. However, from time to time, a particular loan may be considered impaired and an allowance for loan losses established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment in accordance with relevant accounting guidance. The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value or discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceeds the recorded investments in such loans. At ~~March~~June 3130, 2012, substantially all of the impaired loans were evaluated based on the fair value of the collateral. In accordance with relevant accounting guidance, impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, the Bank records the impaired loan as a nonrecurring Level 2 valuation. Valuations based on management estimates are recorded as nonrecurring Level 3. Mortgage loans available for sale and held for investment are valued using fair values attributable to similar mortgage loans. The fair value of the other loans is based on the fair value of obligations with similar credit characteristics. Mortgage loans held for investment are valued using fair values attributable to similar mortgage loans. The fair value of the other loans is based on the fair value of obligations with similar credit characteristics.

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

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

As of ~~March~~June 3130, 2012 and December 31, 2011, the Bank did not carry any assets that were measured at fair value on a recurring basis.

Assets measured at fair value on a nonrecurring basis

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

Balance at 03/31/12

Level 1

Level 2

Level 3

Balance at 06/30/12

Level 1

Level 2

Level 3

Loans held for investment

1716,~~347~~860,~~317~~043

Other real estate owned

67,~~897~~549,~~855~~712

Totals

24,~~245~~409,~~172~~755

	Balance at 12/31/11		Level 1		Level 2		Level 3
Loans held for investment	$	17,902,323	$	-	$	-	$	17,902,323
Other real estate owned		7,350,678		-		-		7,350,678
Totals	$	25,253,001	$	-	$	-	$	25,253,001

Disclosure of fair value information about financial instruments, for which it is practicable to estimate that value, is required whether or not recognized in the consolidated balance sheets. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instruments. Certain financial instruments with a fair value that is not practicable to estimate and all non-financial instruments are excluded from the disclosure requirements. Accordingly, the aggregate fair value amounts presented do not necessarily represent the underlying value of the Corporation.

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

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

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

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

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

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

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

Mortgage servicing rights - The fair value of MSRs is estimated using third-party information for selected asset price tables for servicing cost and servicing fees applied to the Bank’s portfolio of serviced loans.

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

~~Other borrowings –~~ The ~~carrying~~estimated ~~value~~fair values of ~~other~~financial ~~borrowings,~~instruments ~~including~~at ~~federal~~June ~~funds~~30, ~~purchased~~2012 and ~~repurchase~~December ~~agreements~~31, ~~approximates~~2011are ~~fair~~as ~~value.~~follows:

The estimated fair values of financial instruments at March 31, 2012 and December 31, 2011are as follows:

	June 30, 2012				December 31, 2011
	Carrying Amount		Estimated Fair Value			Carrying Amount		Estimated Fair Value
FINANCIAL ASSETS
Cash and due from banks	$	29,523,962	$	29,523,962		$	52,942,095	$	52,942,095
Federal funds sold		38,198,082		38,198,082			55,121,113		55,121,113
Held to maturity securities		335,836,897		339,885,266			360,566,062		363,252,684
Federal reserve stock		322,100		322,100			322,100		322,100
Loans held for investment, net		685,517,248		693,864,864			696,785,798		701,196,384
Cash surrender value of life insurance		27,821,733		27,821,733			12,491,722		12,491,722
Mortgage servicing rights		1,621,170		1,782,632			1,598,802		1,884,447
Accrued interest receivable		4,373,292		4,373,292			4,650,828		4,650,828
FINANCIAL LIABILITIES
Deposits	$	1,024,207,263	$	1,022,834,783		$	1,070,479,902	$	1,069,056,674
Accrued interest payable		215,583		215,583			251,243		251,243

	March 31, 2012				December 31, 2011
	Carrying Amount		Estimated Fair Value			Carrying Amount		Estimated Fair Value
FINANCIAL ASSETS
Cash and due from banks	$	28,707,458	$	28,707,458		$	52,942,095	$	52,942,095
Federal funds sold		43,524,051		43,524,051			55,121,113		55,121,113
Held to maturity securities		397,358,546		398,868,076			360,566,062		363,252,684
Federal reserve stock		322,100		322,100			322,100		322,100
Loans held for investment, net		686,375,316		693,975,823			696,785,798		701,196,384
Cash surrender value of life insurance		12,610,554		12,610,554			12,491,722		12,491,722
Mortgage servicing rights		1,587,287		1,810,083			1,598,802		1,884,447
Accrued interest receivable		4,626,856		4,626,856			4,650,828		4,650,828
FINANCIAL LIABILITIES
Deposits	$	1,034,180,925	$	1,032,820,574		$	1,070,479,902	$	1,069,056,674
Accrued interest payable		224,847		224,847			251,243		251,243

The estimated fair value of fee income on letters of credit outstanding at June 30, 2012 and December 31, 2011 is insignificant. Loan commitments on which the committed interest rate is less than the current market rate are also insignificant at June 30, 2012 and December 31, 2011.

The estimated fair value of fee income on letters of credit outstanding at March 31, 2012 and December 31, 2011 is insignificant. Loan commitments on which the committed interest rate is less than the current market rate are also insignificant at March 31, 2012 and December 31, 2011.

5. Held to Maturity Securities

Securities classified as held to maturity are those securities the Bank has both the intent and ability to hold to maturity regardless of changes in market conditions, liquidity needs or changes in general economic conditions. These securities are carried at cost, adjusted for amortization of premium and accretion of discount, computed by the effective interest method over their contractual lives. Realized gains and losses are computed on a specific identification basis and declines in value determined to be other than temporary due to credit issues are included in gains (losses) on sale of securities. In the event that a security is called, the Bank would expect to receive 100% of the principal. Amortized costs and fair values of held to maturity securities as of ~~March~~June 3130, ~~2011~~2012 and December 31, 2011 are summarized as follows:

March 31, 2012

June 30, 2012

Amortized Cost

Unrealized Gains

Unrealized Losses

Fair Value

Obligations of:

States and political subdivisions

6460,~~592~~146,~~582~~013

1,~~652~~938,~~783~~157

(2926,~~318~~415

)

6662,~~216~~057,~~047~~755

U.S. government-sponsored entities

~~157~~107,~~604~~000,~~942~~000

~~288~~341,~~352~~300

~~(721,680~~-

)

~~157~~107,~~171~~341,~~614~~300

Collateralized mortgage obligations

4547,~~812~~617,~~350~~750

~~313~~807,~~827~~039

(~~329~~40,~~705~~460

)

4548,~~796~~384,~~472~~329

Mortgage-backed securities

~~129~~121,~~298~~023,~~672~~134

~~399~~1,~~402~~054,135

(6425,~~131~~387

)

~~129~~122,~~633~~051,~~943~~882

Other

50,000

Totals

~~397~~335,~~358~~836,~~546~~897

24,~~654~~140,~~364~~631

(192,~~144,834~~262

)

~~398~~339,~~868~~885,~~076~~266

	December 31, 2011
	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
Obligations of:
States and political subdivisions	$	63,145,630	$	1,897,676	$	(3,892	)	$	65,039,414
U.S. government-sponsored entities		261,601,680		810,407		(5,000	)		262,407,087
Collateralized mortgage obligations		17,069,071		25,702		(81,226	)		17,013,547
Mortgage-backed securities		18,699,681		52,067		(9,112	)		18,742,636
Other		50,000		-		-			50,000
Totals	$	360,566,062	$	2,785,852	$	(99,230	)	$	363,252,684

The amortized cost and fair value of held-to-maturity securities at ~~March~~June 3130, 2012 by contractual maturity are shown below. Expected maturities differ from contractual maturities because borrowers or issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Amortized Cost		Fair Value
Due in one year or less	$	1354,~~008~~374,~~204~~594	$	1354,~~188~~602,~~897~~091
Due after one year less than 5 years		~~158~~170,~~965~~073,~~561~~142		~~160~~172,~~444~~241,~~541~~921
Due after 5 years less than 10 years		~~158~~101,~~700~~389,~~784~~161		~~158~~102,~~773~~999,~~252~~254
Due in more than 10 years		6610,~~683~~000,~~997~~000		6610,~~461~~042,~~386~~000
Totals	$	~~397~~335,~~358~~836,~~546~~897	$	~~398~~339,~~868~~885,~~076~~266

Held to maturity securities with an amortized cost of $9477.5 million and $114.5 million at ~~March~~June 3130, 2012 and December 31, 2011, respectively, were pledged as collateral on public deposits and for other purposes as required or permitted by law.

The following table summarizes the portion of the Bank’s held to maturity securities portfolio which has gross unrealized losses, reflecting the length of time that individual securities have been in a continuous unrealized loss position at ~~March~~June 3130, 2012 and December 31, 2011.

	March 31, 2012
	June 30, 2012
	Continuous unrealized losses existing for less than 12 months				Continuous unrealized losses existing for 12 months or more				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Obligations of:
States and political subdivisions	$	32,~~455~~007,~~275~~671	$	2926,~~318~~415	$	-	$	-	$	32,~~455~~007,~~275~~671	$	2926,~~318~~415
U.S. government-sponsored entities		81,678,320		721,680		-		-		81,678,320		721,680
Collateralized mortgage obligations		8,708,838		40,460		-		-		8,708,838		40,460
Collateralized mortgage obligations		19,582,960		329,705		-		-		19,582,960		329,705
Mortgage-backed securities		24,062,781		25,387		-		-		24,062,781		25,387
Mortgage-backed securities		21,994,434		64,131		-		-		21,994,434		64,131
Totals	$	34,779,290	$	92,262	$	-	$	-	$	34,779,290	$	92,262
Totals	$	126,710,989	$	1,144,834	$	-	$	-	$	126,710,989	$	1,144,834

	December 31, 2011
	Continuous unrealized losses existing for less than 12 months				Continuous unrealized losses existing for 12 months or more				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Obligations of:
States and political subdivisions	$	979,394	$	3,892	$	-	$	-	$	979,394	$	3,892
U.S. government-sponsored entities		9,995,000		5,000		-		-		9,995,000		5,000
Collateralized mortgage obligations		11,163,181		81,226		-		-		11,163,181		81,226
Mortgage-backed securities		5,403,167		9,112		-		-		5,403,167		9,112
Totals	$	27,540,742	$	99,230	$	-	$	-	$	27,540,742	$	99,230

Management does not believe any individual unrealized loss as of ~~March~~June 3130, 2012 or December 31, 2011 represents other than temporary impairment. At both ~~March~~June 3130, 2012 and December 31, 2011, the Bank held no investment securities that had unrealized losses existing for greater than 12 months. The Bank held fourteen securities at June 30, 2012 that had unrealized losses existing for less than 12 months. Management believes the temporary impairment in fair value was caused by market fluctuations in interest rates and not by deterioration in credit quality of the underlying portfolio of securities. Since securities are held to maturity, management does not believe that the Bank will experience any losses on these investments.

6. Loans

Major classifications of loans are as follows as of ~~March~~June 3130, 2012 and December 31, 2011:

	March 31, 2012			December 31, 2011
	June 30, 2012			December 31, 2011
Commercial	$	1819,~~747~~460,~~827~~073		$	19,956,000
Real Estate
Construction		4445,~~774~~590,~~394~~120			46,600,467
Commercial		~~297~~302,~~951~~941,~~623~~303			298,042,808
Residential		~~286~~274,~~022~~687,~~104~~737			288,609,383
Multifamily		3641,~~604~~104,~~964~~277			39,798,866
Installment and Consumer		1413,~~123~~299,~~721~~937			14,790,362
	$	~~698~~697,~~224~~083,~~633~~447		$	707,797,886
Less: Allowance for loan losses		(11,~~849~~566,~~317~~199	)		(11,012,088	)
Net Loans	$	~~686~~685,~~375~~517,~~316~~248		$	696,785,798

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

Commercial loans - Historically commercial lending has been a small part of the Bank’s portfolio which continues to be the case in 2012. Commercial balances have decreased during these difficult economic times. Reductions of outstanding balances on lines of credit have occurred asin ~~well~~addition asto a decline in the demand for term financing as businesses have made little, if any, investment in new equipment. Commercial loans are collateralized by general business assets such as accounts receivable, inventory and equipment and have no real estate component. During weak economic periods, the Bank can be exposed to heightened risk if a business is out of compliance with debtor covenants supporting commercial loans.

Real estate construction loans - Loans to residential real estate developers comprise most of the dollars outstanding in real estate construction loans. Historically, real estate construction loans have been made to developers who are well known to the Bank, have prior successful project experience and are well capitalized. Loans are made to customers in the Bank’s Southeastern Wisconsin market. Real estate construction loans of this type are generally larger in size and involve greater risks than residential mortgage loans because payments depend on the success of the project or in the case of commercial development, successful management of the property. The Bank will generally make credit extensions to borrowers with adequate outside liquidity to support the project in the event the actual performance is less than projected. Developers with which the Bank does business have the ability to service the development debt personally or through their companies, however, these individuals are not immune to a prolonged weak economy such as the Bank has experienced. Most of the Bank’s real estate development loans are performing even over three years into the economic downturn and the Bank’s borrowers’ inventories are decreasing. The greatest risk to the Bank within this segment are loans secured by raw land and condominium development loans. These two groups have been most severely affected by the prolonged economic downturn. In the case of loans secured by undeveloped acreage, the price per acre has decreased dramatically as other lenders liquidate the collateral on these raw land or “dirt” loans. The Bank has a few customers continuing to service the debt from free cash flow, but this becomes more problematic as the housing market continues a slow recovery or in some cases a non-recovery. In the case of condominium loans, risk factors the Bank inherits upon the failure of a developer include the existence and/or control of the condo association, the availability of term financing to initial buyers of units and partial project completion for common use areas.

Commercial real estate loans - The Bank’s commercial real estate lending efforts are focused on owner occupied, improved property such as office buildings, warehouses, small manufacturing operations and retail facilities. The most significant risk factor is occupancy. The fact that the Bank prefers owner occupied commercial real estate ~~mitigates~~helps to mitigate that risk, provided of course, the owner’s business survives. The Bank’s $19.17 million per-borrower legal lending limit would permit it to compete for activity in the middle market, but management prefers to seek small businesses as its target borrowers. Loans to such businesses are approved based on the creditworthiness, economic feasibility and cash flow abilities of the borrower.

Residential real estate loans - Loans in this segment of the portfolio have historically represented the lowest risk due to the large number of individual loans with relatively small average balances. The Bank considers owner-occupied one-to-four family loans to be low risk because underwriting has always required 20% equity and qualified borrowers with proper debt service coverage ratios. These loans provide a foundation for the sale of all other retail banking products and have always been a staple of the Bank’s portfolio. However, in the acquisition of Bank of Elmwood (the “Acquired Bank”) by the Bank from the FDIC in October 2009 (the “Acquisition”) the Bank acquired a number of residential real estate loans that do not meet the Bank’s underwriting standards and these borrowers were encouraged to bring loans current, pay delinquent taxes, refinance at another financial institution, comply with the Bank’s underwriting standards or face foreclosure. The greatest risks to the Bank in this segment are those one-to-four family residential real estate loans that are not owner occupied. Many of these scattered site owner’s loans were generated by the Acquired Bank through their “Rehab and Go” and “Equity is Cash” programs. Often rehab dollars were not invested in the property, the properties were over-appraised and asno ~~rental~~replacement ~~property~~reserves ~~damage~~were ~~was~~required ~~prevalent~~to ~~but~~address noprevalent ~~replacement~~rental ~~reserves~~property ~~were~~damage ~~required~~ as would be in a commercial real estate loan.

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

Installment and other loans - These loans consist of auto loans, mobile home loans and unsecured consumer loans which have been decreasing at the Bank for several years. Auto loan volume decreased despite improved new car sales in ~~2011~~2012 because dealer incentive financing makes this non-competitive. The Bank has historically limited its exposure to mobile home loans and unsecured consumer loans. However, the Bank acquired a number of such consumer loans in the Acquisition, many of which continue to perform, despite not meeting the Bank’s historical underwriting standards.

The following table presents the contractual aging of the recorded investment in loans as of ~~March~~June 3130, 2012 and December 31, 2011:

As of March 31, 2012

As of June 30, 2012

Current

Days Past Due

Total

Loans

30-59

60-89

Over 90

Total

Loans

Commercial

1819,~~454~~211,~~195~~057

4136,~~704~~280

~~79,240~~428

~~172~~212,~~688~~308

~~293~~249,~~632~~016

1819,~~747~~460,~~827~~073

Real estate

Construction

4243,~~705~~499,~~667~~768

75201,~~000~~585

~~871,531~~-

1,~~122~~888,~~196~~767

2,~~068~~090,~~727~~352

4445,~~774~~590,~~394~~120

Commercial

~~287~~293,~~389~~311,~~736~~853

23,~~623~~139,~~885~~321

~~954~~436,~~547~~018

6,~~983~~054,~~455~~111

109,~~561~~629,~~887~~450

~~297~~302,~~951~~941,~~623~~303

Residential

~~260~~253,~~174~~201,~~667~~458

63,~~352~~232,~~577~~824

2,~~282~~835,~~495~~475

1715,~~212~~417,~~365~~980

2521,~~847~~486,~~437~~279

~~286~~274,~~022~~687,~~104~~737

Multifamily

3439,~~848~~831,~~872~~744

-120,143

1,~~756~~152,~~092~~390

1,~~756~~272,~~092~~533

3641,~~604~~104,~~964~~277

Installment and other

1312,~~338~~546,~~469~~093

~~340~~21,~~856~~698

35274,~~840~~818

~~408~~457,~~556~~328

~~785~~753,~~252~~844

1413,~~123~~299,~~721~~937

Total Loans

~~656~~661,~~911~~601,~~606~~973

96,~~434~~751,~~022~~851

43,~~223~~546,~~653~~739

2725,~~655~~182,~~352~~884

4135,~~313~~481,~~027~~474

~~698~~697,~~224~~083,~~633~~447

Purchase Credit-Impaired Loans

(25,~~475~~683,~~813~~716

)

(1495,~~039,156~~726

)

(~~238~~825,~~480~~013

)

(54,~~420~~480,~~696~~274

)

(65,~~698~~801,~~332~~013

)

(3231,~~174~~484,~~145~~729

)

Total loans, excluding Purchase Credit-Impaired Loans

~~631~~635,~~435~~918,~~793~~257

86,~~394~~256,~~866~~125

32,~~985~~721,~~173~~726

2220,~~234~~702,~~656~~610

3429,~~614~~680,~~695~~461

~~666~~665,~~050~~598,~~488~~718

	As of December 31, 2011
	Current			Days Past Due												Total
	Loans				30-59			60-89		Over 90			Total			Loans
Commercial	$	19,443,774		$	58,506		$	152,148		$	301,572		$	512,226		$	19,956,000
Real estate
Construction		44,707,804			189,794			119,174			1,583,695			1,892,663			46,600,467
Commercial		287,520,615			3,033,167			1,358,887			6,130,139			10,522,193			298,042,808
Residential		268,286,798			3,360,425			2,702,845			14,259,315			20,322,585			288,609,383
Multifamily		37,933,674			415,821			-			1,449,371			1,865,192			39,798,866
Installment and other		14,017,731			283,519			14,331			474,781			772,631			14,790,362
Total Loans		671,910,396			7,341,232			4,347,385			24,198,873			35,887,490			707,797,886
Purchase Credit-Impaired Loans		(31,085,630	)		(146,855	)		(885,441	)		(5,037,404	)		(6,069,700	)		(37,155,330	)
Total loans, excluding Purchase Credit-Impaired Loans	$	640,824,766		$	7,194,377		$	3,461,944		$	19,161,469		$	29,817,790		$	670,642,556

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

The following table presents the recorded investment in nonaccrual loans and loans past due ninety days or more and still accruing by class of loans as of ~~March~~June 3130, 2012 and December 31, 2011:

	As of March 31, 2012
	As of June 30, 2012
	Nonaccrual			Past due 90 days or more and accruing
Commercial	$	~~265~~234,~~552~~569		$	~~10,508~~-
Real estate
Construction		2,~~129~~006,~~656~~330			~~109~~45,~~960~~000
Commercial		87,~~051~~484,~~411~~083			~~744~~457,~~131~~808
Residential		1817,~~400~~506,~~878~~881			1144,~~214,749~~102
Multifamily		1,~~880~~274,~~337~~999			-
Installment and other		~~131~~152,~~496~~207			~~322~~349,~~927~~423
Total Loans		3028,~~859~~659,~~330~~069			2996,~~402,275~~333
Purchase Credit-Impaired Loans:
Commercial		(~~1,923~~428	)		-
Real Estate
Construction		-			-
Commercial		(1,~~399~~509,~~647~~808	)		-
Residential		(4,~~458~~420,~~315~~108	)		(1229,~~736~~861	)
Multifamily		~~(603,395~~-	)		-
Installment & Other		-			-
Total Purchase Credit-Impaired Loans		(65,~~463~~930,~~280~~344	)		(1229,~~736~~861	)
Total loans, excluding Purchase Credit-Impaired Loans	$	2422,~~396~~728,~~050~~725		$	2966,~~389,539~~472

	As of December 31, 2011
	Nonaccrual			Past due 90 days or more and accruing
Commercial	$	393,391		$	47,156
Real estate
Construction		1,101,343			732,911
Commercial		7,455,567			426,242
Residential		15,931,722			757,514
Multifamily		1,990,563			-
Installment and other		62,742			412,039
		26,935,328			2,375,862
Purchase Credit-Impaired Loans:
Commercial		(2,919	)		(12,749	)
Real Estate
Construction		-			-
Commercial		(1,602,816	)		-
Residential		(4,671,780	)		(12,914	)
Multifamily		(603,395	)		-
Installment & Other		-			-
Total Purchase Credit-Impaired Loans		(6,880,910	)		(25,663	)
Total loans, excluding Purchase Credit-Impaired Loans	$	20,054,418		$	2,350,199

Management uses an internal asset classification system as a means of identifying problem and potential problem assets. At ~~the~~their quarterly meetings, the Board of Directors of the Bank reviews trends for loans classified as “Special Mention,” “Substandard” and “Doubtful” for the previous twelve months both as a total dollar volume in each classified category and as the percent of capital each classified category represents. A Special Mention loan has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan at a future date. An asset is classified Substandard if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Substandard assets include those characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Assets classified as Doubtful have all the weaknesses inherent in those classified Substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. Assets classified as Loss are those considered uncollectible and viewed as non-bankable assets, worthy of charge-off. Assets that do not currently expose the Bank to sufficient risk to warrant classification in one of the aforementioned categories, ~~but possess weaknesses that may or may not be within the control of the customer~~ are classified as “Pass.” The following tables present the risk category of loans by class of loans based on the most recent analysis performed and the contractual aging as of ~~March~~June 3130, 2012 and December 31, 2011:

	As of March 31, 2012
	As of June 30, 2012
			Special
	Pass		Special Mention		Substandard		Doubtful		Total
	Pass		Mention		Substandard		Doubtful		Total
Commercial	$	17,531,044	$	1,451,651	$	393,496	$	83,882	$	19,460,073
Commercial	$	17,109,371	$	867,331	$	738,371	$	32,754	$	18,747,827
Real estate
Construction		4142,~~649~~533,~~913~~923		-		2,~~960~~893,~~943~~634		~~163~~162,~~538~~563		4445,~~774~~590,~~394~~120
Commercial		~~265~~269,~~460~~488,~~413~~835		1112,~~677~~902,~~487~~206		20,~~758~~495,~~951~~597		54,~~772~~665		~~297~~302,~~951~~941,~~623~~303
Multifamily		3237,~~365~~485,~~706~~240		2,~~358~~344,~~921~~038		1,~~763~~158,~~889~~551		116,448		3641,~~604~~104,~~964~~277
Total	$	~~356~~367,~~585~~039,~~403~~042	$	1416,~~903~~697,~~739~~895	$	2624,~~222~~941,~~154~~278	$	~~367~~417,~~512~~558	$	~~398~~409,~~078~~095,~~808~~773
Current	$	~~354~~364,~~215~~588,~~774~~790	$	1415,~~000~~856,~~389~~316	$	15,~~018~~409,~~769~~316	$	~~163,538~~-	$	~~383~~395,~~398~~854,~~470~~422
30-59		1,~~259~~816,~~798~~126		~~649~~635,~~691~~072		~~831~~883,~~100~~568		-162,563		23,~~740~~497,~~589~~329
60-89		~~487~~337,~~932~~825		-		198,~~417,386~~621		-		1436,~~905,318~~446
Over 90		~~621~~296,~~899~~301		~~253~~206,~~659~~507		8,~~954~~549,~~899~~773		~~203~~254,~~974~~995		109,~~034~~307,~~431~~576
Total	$	~~356~~367,~~585~~039,~~403~~042	$	1416,~~903~~697,~~739~~895	$	2624,~~222~~941,~~154~~278	$	~~367~~417,~~512~~558	$	~~398~~409,~~078~~095,~~808~~773

	As of December 31, 2011
			Special
	Pass		Special Mention		Substandard		Doubtful		Total
	Pass		Mention		Substandard		Doubtful		Total
Commercial	$	17,834,473	$	1,192,000	$	895,121	$	34,406	$	19,956,000
Real estate
Construction		41,739,351		555,665		4,140,419		165,032		46,600,467
Commercial		270,211,863		10,912,130		16,864,133		54,682		298,042,808
Multifamily		34,959,277		2,849,026		1,874,115		116,448		39,798,866
Total	$	364,744,964	$	15,508,821	$	23,773,788	$	370,568	$	404,398,141
Current	$	361,193,743	$	15,233,112	$	13,013,980	$	165,032	$	389,605,867
30-59		3,052,889		-		644,399		-		3,697,288
60-89		320,762		275,709		1,033,738		-		1,630,209
Over 90		177,570		-		9,081,671		205,536		9,464,777
Total	$	364,744,964	$	15,508,821	$	23,773,788	$	370,568	$	404,398,141

For residential real estate and installment loan classes, the Bank also evaluates credit quality based on the aging status of the loan, which was previously presented, and by payment activity. The following table presents the recorded investment in those loan classes based on payment activity as of ~~March~~June 3130, 2012 and December 31, 2011:

As of March 31, 2012

As of June 30, 2012

Performing

Nonperforming

Total

Residential Real Estate

~~266~~257,~~406~~036,~~477~~754

1917,~~615~~650,~~627~~983

~~286~~274,~~022~~687,~~104~~737

Installment & Other

1312,~~669~~798,~~298~~307

~~454~~501,~~423~~630

1413,~~123~~299,~~721~~937

Total

~~280~~269,~~075~~835,~~775~~061

2018,~~070~~152,~~050~~613

~~300~~287,~~145~~987,~~825~~674

	As of December 31, 2011
	Performing		Nonperforming		Total
Residential Real Estate	$	271,920,147	$	16,689,236	$	288,609,383
Installment & Other		14,315,581		474,781		14,790,362
Total	$	286,235,728	$	17,164,017	$	303,399,745

At ~~March~~June 3130, 2012, the Corporation has identified $52.1 8 million of loans as impaired, including $2622.16 million of performing troubled debt restructurings. A loan is identified as impaired when, based on current information and events, it is probable that the Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement. A performing troubled debt restructuring consists of loans that have been modified and are performing in accordance with the modified terms for a sufficient length of time, generally six months, or loans that were modified on a proactive basis. A summary of the details regarding impaired loans follows:

	March 31, 2012		December 31, 2011
	June 30, 2012		December 31, 2011
Loans for which there was a related allowance for loan loss	$	2423,~~628~~776,~~452~~630	$	24,368,902
Impaired loans with no related allowance		2729,~~463~~044,~~538~~984		24,144,704
Total Impaired Loans	$	52,~~091~~821,~~990~~614	$	48,513,606
Average quarterly balance of impaired loans	$	50,~~302~~667,~~798~~610	$	46,524,919
Related allowance for loan losses		76,~~281~~916,~~135~~587		6,466,579
Interest income recognized while impaired		~~294~~578,~~198~~948		842,282

The following table presents loans individually evaluated for impairment by class of loans as of ~~March~~June 3130, 2012 and December 31, 2011:

As of March 31, 2012

As of June 30, 2012

Allowance

Unpaid Principal Balance

Partial Charge- offs

Allowance For Loan Losses Allocation

Recorded Investment

Unpaid Principal

Partial Charge-

For Loan Losses

Recorded

Balance

offs

Allocation

Investment

Loans with no related allowance recorded:

Commercial

~~114~~29,~~014~~352

41,~~230~~107

~~109~~28,~~784~~245

Real estate

Construction

~~914~~889,~~905~~605

~~15,846~~-

~~899~~889,~~059~~605

Commercial

1114,~~981~~818,~~449~~239

1,~~048~~125,~~643~~434

1013,~~932~~692,~~806~~805

Residential

1514,~~364~~224,~~728~~207

~~123~~115,~~292~~556

1514,~~241~~108,~~436~~651

Multifamily

130,880

68,~~636~~271

~~124~~122,~~244~~609

Installment & Other

~~156~~204,~~223~~298

141,229

~~156~~203,~~209~~069

Total

2830,~~662~~296,~~199~~581

1,~~198~~251,~~661~~597

2729,~~463~~044,~~538~~984

Loans with a related allowance recorded:

Commercial

~~155~~210,~~926~~316

~~158~~3,992

~~66,~~131,324

8975,~~637~~000

Real estate

Construction

1,~~686~~645,~~245~~918

1617,~~429~~404

~~475~~454,~~440~~139

1,~~194~~174,~~376~~375

Commercial

5,~~059~~021,~~626~~376

~~189~~214,~~998~~029

1,~~694~~523,~~595~~133

3,~~175~~284,~~033~~214

Residential

16,~~437~~193,~~744~~749

~~360~~362,~~215~~433

4,~~318~~137,~~113~~048

11,~~759~~694,~~416~~268

Multifamily

1,~~757~~154,~~918~~216

1,~~824~~826

~~662~~579,~~239~~302

1573,~~093,855~~088

Installment & Other

99150,~~617~~739

6491,~~617~~641

3559,~~000~~098

Total

2524,~~197~~376,~~076~~314

~~568~~599,~~624~~684

76,~~281~~916,~~135~~587

1716,~~347~~860,~~317~~043

Total Impaired Loans

5354,~~859~~672,~~275~~895

1,~~767~~851,~~285~~281

76,~~281~~916,~~135~~587

4445,~~810~~905,~~855~~027

	As of December 31, 2011
					Allowance
	Unpaid Principal Balance		Partial Charge- offs		Allowance For Loan Losses Allocation		Recorded Investment
	Unpaid Principal		Partial Charge-		For Loan Losses		Recorded
	Balance		offs		Allocation		Investment
Loans with no related allowance recorded:
Commercial	$	366,920	$	11,218	$	-	$	355,702
Real estate
Construction		1,481,875		13,850		-		1,468,025
Commercial		7,968,827		1,034,776		-		6,934,051
Residential		14,640,519		82,953		-		14,557,566
Multifamily		734,274		5,508		-		728,766
Installment & Other		100,594		-		-		100,594
Total		25,293,009		1,148,305		-		24,144,704

Loans with a related allowance recorded:
Commercial		37,396		-		24,175		13,221
Real estate
Construction		774,837		14,643		274,218		485,976
Commercial		8,066,785		185,080		1,743,062		6,138,643
Residential		14,715,142		376,919		3,847,056		10,491,167
Multifamily		1,279,699		17,902		523,481		738,316
Installment & Other		89,587		-		54,587		35,000
Total		24,963,446		594,544		6,466,579		17,902,323
Total Impaired Loans	$	50,256,455	$	1,742,849	$	6,466,579	$	42,047,027

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio class and based on impairment method as of ~~March~~June 3130, 2012 and December 31, 2011:

As of March 31, 2012

As of June 30, 2012

Commercial

Construction

Commercial Real Estate

Residential Real Estate

Multifamily

Consumer

Total

Commercial

Construction

Real Estate

Multifamily

Consumer

Total

Allowance for loan losses:

Beginning balance

163,865

583,784

3,748,857

5,569,743

786,919

158,920

11,012,088

Charge-offs

-(24,891

)

-(28,502

)

(~~143~~411,~~813~~116

)

(~~726~~2,~~279~~137,783

)

(47164,~~751~~693

)

(6668,~~603~~175

)

(~~984~~2,~~446~~835,160

)

Recoveries

5,~~358~~902

32,786

~~122~~148,~~116~~348

~~145~~181,~~206~~244

-2,065

1618,~~209~~926

~~321~~389,~~675~~271

Provision

31129,~~833~~584

~~159~~178,~~206~~984

9135,~~819~~577

12,~~072~~232,~~246~~957

~~169~~244,~~594~~543

5778,~~302~~355

13,~~500~~000,000

Ending Balance

~~201~~274,~~056~~460

~~775~~767,~~776~~052

3,~~736~~621,~~979~~666

65,~~060~~846,~~916~~161

~~908~~868,~~762~~834

~~165~~188,~~828~~026

11,~~849~~566,~~317~~199

Loans:

Ending balance

1819,~~747~~460,~~827~~073

4445,~~774~~590,~~394~~120

~~297~~302,~~951~~941,~~623~~303

~~286~~274,~~022~~687,~~104~~737

3641,~~604~~104,~~964~~277

1413,~~123~~299,~~721~~937

~~698~~697,~~224~~083,~~633~~447

Allowance for loan losses;

Individually evaluated for impairment

66130,~~131~~896

~~475~~454,~~440~~139

1,~~694~~523,~~595~~133

3,~~389~~220,~~255~~969

~~571~~579,~~340~~302

6491,~~617~~641

6,~~261~~000,~~378~~080

Collectively evaluated for impairment

~~134~~143,~~925~~136

~~300~~312,~~336~~913

2,~~042~~098,~~384~~533

1,~~742~~709,~~803~~113

~~246~~289,~~523~~532

~~101~~96,~~211~~385

4,~~568~~649,~~182~~612

Acquired

-428

~~928~~916,~~858~~079

~~90,899~~-

1916,~~019,757~~507

Total allowance for loan losses

~~201~~274,~~056~~460

~~775~~767,~~776~~052

3,~~736~~621,~~979~~666

65,~~060~~846,~~916~~161

~~908~~868,~~762~~834

~~165~~188,~~828~~026

11,~~849~~566,~~317~~199

Recorded Investment

1819,~~546~~185,~~771~~613

4344,~~998~~823,~~618~~068

~~294~~299,~~214~~319,~~644~~637

~~279~~268,~~961~~841,~~188~~576

3540,~~696~~235,~~202~~443

13,~~957~~111,~~893~~911

~~686~~685,~~375~~517,~~316~~248

Ending Balance:

Individually evaluated for impairment

~~265~~234,~~552~~569

2,~~568~~518,~~875~~119

1518,~~802~~500,~~437~~152

3129,~~318~~939,~~965~~967

1,~~880~~274,~~337~~999

~~255~~353,~~824~~808

52,~~091~~821,~~990~~614

Collectively evaluated for impairment

1819,~~470~~207,~~585~~426

41,~~114~~989,~~486~~779

~~279~~281,~~591~~601,~~718~~626

~~238~~229,~~580~~345,~~641~~432

3338,~~747~~852,~~070~~170

1312,~~855~~933,~~203~~935

~~625~~623,~~359~~930,~~703~~368

Acquired

1118,~~690~~078

1,~~091~~082,~~033~~222

2,~~557~~839,~~468~~525

1615,~~122~~402,~~498~~338

977,~~557~~108

12,~~694~~194

20,~~772~~331,~~940~~465

Total ending balance

1819,~~747~~460,~~827~~073

4445,~~774~~590,~~394~~120

~~297~~302,~~951~~941,~~623~~303

~~286~~274,~~022~~687,~~104~~737

3641,~~604~~104,~~964~~277

1413,~~123~~299,~~721~~937

~~698~~697,~~224~~083,~~633~~447

	As of December 31, 2011
	Commercial			Construction			Commercial Real Estate			Residential Real Estate			Multifamily			Consumer			Total
	Commercial			Construction			Real Estate			Real Estate			Multifamily			Consumer			Total
Allowance for loan losses:
Beginning balance	$	412,745		$	447,955		$	2,819,054		$	4,593,811		$	1,010,978		$	242,049		$	9,526,592
Charge-offs		(299,829	)		(256,279	)		(1,199,872	)		(4,971,619	)		(117,115	)		(283,184	)		(7,127,898	)
Recoveries		10,232			36,965			86,453			88,024			-			21,720			243,394
Provision		40,717			355,143			2,043,222			5,859,527			(106,944	)		178,335			8,370,000
Ending Balance	$	163,865		$	583,784		$	3,748,857		$	5,569,743		$	786,919		$	158,920		$	11,012,088
Loans:
Ending balance	$	19,956,000		$	46,600,467		$	298,042,808		$	288,609,383		$	39,798,866		$	14,790,362		$	707,797,886
Allowance for loan losses;
Individually evaluated for impairment		24,176			274,218			1,741,553			2,767,300			523,481			54,586			5,385,314
Collectively evaluated for impairment		139,689			309,566			2,005,795			1,722,687			263,438			104,334			4,545,509
Acquired		-			-			1,509			1,079,756			-			-			1,081,265
Total allowance for loan losses		163,865			583,784			3,748,857			5,569,743			786,919			158,920			11,012,088
Recorded Investment	$	19,792,135		$	46,016,683		$	294,293,951		$	283,039,640		$	39,011,947		$	14,631,442		$	696,785,798
Ending Balance:
Individually evaluated for impairment	$	393,391		$	2,227,927		$	14,815,756		$	28,895,790		$	1,990,563		$	190,179		$	48,513,606
Collectively evaluated for impairment		19,526,299			43,272,500			280,378,746			240,804,604			36,824,488			14,587,610			635,394,247
Acquired		36,310			1,100,040			2,848,306			18,908,989			983,815			12,573			23,890,033
Total ending balance	$	19,956,000		$	46,600,467		$	298,042,808		$	288,609,383		$	39,798,866		$	14,790,362		$	707,797,886

The Corporation continues to evaluate loans purchased in conjunction with the Acquisition for impairment in accordance with GAAP. The purchased loans were considered impaired at the Acquisition date if there was evidence of deterioration since origination and if it was probable that not all contractually required principal and interest payments would be collected. The following table reflects the carrying value of all purchased loans as of ~~March~~June 3130, 2012 and December 31, 2011.

As of March 31, 2012

As of June 30, 2012

Contractually Required Payments Receivable

Credit Impaired

Non-Credit Impaired

Carrying Value of Purchased Loans

Commercial

~~129~~74,~~001~~556

~~898~~843,~~355~~459

~~709~~689,~~145~~438

Real Estate

Construction

2,~~680~~669,~~523~~625

4443,~~075~~447

1,~~494~~557,~~297~~760

Commercial

1041,~~166~~612,~~463~~697

1051,~~196~~506,~~228~~436

1370,~~308~~056,~~033~~009

Residential

431,~~186~~276,~~229~~086

~~53,718,957~~-

72977,~~774,200~~108

Multifamily

210,~~296~~049,~~524~~781

-8,070,990

112,~~580~~537,~~951~~753

Installment and Consumer

15,~~719~~219

32,~~143~~811,~~934~~248

1,~~843~~653,~~160~~407

Total

5855,~~474~~697,~~459~~964

6863,~~001~~275,~~549~~580

9187,~~709~~471,~~786~~475

	As of December 31, 2011
	Contractually Required Payments Receivable
	Credit Impaired		Non-Credit Impaired		Carrying Value of Purchased Loans
Commercial	$	235,856	$	972,354	$	828,188
Real Estate
Construction		3,676,897		44,697		2,191,129
Commercial		10,509,579		12,485,797		15,459,924
Residential		48,061,689		56,780,596		79,049,005
Multifamily		2,302,782		-		1,587,210
Installment and Consumer		18,223		3,485,572		2,018,806
Total	$	64,805,026	$	73,769,016	$	101,134,262

As of ~~March~~June 3130, 2012, the estimated contractually-required payments receivable on credit impaired and non-credit impaired loans was $5855.57 million and $6863.03 million, respectively. The cash flows expected to be collected related to principal as of ~~March~~June 3130, 2012 on all purchased loans is $9187.75 million. These amounts are based upon the estimated fair values of the underlying collateral or discounted cash flows at ~~March~~June 3130, 2012. The difference between the contractually required payments at Acquisition and the cash flow expected to be collected at Acquisition is referred to as the non-accretable difference. Subsequent decreases to the expected cash flows will generally result in a provision for loan losses. Subsequent increases in cash flows ~~will~~ result in a ~~reversal~~reduction of the ~~provision~~remaining ~~for~~portion ~~loan~~of ~~losses~~any ~~charged~~allowance tofor ~~earnings~~loan tolosses ~~the~~previously ~~extent~~established, ~~of prior charges or~~ a reclassification of the difference from non-accretable ~~discount~~ to accretable ~~discount,~~ with a positive impact on interest income prospectively or the non-accretable difference will have a positive impact on non-interest income if a loan is paid-off in full. Further, any excess of cash flows expected over the estimated fair value is referred to as the accretable yield and is recognized in interest income over the remaining life of the loan when there is a reasonable expectation about the amount and timing of such cash flows.

The change in the carrying amount of accretable yield for purchased loans was as follows for the three and six months ended ~~March~~June 3130, 2012 and 2011.

ACCRETABLE YIELD

	For Three Months Ended March 31,
	For Three Months Ended June 30,
	2012		2011
Beginning Balance	$	98,~~760~~406,~~544~~210	$	1413,~~414~~318,~~324~~897
Additions		0-		0-
Accretion(1)		1,~~354~~180,~~334~~467		1,~~095~~510,~~427~~635
Ending Balance	$	87,~~406~~225,~~210~~743	$	1311,~~318~~808,~~897~~262

	For Six Months Ended June 30,
	2012		2011
Beginning Balance	$	9,760,544	$	14,414,324
Additions		-		-
Accretion(1)		2,534,801		2,606,062
Ending Balance	$	7,225,743	$	11,808,262

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

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

7. Allowance for Loan Losses

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

ALLOWANCE FOR LOAN LOSSES

	For Three Months Ended March 31,
	For Three Months Ended June 30,
	2012			2011
Balance at beginning of period	$	11,~~012~~849,~~088~~317		$	9,~~526~~870,~~592~~254
Charge-offs		(~~984~~1,~~446~~850,714	)		(1,~~083~~968,~~128~~395	)
Recoveries		~~321~~67,~~675~~596			2652,~~790~~524
Net loans charged-off		(~~662~~1,~~771~~783,118	)		(1,~~056~~915,~~338~~871	)
Additions to ALL charged to expense		1,500,000			1,~~400~~920,000
Balance at end of period	$	11,~~849~~566,~~317~~199		$	9,~~870~~874,~~254~~383

	For Six Months Ended June 30,
	2012			2011
Balance at beginning of period	$	11,012,088		$	9,526,592
Charge-offs		(2,835,160	)		(3,051,523	)
Recoveries		389,271			79,314
Net loans charged-off		(2,445,889	)		(2,972,209	)
Additions to ALL charged to expense		3,000,000			3,320,000
Balance at end of period	$	11,566,199		$	9,874,383

8. Other Real Estate Owned

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

A summary of the activity in OREO is as follows:

	Three Months Ended March 31, 2012			Year Ended December 31, 2011
	Six Months Ended June 30, 2012			Year Ended December 31, 2011
Beginning Balance	$	7,350,678		$	5,407,205
Additions		14,~~042~~189,~~130~~631			10,256,043
Valuation Adjustments		-			-
Sales		(13,~~494~~990,~~953~~597	)		(8,312,570	)
Ending Balance	$	67,~~897~~549,~~855~~712		$	7,350,678

9. Troubled Debt Restructuring

A troubled debt restructuring (“TDR”) includes a loan modification where a borrower is experiencing financial difficulty and the Bank grants a concession to that borrower that the Bank would not otherwise consider except for the borrower’s financial difficulties. Modifications include below market interest rate, interest-only terms, forgiveness of principal, or an exceptionally long amortization period. Most of the Bank’s modifications are below market interest rates. A TDR may be either on accrual or nonaccrual status based upon the performance of the borrower and management’s assessment of collectability. If a TDR is placed on nonaccrual status, it remains there until it performs under the restructured terms for six consecutive months at which time it is returned to accrual status.

23A summary of troubled debt restructurings as of June 30, 2012 and December 31, 2011 is noted in the table below. All troubled debt restructurings are considered impaired loans and, as of June 30, 2012, the ALL associated with those loans was $2.2 million.

A summary of troubled debt restructurings as of March 31, 2012 and December 31, 2011 is noted in the table below. All troubled debt restructurings are considered impaired loans and, as of March 31, 2012, the ALL associated with those loans was $2.1 million.

	June 30, 2012
	Number of Modifications		Total Troubled Debt Restructurings		ALL Allocation		Recorded Investment
Commercial		-	$	-		-	$	-
Real estate
Construction		3		674,351		43,815		630,536
Commercial		22		11,930,925		677,842		11,253,083
Residential		101		16,229,455		1,215,781		15,013,674
Multifamily		2		588,088		219,953		368,135
Installment and other		11		202,623		22,275		180,348
Total Loans		139	$	29,625,442		2,179,666	$	27,445,776

March 31, 2012

December 31, 2011

Number of

Total Troubled Debt

ALL

Recorded

Number of Modifications

Total Troubled Debt Restructurings

ALL Allocation

Recorded Investment

Modifications

Restructurings

Allocation

Investment

Commercial

Real estate

Construction

~~602~~1,~~756~~291,616

4546,~~116~~081

~~557~~1,~~640~~245,535

Commercial

1913

87,~~696~~360,~~941~~189

~~691~~790,~~135~~410

86,~~005~~569,~~806~~779

Residential

9686

1615,~~132~~950,~~712~~281

1923,~~163,353~~937

1415,~~969~~026,~~359~~344

Multifamily

~~590~~541,~~031~~192

~~210~~170,~~260~~295

~~379~~370,~~771~~897

Installment and other

~~124~~127,~~329~~437

11,~~779~~844

~~112~~115,~~550~~593

Total Loans

~~129~~114

2625,~~146~~270,~~769~~715

21,~~121~~942,~~643~~567

2423,~~025~~328,~~126~~148

	December 31, 2011
	Number of		Total Troubled Debt		ALL		Recorded
	Modifications		Restructurings		Allocation		Investment
Commercial		-	$	-	$	-	$	-
Real estate
Construction		4		1,291,616		46,081		1,245,535
Commercial		13		7,360,189		790,410		6,569,779
Residential		86		15,950,281		923,937		15,026,344
Multifamily		2		541,192		170,295		370,897
Installment and other		9		127,437		11,844		115,593
Total Loans		114	$	25,270,715	$	1,942,567	$	23,328,148

The following is a summary of troubled debt restructurings as of June 30, 2012 and December 31, 2011 that were in default. Troubled debt restructurings in default are past due 90 days or more at the end of the period.

The following is a summary of troubled debt restructurings as of March 31, 2012 and December 31, 2011 that were in default. Troubled debt restructures in default are past due 90 days or more at the end of the period.

	June 30, 2012				December 31, 2011
	Number of Modifications		Total in Default		Number or Modifications		Total in Default
Commercial		-	$	-		-	$	-
Real estate
Construction		-		-		-		-
Commercial		-		-		-		-
Residential		19		3,413,078		18		2,860,627
Multifamily		1		465,479		-		-
Installment and other		3		29,358		-		-
Total Loans		23	$	3,907,915		18	$	2,860,627

	March 31, 2012				December 31, 2011
	Number of		Total in		Number or		Total in
	Modifications		Default		Modifications		Default
Commercial		-	$	-		-	$	-
Real estate
Construction		-		-		-		-
Commercial		-		-		-		-
Residential		20		3,410,975		18		2,860,627
Multifamily		1		465,786		-		-
Installment and other		1		1,480		-		-
Total Loans		22	$	3,878,241		18	$	2,860,627

A summary of the type of modifications made on troubled debt restructurings that occurred during the first ~~three~~six months of 2012 and 2011 is noted in the table below.

	For the Three Months Ended March 31, 2012
		For the Six Months Ended June 30, 2012
	~~Modification of Terms~~	Modification of Terms					~~Reduction of Interest Rate~~		Reduction of Interest Rate		~~Interest-only Payments~~					Interest-only Payments	~~Forgiveness of Debt~~				~~Total~~	Forgiveness of Debt						Total
	~~Count~~	Count		~~Balance~~		Balance	~~Count~~		~~Balance~~Count		~~Count~~	Balance		~~Balance~~		Count	~~Count~~		Balance		~~Count~~	Count		~~Balance~~		Balance		Count		Balance
Commercial		-	-	$	-	$	-	-	$	-		-$	-	$	-		-	-	$	-		-	-	$	-	$	-		-	$	-
Real estate
Construction		-	-		-		-	-		-		--	-		-		-	-		-		-	-		-		-		-		-
Commercial		-	-		-		-	3		~~831,423~~4		4	2,387,610		~~945,915~~		6	-		-2,279,191		7	-		~~1,777,338~~		-		10		4,666,801
Residential		1	3		~~32,563~~		206,980	8		~~279,463~~16		1	1,539,525		~~14,023~~		1	-		-14,023		10	-		~~326,049~~		-		20		1,760,528
Multifamily		-	-		-		-	-		-		-	-		-		-	-		-		-	-		-		-		-		-
Installment & Other		-	-		-		-	-		-2		-	82,374		-		-	-		-		-	-		-		-		2		82,374
Total Loans		1	3	$	~~32,563~~	$	206,980	11		~~1,110,886~~22		5	4,009,509	$	~~959,938~~		7	-	$	-2,293,214		17	-	$	~~2,103,387~~	$	-		32	$	6,509,703

	For the Three Months Ended March 31, 2011
	For the Six Months Ended June 30, 2011
	Modification of Terms				~~Reduction of Interest Rate~~	Reduction of Interest Rate			~~Interest-only Payments~~				Interest-only Payments	~~Forgiveness of Debt~~				~~Total~~	Forgiveness of Debt				Total
	Count		Balance		~~Count~~	Count	~~Balance~~		~~Count~~Balance		~~Balance~~		Count	~~Count~~	~~Balance~~	Balance		~~Count~~	~~Balance~~Count		Balance		Count		Balance
Commercial		-	$	-	-		$-	-	-$	-	$	-		-	$	-$	-	-	$	-	$	-		-	$	-
Real estate
Construction		-		-	-		-	-	-	-		-		-		-	-	-		-		-		-		-
Commercial		-		-	-		-	-	-	-		-		-		-	-	-		-		-		-		-
Residential		1		60,827	7		21	~~1,078,500~~	1	2,760,872		~~411,768~~		-4		-	2,354,170	9		~~1,551,095~~-		-		26		5,175,869
Multifamily		-		-	-		-	-	-	-		-		-		-	-	-		-		-		-		-
Installment & Other		-2		-31,526	-		3	-	-	19,116		-		-		-	-	-		-		-		5		50,642
Total Loans		13	$	6092,~~827~~353	7		24	~~1,078,500~~	1	2,779,988	$	~~411,768~~		-4	$	-$	2,354,170	9	$	~~1,551,095~~-	$	-		31	$	5,226,511

10. Regulatory Capital Requirements

As of ~~March~~June 3130, 2012, the most recent notification from the regulatory agencies categorized the Bank as well-capitalized under the regulatory framework for prompt corrective action. To be categorized as well-capitalized, an institution must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the following table:

	Actual					For Capital Adequacy Purposes					To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of March 31, 2012
As of June 30, 2012
Total capital (to risk weighed assets)
Tri City Bankshares Corporation	$	~~132~~133,~~897~~732,000		17.78	%	$	6059,~~176~~986,000		8.0	%	$	n/a		n/a	%
Tri City National Bank	$	~~128~~129,~~491~~356,000		17.13	%	$	6059,~~075~~910,000		8.0	%	$	7574,~~093~~887,000		10.0	%
Tier 1 capital (to risk weighted assets)
Tri City Bankshares Corporation	$	~~123~~124,~~464~~344,000		16.46	%	$	3029,~~088~~990,000		4.0	%	$	n/a		n/a	%
Tri City National Bank	$	119,~~074~~968,000		1516.80	%	$	3029,~~037~~955,000		4.0	%	$	4544,~~056~~932,000		6.0	%
Total capital (to average assets)
Tri City Bankshares Corporation	$	~~123~~124,~~464~~344,000		10.7	%	$	46,~~370~~643,000		4.0	%	$	n/a		n/a	%
Tri City National Bank	$	119,~~074~~968,000		10.3	%	$	46,~~337~~693,000		4.0	%	$	5758,~~921~~366,000		5.0	%

	Actual					For Capital Adequacy Purposes					To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of December 31, 2011
Total capital (to risk weighed assets)
Tri City Bankshares Corporation	$	130,371,000		17.1	%	$	61,037,000		8.0	%	$	n/a		n/a	%
Tri City National Bank	$	125,937,000		16.6	%	$	60,783,000		8.0	%	$	75,979,000		10.0	%

Tier 1 capital (to risk weighted assets)
Tri City Bankshares Corporation	$	120,816,000		15.8	%	$	30,414,000		4.0	%	$	n/a		n/a	%
Tri City National Bank	$	116,421,000		15.5	%	$	30,392,000		4.0	%	$	45,588,000		6.0	%

Total capital (to average assets)
Tri City Bankshares Corporation	$	120,816,000		10.6	%	$	45,524,000		4.0	%	$	n/a		n/a	%
Tri City National Bank	$	116,421,000		10.2	%	$	45,515,000		4.0	%	$	56,894,000		5.0	%

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

Forward-Looking Statements

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

Forward-looking statements are subject to significant risks and uncertainties and the Corporation’s actual results may differ materially from the results discussed in such forward-looking statements. Factors that might cause actual results to differ from the results discussed in forward-looking statements include, but are not limited to, the factors set forth in Item 1A of the 2011 Form 10-K, which item is incorporated herein by reference, and any other risks identified in Part II, Item 1A and elsewhere in this report.

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

PART I - Critical Accounting Policies

Consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) and reflect general practices in the banking industry. Application of these principles requires management to make estimates or judgments that affect the amounts reported in the consolidated financial statements and accompanying notes. These estimates are based on information available to management as of the date of the consolidated financial statements. Accordingly, as this information changes, future financial statements could reflect different estimates or judgments. Certain policies inherently have a greater reliance on the use of estimates, and as such have a greater possibility of producing results that could be materially different than originally reported. Management views critical accounting policies to be those that are highly dependent on subjective or complex judgments, estimates or assumptions, and where changes in those estimates and assumptions could have a significant impact on the consolidated financial statements. Management currently views the following items to be critical accounting policies.

Allowance for Loan Losses

The ALL is a valuation allowance for probable and inherent losses incurred in the loan portfolio. The ALL is increased by provisions charged to earnings and reduced by charge-offs, net of recoveries. Management maintains the ALL at levels that it believes to be adequate to absorb estimated probable credit losses inherent in the loan portfolio. The adequacy of the ALL is determined based on periodic evaluations of the loan portfolios and other relevant factors. The ALL comprises both a specific component and a general component. Even though the entire ALL is available to cover losses on any loan, specific allowances are provided on impaired loans pursuant to accounting standards. The general allowance is based on historical loss experience, adjusted for qualitative and environmental factors. Management reviews the assumptions and methodology related to the general allowance in an effort to update and refine the estimate on a quarterly basis.

In determining the general allowance, management has segregated the loan portfolio by loan class. For each class of loan, management computes a historical loss factor. In determining the appropriate period of activity to use in computing the historical loss factor management looks at trends in net charge-off ratios. It is management’s intention to utilize a period of activity that is most reflective of current experience. Changes in the historical period are made when there is a distinct change in the trend of net charge-off experience. Management adjusts the historical loss factors for the impact of the following qualitative factors: asset quality, changes in volume and terms, policy changes, ability of management, economic trends, industry conditions, changes in credit concentrations and competitive/legal factors. In determining the impact, if any, of an individual qualitative factor, management compares the current underlying facts and circumstances surrounding a particular factor with those in the historical periods, adjusting the historical loss factor in a directionally consistent manner with changes in the qualitative factor. Management separately evaluates both the Bank’s historical portfolio as well as acquired loans that have renewed and are eligible to be considered as part of the general allowance. Management will continue to analyze the qualitative factors on a quarterly basis, adjusting the historical loss factor both up and down, to what weit ~~believe~~believes is appropriate for the probable and inherent risk of loss in its portfolio.

Specific allowances are determined as a result of our impairment process. When a loan is identified as impaired it is evaluated for loss using either the fair value of collateral method or the present value of cash flows method. If the present value of expected cash flows or the fair value of collateral exceeds the Bank’s carrying value of the loan no loss is anticipated and no specific reserve is established. However, if the Bank’s carrying value of the loan is greater than the present value of expected cash flows or fair value of collateral a specific reserve is established. In either situation, loans identified as impaired are excluded from the calculation of the general reserve.

The adequacy of the ALL is reviewed and approved by the Bank's Board of Directors on a quarterly basis. The ALL reflects management's best estimate of the probable and inherent losses on loans and is based on a risk model developed and implemented by management and approved by the Bank's Board of Directors. In addition, various regulatory agencies periodically review the ALL. These agencies may suggest additions to the ALL based on their assessment of the information available to them at the time of their examination.

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

Loans Acquired Through Purchase

Loans acquired through the completion of a purchase, including loans that have evidence of deterioration of credit quality since origination and for which it is probable, at acquisition, that the Bank will be unable to collect all contractually- required payments receivable, are initially recorded at fair value with no valuation allowance. Loans are evaluated individually at the date of acquisition to determine if there is evidence of deterioration of credit quality since origination. Loans where there is evidence of deterioration of credit quality since origination may be aggregated and accounted for as a pool of loans if the loans being aggregated have common risk characteristics. Contractually-required payments for interest and principal that exceed the undiscounted cash flows expected at acquisition, or the “non-accretable difference,” are not recognized as a yield adjustment, a loss accrual or a valuation allowance. Subsequent ~~decreases~~increases toin ~~the expected~~ cash flows ~~will generally~~ result in a ~~provision~~reduction ~~for~~of ~~loan~~the ~~losses.~~remaining ~~Subsequent~~portion ~~increases~~of inany ~~cash~~allowance ~~flows~~for ~~result~~loan inlosses previously established, a ~~reversal~~reclassification of the ~~provision~~difference ~~for~~from ~~loan~~non-accretable ~~losses~~ to ~~the~~accretable ~~extent~~with ofa ~~prior~~positive ~~charges,~~impact oron ainterest ~~reclassification~~income ofprospectively or the ~~difference from~~ non-accretable ~~discount~~difference towill ~~accretable~~have ~~discount with~~ a positive impact on non-interest income. if a loan is paid-off in full. The difference between the undiscounted cash flows expected at acquisition and the investment in the loan, or the “accretable yield,” is recognized as interest income on a level-yield method over the life of the loan. Increases in expected cash flows subsequent to the initial investment are recognized prospectively through adjustment of the yield on the loan over its remaining life. Decreases in expected cash flows are recognized as provision for loan losses. If the Bank does not have the information necessary to reasonably estimate expected cash flows, it may use the cost recovery method or cash basis method of income recognition. Valuation allowances on these impaired loans reflect only losses incurred after the acquisition (meaning the present value of all cash flows expected at acquisition that ultimately are not to be received).

Other Real Estate Owned

OREO comprises real estate acquired in partial or full satisfaction of loans. OREO is recorded at the lower of carrying value or its estimated fair value less estimated selling costs at the date of transfer, with any excess of the related loan balance over the fair value less expected selling costs charged to the ALL. Subsequently, properties are evaluated and any additional declines in value are recorded in current period earnings as a valuation allowance. The amount the Bank ultimately recovers on the sale of repossessed assets may differ substantially from the net carrying value of these assets because of future market factors beyond the Bank’s control.

Income Taxes

The Corporation files a consolidated federal income tax return and combined state income tax returns. Income tax expense is recorded based on the liability method. Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. The differences relate principally to the ALL, mortgage servicing rights, deferred loan fees, and premises and equipment. Valuation allowances are established when necessary to reduce deferred income tax assets to the amount expected to be realized. The Corporation also accounts for the uncertainty in income taxes related to the recognition and measurement of a tax position taken or expected to be taken in an income tax return. The Corporation follows the applicable accounting guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition related to the uncertainty in these income tax positions. It is the Corporation’s policy to include interest and penalties in tax expense.

Financial Condition

Total Assets

The Corporation’s total assets decreased $1061.08 million, or 05.81%, from $1,215.1 million at December 31, 2011 to $1,~~205~~153.13 million at ~~March~~June 3130, 2012. The decrease in total assets was primarily due to a decrease in cash, federal funds sold, ~~and~~ total loans and investment securities which was partially off set by an increase in ~~investment~~the ~~securities~~cash surrender value of life insurance due to the purchase of an additional $15.0 million of bank owned life insurance during the first ~~three~~six months of 2012.

Cash and Cash Equivalents

Cash and cash equivalents, including federal funds sold as of June 30, 2012 decreased $3540.83 million or 3337.23%, since December 31, 2011. Cash and due from banks decreased $2423.24 million while federal funds sold decreased $1116.69 million. The decrease in cash and cash equivalents is due to the short-term increase in deposits at year-end associated with municipal deposits from the collection of property taxes and with commercial deposits resulting from holiday spending. These deposits typically run off during the first ~~quarter~~six months of each year. In addition, management reinvested a portion of the excess funds during the first ~~quarter~~six months of 2012 into suitable investment securities given the continued low interest rate environment.

Investment Securities

Investment securities ~~increased~~decreased $3624.87 million, or 106.29%, during the first ~~three~~six months of 2012 to $~~397~~335.48 million. During the first ~~three~~six months of 2012, $~~197~~216.39 million of investment securities were purchased, $~~154~~217.90 million of investment securities were called, $418.28 million of investment securities paid down and $15.48 million of investment securities matured. The ~~increase~~decrease in the investment securities portfolio during 2012 was due to the ~~reinvestment~~cyclical decline of ~~excess~~total ~~liquidity~~deposits since year-end. Management continues to follow its practice of holding the securities in the investment portfolio to maturity.

State and political subdivision investment securities ~~increased~~decreased $13.40 million to $6460.62 million at ~~March~~June 3130, 2012 compared to $63.2 million at December 31, 2011. Management maintains overall quality as well as addresses its asset/liability management concerns by limiting purchases to rated investments of high quality or, on a limited basis, to well known local non-rated issues. Investments in securities of U.S. government sponsored entities (“GSEs”) decreased $~~104~~154.06 million to $~~157~~107.60 million at ~~March~~June 3130, 2012 compared to $261.6 million at year end 2011. Many of the GSE securities have step-up features that provide the Bank the advantage of increasing yields in a rising rate environment, while the issuer receives the advantage of a call option in return and therefore the ability to reprice the security in a falling rate environment. Many of the step-up bonds that were called during the first ~~quarter~~six months of 2012 were reinvested in collateralized mortgage obligations (“CMOs”) and mortgage-backed securities (“MBSs”). As a result, CMOs increased $2830.85 to $4547.96 million at ~~March~~June 3130, 2012 compared to $17.1 million at December 31, 2011 while MBSs increased $~~110~~102.63 million to $~~129~~121.30 million at ~~March~~June 3130, 2012 compared to $18.7 million at December 31, 2011. CMOs amd MBSs are structured to return principal as the weighted average life is significantly shorter than the maturity of the underlying mortgages. ~~The cash flow will enhance the yield of the investment portfolio when interest rates rise as the economy strengthens.~~

Loans

Total loans decreased $910.67 million or 1.45% during the first ~~three~~six months of 2012 from $707.8 million at December 31, 2011 to $~~698~~697.21 million at ~~March~~June 3130, 2012. The decrease in total loans outstanding was partially due to the continued aggressive management of the loans acquired in the Acquisition to conform them to the Bank’s historical underwriting standards, which in some cases resulted in the borrower refinancing elsewhere. In addition, management continues to focus on credit quality resulting in continued scrutiny of equity, cash flow and borrower character for new loan opportunities created as borrowers refinance their credits with competing banks. The Bank does not make “subprime” or so-called “Alt-A” loans (alternative documentation loans with lower approval standards) and does not hold any such loans in its portfolio. Loans originated by the Bank are generally loans to small businesses and individuals in the communities served in the Southeastern Wisconsin market.

As of October 23, 2009 (the “Acquisition Date”) the Acquired Bank’s loan portfolio was discounted $85.1 million to reflect the estimated fair value of the acquired loans. Between the Acquisition Date and March 31, 2012 the discount has been significantly reduced as a result of activity in the Acquired Bank’s loan portfolio including renewals, amortization, pay-offs and charge-offs. Thus, the Bank’s total loans of $698.2 million at March 31, 2012 include a discount of $34.8 million reflecting the difference between cash flows expected to be received and the contractually required payments on the acquired loans. Credit management to ensure credit quality of the acquired loans as they are integrated into the Bank’s portfolio will continue to be a priority in 2012 and will remain so until the loans are completely transitioned. Management believes the remaining discount will be sufficient to cover the remaining credit losses related to the acquired loans.29

	LOAN PORTFOLIO ANALYSIS
	(Dollars in Thousands)
	March 31, 2012					December 31, 2011
	Loan Balance		Percent of Loans in each Category			Loan Balance		Percent of Loans in each Category
Commercial	$	18,748		2.69	%	$	19,956		2.82	%
Real Estate
Construction		44,774		6.41	%		46,600		6.58	%
Commercial		297,952		42.67	%		298,043		42.11	%
Residential		286,022		40.97	%		288,609		40.78	%
Multi-Family		36,605		5.24	%		39,799		5.62	%
Installment and Consumer		14,124		2.02	%		14,790		2.09	%
Total	$	698,225		100.00	%	$	707,797		100.00	%

As of October 23, 2009 (the “Acquisition Date”) the Acquired Bank’s loan portfolio was discounted $85.1 million to reflect the estimated fair value of the acquired loans. Between the Acquisition Date and June 30, 2012 the discount has been significantly reduced as a result of activity in the Acquired Bank’s loan portfolio including renewals, amortization, pay-offs and charge-offs. Thus, the Bank’s total loans of $697.1 million at June 30, 2012 include a discount of $31.5 million reflecting the difference between cash flows expected to be received and the contractually required payments on the acquired loans. Credit management to ensure credit quality of the acquired loans as they are integrated into the Bank’s portfolio will continue to be a priority in 2012 and will remain so until the loans are completely transitioned. Management believes the remaining discount will be sufficient to cover the remaining credit losses related to the acquired loans.

	LOAN PORTFOLIO ANALYSIS (Dollars in Thousands)

	June 30, 2012					December 31, 2011
	Loan Balance		Percent of Loans in each Category			Loan Balance		Percent of Loans in each Category
Commercial	$	19,460		2.79	%	$	19,956		2.82	%
Real Estate
Construction		45,590		6.54	%		46,600		6.58	%
Commercial		302,941		43.45	%		298,043		42.11	%
Residential		274,688		39.41	%		288,609		40.78	%
Multi-Family		41,104		5.90	%		39,799		5.62	%
Installment and Consumer		13,300		1.91	%		14,790		2.09	%
Total	$	697,083		100.00	%	$	707,797		100.00	%

Cash Surrender Value of Life Insurance

The cash surrender value of life insurance increased $15.3 million to $27.8 million during the first six months of 2012. The increase was primarily due to the purchase of an additional $15.0 million of single premium bank owned life insurance. The purchase was made due to the attractive return on investment through the increase of the cash surrender value of the policies relative to other investment alternatives.

Accrued Interest Receivable and Other Assets

Accrued interest receivable and other assets ~~increased~~decreased $0.15 million or 16.46% to $87.26 million during the first ~~three~~six months of 2012.

Total Deposits and Borrowings

Deposits at the Bank decreased $3646.3 million, or 3.4.3%, from $1,070.5 million at December 31, 2011 to $1,~~034~~024.2 million at ~~March~~June 3130, 2012. Demand deposits decreased $9.3.4 million, savings and NOW accounts decreased $3445.13 million, and time deposits increased $72.14 million. The decrease in demand accounts as well as savings and NOW accounts was driven by a decrease of $9.26 million and $5370.03 million in municipal deposits, respectively. The decline in municipal NOW accounts was partially offset by significant growth in both non-municipal NOW accounts and savings accounts. The decrease in municipal deposits during the first ~~quarter~~six months is expected due to the increase in municipal deposits from the receipt of property tax payments in December of each year. A portion of these deposits tend to be transferred to the State of Wisconsin Investment Fund after the first of the year with the remaining balances declining throughout the year as funds are spent on operating activities.

The Bank did not have any borrowings as of June 30, 2012 or December 31, 2011. The Bank adjusts its level of daily borrowing and short term daily investment depending upon its needs each day. Excess funds or funding requirements are addressed at the close of each business day. Funding needs are met through the Bank’s federal funds facility with its primary correspondent banks.

~~The~~Payable ~~Bank~~for ~~did~~Investments not have any borrowings as of March 31, 2012 or December 31, 2011. The Bank adjusts its level of daily borrowing and short term daily investment depending upon its needs each day. Excess funds or funding requirements are addressed at the close of each business day. Funding needs are met through the Bank’s federal funds facility with its primary correspondent banks.Purchased

~~Payable~~The ofCorporation did not have a payable for investments purchased as of June 30, 2012 compared to s $17.2 million payable on December 31, 2011. This payable represented amounts owned for securities that were purchased prior to the end of the period that did not settle until after the end of the period.

Payable for investments purchased increased $26.2 million to $43.4 million as of March 31, 2012 compared to $17.2 million on December 31, 2011. This payable represents securities that were purchased prior to the end of the period that did not settle until after the end of the period.

Accrued Interest Payable and Other Liabilities

Accrued interest payable and other liabilities decreased $21.56 million to $3.09 million at ~~March~~June 3130, 2012 from $5.5 million at December 31, 2011. The decrease is primarily due to a dividend payable of $1.9 million as of December 31, 2011 compared to no such dividend payable as of ~~March~~June 3130, 2012 ~~as well as a decrease in taxes payable~~.

Capital Resources

Total stockholders’ equity increased $23.62 million, or 2.16%, during the first ~~three~~six months of 2012, which was equal to the Corporation’s net income of $25.61 million ~~for~~minus ~~the~~dividends ~~period,~~declared asof no$1.9 ~~dividends~~million ~~were~~for ~~declared during~~ the period. In December of 2011, the Board declared a regular dividend of $0.21 per share that was paid in January of 2012. In April of 2012 the Board declared a regular dividend of $0.21 per share to shareholders of record on April 23, 2012 that iswas ~~payable~~paid on May 3, 2012. The Board will continue to review earnings, monitor regulatory developments and consider other appropriate factors relative to declaring the amount of future dividends.

Federal banking regulatory agencies have established capital adequacy rules applicable to banks that take into account risk attributable to balance sheet assets and off-balance-sheet activities. As ofThe ~~March 31, 2012, the~~ Bank’'s Tier 1 leverage ~~ratio~~ratios ~~was~~were 1015.3% at June 30, 2012 compared to 1015.2% at December 31, 2011. Tier 1 risk-based capital ratios were 1516.80 % at ~~March~~June 3130, 2012 and 15.5% at December 31, 2011. As of ~~March~~June 3130, 2012, the Bank’s total risk-based capital ratio was 17.13 % compared to 16.6% at December 31, 2011. The increase in ~~all three~~ capital ratios was largely due to an increase in total capital through retained earnings.

All of the Bank’s capital ratios at ~~March~~June 3130, 2012 were significantly in excess of minimum regulatory requirements. A bank is “well capitalized” if it maintains a minimum Tier 1 leverage ratio of 5.0%, a minimum Tier 1 risk based capital ratio of 6.0% and a minimum total risk-based capital ratio of 10.0%. Earnings continue to be stable and provide sufficient capital retention for anticipated growth. Management believes that the Bank has a strong capital position and is positioned to take advantage of opportunities for profitable geographic and product expansion and to provide depositor and investor confidence. Management actively reviews capital strategies for the Bank in light of perceived business risks, future growth opportunities, industry standards and regulatory requirements.

Nonperforming Assets and ALL

Nonperforming loans, excluding purchased credit-impaired loans, were $2523.97 million at ~~March~~June 3130, 2012 compared to $22.4 million at December 31, 2011. There continued to be significant activity in the Bank’s nonperforming loans as many of those loans move through the foreclosure process and ~~end~~transition upto in OREO. Total interest income that was accrued but never recorded as income on non-accrual loans was $32.08 million at ~~March~~June 3130, 2012 and $2.7 million at December 31, 2011.

The carrying value of OREO was $67.96 million at ~~March~~June 3130, 2012 compared to $7.4 million at December 31, 2011. There has been significant activity in OREO as 1341 properties have been added to OREO and 2666 OREO properties were sold during the first ~~three~~six months of 2012. As of ~~March~~June 3130, 2012, the Bank had 5442 total properties in OREO. The elevated carrying value and number of properties in OREO is due to the Acquisition, as well as the continued depressed state of the economy and real estate markets over the past several years. The Bank’s goal is to minimize the delay in liquidation of OREO properties. As a result of the Acquisition, management estimates it will continue to foreclose and liquidate a significant number of properties during the remainder of 2012. Management expects that the fair values recorded in the Acquisition accounting will be sufficient to cover any necessary write downs and realized losses on such liquidations of the acquired loans.

The ALL increased $0.86 million or 75.60% to $11.86 million during the first ~~three~~six months of 2012. A $13.50 million provision for loan loss was charged to earnings for the ~~three~~six months ended ~~March~~June 3130, 2012. In addition, a total of $12.08 million of loans were charged-off during the first ~~three~~six months of 2012, which was partially offset by $0.34 million of recoveries during the period on loans that had been previously charged-off. The Bank’s charge-offs and the corresponding provision for loan losses reflect activity on acquired loans as well as the adverse effects of the continuing difficult economic conditions.

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

SUMMARY OF ALLOWANCE FOR LOAN LOSSES

(Dollars in Thousands)

	March 31, 2012			December 31, 2011
	For the Six Months Ended June 30, 2012			For the Twelve Months Ended December 31, 2011
Balance of ALL at beginning of period	$	11,012		$	9,527
Total loans charged-off		(~~985~~2,835	)		(7,128	)
Total recoveries		~~322~~389			243
Net loans charged-off		(~~663~~2,446	)		(6,885	)
Additions to ALL charged to expense		13,~~500~~000			8,370
Balance of ALL at end of period	$	11,~~849~~566		$	11,012
Nonaccrual loans	$	18,471		$	16,337
Troubled debt restructurings-nonaccrual		4,914			3,692
Loans past due 90 days or more		2,402			2,376
Total nonperforming loans(1)		25,787			22,405
OREO		6,898			7,351
Total nonperforming assets	$	32,685		$	29,756
Ratio of nonperforming loans to total loans		3.69	%		3.17	%
Ratio of nonperforming assets to total assets		2.71	%		2.49	%
Ratio of ALL to total nonperforming loans		45.95	%		49.15	%
Ratio of net loans charged off during the period to average loans outstanding(2)		0.38	%		0.95	%
Ratio of ALL to total loans		1.70	%		1.56	%

(1) This amount excludes purchased credit-impaired loans of $7.5 million and $6.9 million at March 31, 2012 and December 31, 2011, respectively. Purchased credit-impaired loans had evidence of deterioration in credit quality prior to the Acquisition. Fair value of these loans as of October 23, 2009, the date of the Acquisition, includes estimates of credit losses.

	As of June 30, 2012			As of December 31, 2011
Nonaccrual loans	$	17,266		$	16,337
Troubled debt restructurings-nonaccrual		5,463			3,692
Loans past due 90 days or more		966			2,376
Total nonperforming loans(1)		23,695			22,405
OREO		7,550			7,351
Total nonperforming assets	$	31,245		$	29,756

Ratio of nonperforming loans to total loans		3.40	%		3.17	%
Ratio of nonperforming assets to total assets		2.71	%		2.49	%
Ratio of ALL to total nonperforming loans		48.81	%		49.15	%
Ratio of net loans charged off during the period to average loans outstanding(2)		0.70	%		0.95	%
Ratio of ALL to total loans		1.66	%		1.56	%

(21) ~~Net~~This amount excludes purchased credit-impaired loans ~~charged~~of $5.9 million and $6.9 million at June 30, 2012 and December 31, 2011, respectively. Purchased credit-~~off~~impaired ~~for~~loans had evidence of deterioration in credit quality prior to the ~~three~~Acquisition. ~~months~~Fair ~~ended~~value ~~March~~of 31these loans as of October 23, ~~2012~~2009, ~~has~~the ~~been~~date ~~annualized~~of the Acquisition, includes estimates of credit losses.

(2)	Net loans charged-off for the six months ended June 30, 2012 has been annualized.

Liquidity

The ability to provide the necessary funds for the Bank’s day-to-day operations depends on a sound liquidity position. Management monitors the Bank’s liquidity by reviewing the maturity distribution between interest-earning assets and interest-bearing liabilities. Fluctuations in interest rates can be the primary cause for the flow of funds into or out of a financial institution. The Bank continues to offer products that are competitive and encourages depositors to invest their funds in these products. Management believes that these efforts will help the Bank to not only retain these deposits, but to encourage continued deposit growth. ~~The~~As of June 30, 2012 the Bank has the ability to borrow up to $50.0 million in federal funds purchased, the ability to borrow up to $5030.1 million through repurchase agreements and has an additional $29.2 million available for short-term liquidity through the Federal Reserve Bank Discount window.

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

Off-Balance Sheet Arrangements

The Bank’s obligations also include off-balance sheet arrangements consisting of loan-related commitments, of which only a portion are expected to be funded. At ~~March~~June 3130, 2012, the Bank’s loan-related commitments, including standby letters of credit and financial guarantees, totaled $~~104~~102.56 million.

Results of Operations

~~The~~Comparison ~~following table sets forth the Corporation’s consolidated results~~ of ~~operations and related summary information for~~ the ~~three-month~~Three ~~periods~~Months ~~ended~~Ended ~~March~~June 3130, 2012 and ~~March~~June 3130, 2011.

The following table sets forth the Corporation’s consolidated results of operations and related summary information for the three-month periods ended June 30, 2012 and June 30, 2011.

SUMMARY RESULTS OF OPERATIONS

(Dollar amounts in thousands, except per share data)

	Three months ended
	Three months ended June 30,
	March 31,
	2012			2011
Net income	$	2,~~570~~514		$	2,~~286~~653
Earnings per share	$	0.2928		$	0.2629
Cash dividends per share	$	0.21		$	-
Dividends declared per share	$	0.21		$	-
Return on average assets		0.8986	%		0.8295	%
Return on average equity		8.4307	%		89.0015	%
Efficiency ratio, as reported(1)		6466.5936	%		6962.3865	%

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

The Corporation posted net income of $2.65 million for the ~~first~~second quarter of 2012, ana ~~increase~~decrease of $0.32 million, or 125.42%, from the ~~first~~second quarter of 2011. Earnings per share ~~increased~~decreased to $0.2928 for the three months ended ~~March~~June 3130, 2012 compared to $0.2629 for the same period in 2011.

The increase in earnings was due to a $0.8 million increase in non-interest income and a $0.2 million decrease in non-interest expense, which was partially offset by a higher effective tax rate. In addition, net interest income increased $0.1 million and was offset by a $0.1 million increase in loan loss reserves. The increase in non-interest income was primarily due to increased mortgage lending activity and an increase in the gain on sale of other real estate owned net of expenses. Non-interest expenses decreased due to a decline in regulatory assessments. The increase in net interest income was due to increased interest income from investments and lower interest expenses on deposits, which was partially offset by a decrease in interest income on loans. Operating earnings during the first quarter of 2012 were also positively affected by an increase in Acquisition-related purchase accounting income, which totaled $1.8 million during the first quarter of 2012 compared to $1.4 million during the same period in 2011. The Acquisition-related purchase accounting income and expense impact the net interest margin, other income and other operating expenses.

The decrease in earnings was due to a $1.5 million decrease in net interest margin and a $0.3 million increase in non-interest expense, which was partially offset by a $1.2 million increase in non-interest income and a $0.4 million decrease in the provision for loan losses. The decrease in net interest income was due a reduction of interest income on both loans and investment securities which was partially offset by a decrease in interest paid on deposits. The increase in non-interest expense is primarily due to an increase in other expenses which included a $0.2 million one-time expense related to a loan that was sold into the secondary market that was subsequently charged-off. The increase in non-interest income was primarily due to increased mortgage lending activity reslting in significantly higher gains on the sale of loans as well as an increase in Acquisition-related purchase accounting income. The decrease in the provision for loan losses was due to a decrease in net charge-offs. Operating earnings during the second quarter of 2012 were positively affected by an increase in Acquisition-related purchase accounting income, which totaled $2.2 million during the second quarter of 2012 compared to $2.1 million during the same period in 2011. The Acquisition-related purchase accounting income and expense impact the net interest margin, other income and other operating expenses.

Interest Income

Total interest income on loans decreased $01.96 million, or 713.42%, in the ~~first~~second quarter of 2012 compared to the ~~first~~second quarter of 2011. The decrease was due to both a reduction in loan volume and the continued low interest rate environment. Average loans decreased $3531.81 million, or 4.93%, for the quarter ended ~~March~~June 3130, 2012 compared to the ~~first~~second quarter of 2011, due primarily to the run-off of acquired loans. In addition to ~~lower~~a decrease in loan volume, loan yields decreased 1761 basis points to 6.1802% for the ~~first~~second quarter of 2012 compared to 6.3563% for the ~~first~~second quarter of 2011, as new and renewed loans were booked at lower interest rates than the existing portfolio. The decrease in interest income on loans was ~~partially~~also ~~offset~~due byto ana ~~increase~~decrease in the purchase accounting income related to the Acquisition of $0.23 million from $1.15 million for the ~~first~~second quarter of 2011 to $1.32 million in ~~first~~second quarter of 2012. Loan discount accretion is realized as the Acquired Bank’s loan portfolio continues to amortize, mature or pay off. Interest income on loans for the ~~first~~second quarter of 2012, excluding loan discount accretion, decreased by $1.13 million compared to same period in 2011.

Interest income on investment securities on a tax-equivalent basis ~~increased~~decreased $0.52 million, or 3612.4%, for the ~~first~~second quarter of 2012 compared to the ~~first~~second quarter of 2011. This change reflects ana ~~increase~~decrease in ~~both~~ rate ~~and~~which was partially offset by an increase in volume. The average tax equivalent yield on the investment securities ~~increased~~decreased 2960 basis points to 21.2358% during the ~~first~~second quarter of 2012 compared to 12.9418% for the same period of 2011. The ~~increase~~decrease in interest income on investment securities was ~~also~~partially ~~caused~~offset by a $65.16 million increase in the average amount of investment securities to $~~336~~382.90 million for the three months ended ~~March~~June 3130, 2012. In addition, the Bank earned $114,000 of interest income on average federal funds sold of $5616.1 million during the ~~first~~second quarter of 2012 compared to $122,000 of interest income earned on average federal funds sold of $347.65 million during the same period of 2011.

Interest Expense

Interest expense for the three months ended ~~March~~June 3130, 2012 decreased $0.43 million or 3126.59%, compared to the same period in 2011. The average yield on interest-bearing liabilities decreased 2216 basis points to 0.4240% during the ~~first~~second quarter of 2012 compared to 0.6456% in the ~~first~~second quarter of 2011. The decrease in average yields was partially offset by an increase in average interest-bearing liabilities of $3227.89 million to $~~868~~866.8 million for the ~~first~~second quarter of 2012 from $~~836~~838.09 million for the ~~first~~second quarter of 2011, primarily due to an increase in core deposits.

Net Interest Margin

Net interest income in the consolidated statements of operations (which excludes the tax-equivalent adjustment) was $1110.69 million for the ~~first~~second ~~three~~quarter ~~months~~ of 2012, compared to $1112.54 million for the same period in 2011. The tax equivalent adjustments (adjustments needed to bring tax-exempt interest to a level that would yield the same after-tax income had that income been subject to taxation using a 34% tax rate) of $0.2 million for the ~~first~~second quarter of 2012 and ~~$0.2 million for the first quarter of~~ 2011 resulted in a tax-equivalent net interest income of $11.81 million and $1112.76 million, respectively. The tax-equivalent net interest margin for the three months ended ~~March~~June 3130, 2012 was 4.3106% compared to 4.4880% for the three months ended ~~March~~June 3130, 2011.

NET INTEREST INCOME ANALYSIS ON A TAX-EQUIVALENT BASIS

(Dollars in Thousands)

	Three months ended March 31, 2012							Three months ended March 31, 2011
	Three months ended June 30, 2012							Three months ended June 30, 2011
	Average Balance		Interest Income/ Expense		Average Yield/ Rate			Average Balance		Interest Income/ Expense		Average Yield/ Rate
ASSETS
Interest-earning assets:
Loans (1)	$	~~700~~695,~~552~~192	$	10,~~816~~456		6.1802	%	$	~~736~~726,~~305~~290	$	1112,~~687~~046		6.3563	%
Taxable investment securities		~~286~~333,~~585~~964		1,~~340~~015		1.8722	%		~~228~~270,~~627~~594		~~812~~1,207		1.4278	%
Non-taxable investment securities(2)		5048,~~284~~043		~~535~~493		4.2610	%		4345,~~103~~787		~~503~~515		4.6750	%
Federal funds sold		5616,~~115~~094		114		0.0809	%		347,~~622~~472		122		0.1411	%
Total interest earning assets	$	1,093,~~536~~293	$	1211,~~702~~968		4.6538	%	$	1,~~042~~050,~~657~~143	$	13,~~014~~770		45.9924	%
Noninterest earning assets:
Other assets		6673,~~793~~638							66,~~507~~590
TOTAL ASSETS	$	1,~~160~~166,~~329~~931						$	1,~~109~~116,~~164~~733
LIABILITIES AND EQUITY
Interest-bearing liabilities:
Transaction accounts	$	290,033	$	111		0.15	%	$	280,029	$	181		0.26	%
Money market		209,980		215		0.41	%		182,060		278		0.61	%
Savings deposits		184,835		81		0.18	%		167,356		100		0.24	%
Other time deposits		183,908		503		1.09	%		205,143		769		1.50	%
Short-term borrowings		-		-		0.00	%		1,394		-		0.00	%
Total interest-bearing liabilities	$	868,756	$	910		0.42	%	$	835,982	$	1,328		0.63	%
Noninterest earning liabilities:
Demand deposits		163,635							154,821
Other		5,978							3,997
Stockholders’ equity		121,960							114,364
Total liabilities and sockholders’ equity	$	1,160,329						$	1,109,164
Net interest earnings and interest rate spread(3)			$	11,792		4.23	%			$	11,686		4.36	%
Net interest margin(4)						4.31	%						4.48	%

LIABILITIES AND EQUITY
Interest-bearing liabilities:
Transaction accounts		264,184		99	0.15	%		253,830		111	0.17	%
Money market		212,690		191	0.36	%		198,938		248	0.50	%
Savings deposits		200,642		88	0.17	%		181,509		99	0.22	%
Other time deposits		184,221		476	1.03	%		196,650		710	1.44	%
Short-term borrowings		5,068		10	0.79	%		7,965		12	0.60	%
Total interest-bearing liabilities		866,805		864	0.40	%		838,892		1,180	0.56	%
Noninterest earning liabilities:
Demand deposits		164,777						156,394
Other		10,781						5,520
Stockholders’ equity		124,568						115,927
Total liabilities and sockholders’ equity	$	1,166,931					$	1,116,733
Net interest earnings and interest rate spread(3)			$	11,104	3.98	%			$	12,590	4.68	%

Net interest margin(4)					4.06	%					4.80	%

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

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

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

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

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

	For the three months ended
	For the three months ended June 30, 2012 and 2011 Increase (Decrease) Due to
	March 31, 2012 and 2011
	Increase (Decrease) Due to
Interest earned on:	Volume			Rate (1)			Net
Loans	$	(~~569~~516	)	$	(~~302~~1,074	)	$	(~~871~~1,590	)
Taxable investment securities		~~206~~283			~~322~~(474	)		~~528~~(191	)
Nontaxable investment securities		8425			(5247	)		32(22	)
Federal funds sold		82			(91	)		(1	)
Total interest-earning assets	$	(~~271~~206	)	$	(411,596	)	$	(~~312~~1,802	)
Interest paid on:
Transaction accounts	$	75		$	(7616	)	$	(6911	)
Money market		4317			(~~106~~75	)		(6358	)
Savings		11			(2922	)		(1811	)
Other time		(8145	)		(~~187~~189	)		(~~268~~234	)
Short-term borrowings		-(4	)		-2			-(2	)
Total interest-bearing liabilities	$	(2016	)	$	(~~398~~300	)	$	(~~418~~316	)
Decrease in net interest income							$	~~106~~(1,486	)

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

Provision for Loan Losses

The Bank recorded a provision for loan losses (“PLL”) of $1.5 million during the three months ended ~~March~~June 3130, 2012 compared to $1.49 million during the same period in 2011. The ~~increase~~decrease in the PLL during the period was due to ana ~~increase~~decrease ~~needed~~ in ~~the~~charge-offs ~~ALL~~net ~~due~~of ~~to credit challenges in the Bank’s loan portfolio primarily due to continued poor economic conditions~~recoveries.

Noninterest Income

Noninterest income for the three months ended ~~March~~June 3130, 2012 increased $01.82 million, or 2232.59%, compared to the same period in 2011. The increase was primarily due to an increase in mortgage lending activity, and an increase in non-accretable discount taken to income ~~and higher other noninterest income due to an increase in the gain on sale of OREO net of expenses~~. The increase in mortgage lending activity, which was largely driven by extremely low interest rates, resulted in an increase in the gain of sale of those loans of $0.26 million during the ~~first~~second ~~three~~quarter ~~months~~ of 2012 compared to the same period in 2011. The increase of $0.24 million in non-accretable discount recorded to income asis part of the purchase accounting resulting from the Acquisition. This is income related to loans acquired in the Acquisition that were specifically identified as credit-impaired loans pursuant to applicable guidance for accounting for acquired loans, but which were repaid or charged off during the quarter. The non-accretable discount recorded to income represents the excess of net amounts received over the recorded fair value of such loans. In future periods, non-accretable income could vary significantly, as it is dependent on the difference between expected future cash flows received and the Acquisition accounting fair value discounts applied to the loans specifically impaired. The $0.4 million increase in other non-interest income for the first quarter of 2012 compared to the comparable quarter in 2011, was primarily due to an increase in the gain of sale of OREO net of expenses.

Noninterest Expense

Noninterest expense ~~decreased~~increased $0.24 million, or 14.52%, during the three months ended ~~March~~June 3130, 2012 compared to the same period in 2011. ~~Normal~~The ~~increases~~increase inis ~~salary~~primarily ~~and~~due ~~benefits~~to ~~and~~an ~~computer~~increase ~~services~~in ~~were~~other ~~offset~~expenses bywhich ~~decreases~~included ina ~~regulatory~~$0.2 ~~agency~~million ~~assessments~~one-time ~~and~~expense ~~other~~related ~~expenses~~to ~~during~~a ~~the~~loan ~~first~~that ~~quarter~~was ofsold ~~2012~~into ~~compared~~the tosecondary ~~the~~market ~~same~~that ~~period~~was insubsequently ~~2011~~charged-off. The core deposit intangible amortization expense remained stable at $0.1 million and is recognized as part of the purchase accounting related to the Acquisition. The core deposit intangible will continue to be amortized over the next seven years.

Income Taxes

Income tax expense for the ~~first~~second quarter of 2012 was $1.53 million compared to $01.95 million for the ~~first~~second quarter of 2011. The Corporation’s effective tax rate (income tax expense divided by income before income taxes) was 3734.04% for the ~~first~~second quarter of 2012 compared to 2735.73% during the ~~first~~second quarter of 2011. The ~~increase~~decrease in the effective tax rate in 2012 was due to ana ~~increase~~decrease in pre-tax income, which ~~decreases~~increases the effect of permanent non-taxable items on the effective tax rate ~~as well as a true-up of the Bank’s tax position in the first quarter of 2011, which lowered the effective tax rate at that date~~.

Comparison of the Six Months Ended June 30, 2012 and June 30, 2011.

The following table sets forth the Corporation’s consolidated results of operations and related summary information for the six-month periods ended June 30, 2012 and June 30, 2011.

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

	Six months ended June 30,
	2012			2011
Net income	$	5,084		$	4,938
Earnings per share	$	0.57		$	0.55
Dividends declared per share	$	0.21		$	-

Return on average assets		0.87	%		0.89	%
Return on average equity		8.25	%		8.58	%
Efficiency ratio, as reported(1)		65.48	%		65.88	%

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

The Corporation posted net income of $5.1 million for the first six months of 2012, an increase of $0.2 million, or 2.9%, from the first six months of 2011. Earnings per share increased to $0.57 for the six months ended June 30, 2012 compared to $0.55 for the same period in 2011.

The increase in earnings was due to a $2.0 million increase in non-interest income and a $0.3 million decrease in the provision for loan losses, which was partially offset by a decrease in net interest income of $1.4 million, a $0.3 million increase in non-interest expense and a higher effective tax rate. The increase in non-interest income was primarily due to increased mortgage lending activity, an increase in Acquisition-related purchase accounting income and an increase in the gain on sale of other real estate owned, net of expenses. The decrease in the provision for loan losses reflected a decrease in net charge-offs. The decrease in net interest income was due a reduction of interest income on loans which was partially offset by an increase in interest income earned on investment securities and a decrease in interest paid on deposits. The increase in non-interest expense is primarily due to an increase in other expenses which included a $0.2 million one-time expense related to a loan that was sold into the secondary market that was subsequently charged-off. Operating earnings during the first six months of 2012 were also positively affected by an increase in Acquisition-related purchase accounting income, which totaled $4.1 million during the first six months of 2012 compared to $3.5 million during the same period in 2011. The Acquisition-related purchase accounting income and expense impact the net interest margin, other income and other operating expenses.

Interest Income

Total interest income on loans decreased $2.5 million, or 10.4%, in the first six months of 2012 compared to the first six months of 2011. The decrease was due to both a reduction in loan volume and the continued low interest rate environment. Average loans decreased $33.4 million, or 4.6%, for the six months ended June 30, 2012 compared to the first six months of 2011, due primarily to the run-off of acquired loans. In addition to lower loan volume, loan yields decreased 39 basis points to 6.10% for the first six months of 2012 compared to 6.49% for the first six months of 2011, as new and renewed loans were booked at lower interest rates than the existing portfolio. The decrease in interest income on loans was also due to a decrease in the purchase accounting income related to the Acquisition of $0.1 million from $2.6 million for the first six months of 2011 to $2.5 million in first six months of 2012. Loan discount accretion is realized as the Acquired Bank’s loan portfolio continues to amortize, mature or pay off. Interest income on loans for the first six months of 2012, excluding loan discount accretion, decreased by $2.4 million compared to same period in 2011.

Interest income on investment securities on a tax-equivalent basis increased $0.3 million, or 11.4%, for the first six months of 2012 compared to the first six months of 2011. This change reflects an increase in the volume of investment securities which was partially offset by lower interest rates earned on the investment portfolio. The increase in interest income on investment securities was caused by a $65.1 million increase in the average amount of investment securities to $359.4 million for the six months ended June 30, 2012. The average tax equivalent yield on the investment securities decreased 18 basis points to 1.88% during the first six months of 2012 compared to 2.06% for the same period of 2011. In addition, the Bank earned $14,000 of interest income on average federal funds sold of $36.1 million during the first six months of 2012 compared to $14,000 of interest income earned on average federal funds sold of $20.8 million during the same period of 2011.

Interest Expense

Interest expense for the six months ended June 30, 2012 decreased $0.7 million or 29.3%, compared to the same period in 2011. The average yield on interest-bearing liabilities decreased 19 basis points to 0.41% during the first six months of 2012 compared to 0.60% in the first six months of 2011. The decrease in average yields was partially offset by an increase in average interest-bearing liabilities of $30.4 million to $867.8 million for the first six months of 2012 from $837.4 million for the first six months of 2011, primarily due to an increase in core deposits.

Net Interest Margin

Net interest income in the consolidated statements of operations (which excludes the tax-equivalent adjustment) was $22.5 million for the first six months of 2012, compared to $23.9 million for the same period in 2011. The tax equivalent adjustments (adjustments needed to bring tax-exempt interest to a level that would yield the same after-tax income had that income been subject to taxation using a 34% tax rate) of $0.4 million for the first six months of 2012 and 2011 resulted in a tax-equivalent net interest income of $22.9 million and $24.3 million, respectively. The tax-equivalent net interest margin for the six months ended June 30, 2012 was 4.19% compared to 4.64% for the six months ended June 30, 2011.

NET INTEREST INCOME ANALYSIS ON A TAX-EQUIVALENT BASIS

(Dollars in Thousands)

	Six months ended June 30, 2012							Six months ended June 30, 2011
	Average Balance		Interest Income/ Expense		Average Yield/ Rate			Average Balance		Interest Income/ Expense		Average Yield/ Rate
ASSETS
Interest-earning assets:
Loans (1)	$	697,870	$	21,273		6.10	%	$	731,270	$	23,733		6.49	%
Taxable investment securities		310,274		2,355		1.52	%		249,888		2,019		1.62	%
Non-taxable investment securities(2)		49,164		1,028		4.18	%		44,452		1,018		4.58	%
Federal funds sold		36,104		14		0.08	%		20,972		14		0.13	%
Total interest earning assets		1,093,412		24,670		4.51	%		1,046,582		26,784		5.12	%
Noninterest earning assets:
Other assets		70,218							66,386

TOTAL ASSETS		1,163,630							1,112,968

LIABILITIES AND EQUITY
Interest-bearing liabilities:
Transaction accounts		277,109		211	0.15	%		266,857		292	0.22	%
Money market		211,336		406	0.38	%		190,547		526	0.55	%
Savings deposits		192,739		169	0.18	%		174,473		199	0.23	%
Other time deposits		184,064		978	1.06	%		200,873		1,479	1.47	%
Short-term borrowings		2,534		10	0.79	%		4,697		12	0.51	%
Total interest-bearing liabilities		867,782		1,774	0.41	%		837,447		2,508	0.60	%
Noninterest earning liabilities:
Demand deposits		164,206						155,612
Other		8,378						4,759
Stockholders’ equity		123,264						115,150
Total liabilities and sockholders’ equity	$	1,163,630					$	1,112,968
Net interest earnings and interest rate spread(3)			$	22,896	4.10	%			$	24,276	4.52	%

Net interest margin(4)					4.19	%					4.64	%

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

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

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

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

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

	For the six months ended June 30, 2012 and 2011 Increase (Decrease) Due to
Interest earned on:	Volume			Rate (1)			Net
Loans	$	(1,084	)	$	(1,376	)	$	(2,460	)
Taxable investment securities		488			(152	)		336
Nontaxable investment securities		108			(98	)		10
Federal funds sold		10			(10	)		-
Total interest-earning assets	$	(478	)	$	(1,636	)	$	(2,114	)

Interest paid on:
Transaction accounts	$	11		$	(92	)	$	(81	)
Money market		58			(178	)		(120	)
Savings		21			(51	)		(30	)
Other time		(124	)		(377	)		(501	)
Short-term borrowings		(6	)		4			(2	)
Total interest-bearing liabilities	$	(40	)	$	(694	)	$	(734	)

Decrease in net interest income							$	(1,380	)

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

Provision for Loan Losses

The Bank recorded a PLL of $3.0 million during the six months ended June 30, 2012 compared to $3.3 million during the same period in 2011. The decrease in the PLL during the period was due to a decrease in charge-offs net of recoveries.

Noninterest Income

Noninterest income for the six months ended June 30, 2012 increased $2.0 million, or 28.0%, compared to the same period in 2011. The increase was primarily due to an increase in mortgage lending activity, an increase in non-accretable discount taken to income and higher other noninterest income due to an increase in the gain on sale of OREO, net of expenses. The increase in mortgage lending activity, which was largely driven by extremely low interest rates resulted in an increase in the gain of sale of those loans of $0.8 million during the first six months of 2012 compared to the same period in 2011. The increase of $0.6 million in non-accretable discount recorded to income is part of the purchase accounting resulting from the Acquisition. This is income related to loans acquired in the Acquisition that were specifically identified as credit-impaired loans pursuant to applicable guidance for accounting for acquired loans, but which were repaid or charged off during the six months. The non-accretable discount recorded to income represents the excess of net amounts received over the recorded fair value of such loans. In future periods, non-accretable income could vary significantly, as it is dependent on the difference between expected future cash flows received and the Acquisition accounting fair value discounts applied to the loans specifically impaired. The $0.5 million increase in other non-interest income for the first six months of 2012 compared to the comparable period in 2011, was primarily due to an increase in the gain of sale of OREO, net of expenses.

Noninterest Expense

Noninterest expense increased $0.3 million, or 1.3%, during the six months ended June 30, 2012 compared to the same period in 2011. The increase is primarily due to an increase in other expenses which included a $0.2 million one-time expense related to a loan that was sold into the secondary market that was subsequently charged-off. The core deposit intangible amortization expense remained stable at $0.2 million and is recognized as part of the purchase accounting related to the Acquisition. The core deposit intangible will continue to be amortized over the next seven years.

Income Taxes

Income tax expense for the first six months of 2012 was $2.8 million compared to $2.3 million for the first six months of 2011. The Corporation’s effective tax rate (income tax expense divided by income before income taxes) was 35.7% for the first six months of 2012 compared to 32.0% during the first six months of 2011. The increase in the effective tax rate in 2012 was due to an increase in pre-tax income, which decreases the effect of permanent non-taxable items on the effective tax rate as well as a true-up of the Bank’s tax position in the first six months of 2011, which lowered the effective tax rate at that date.

ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The 2011 Form 10-K contains certain disclosures about market risks affecting the Corporation. There have been no material changes to the information provided which would require additional disclosures as of the date of this filing.

ITEM 4 - CONTROLS AND PROCEDURES

The Corporation maintains a set of disclosure controls and procedures that are designed to ensure that information required to be disclosed by it in the reports filed by it under the Securities Exchange Act of 1934, as amended (“Exchange Act”), is recorded and processed, summarized and reported within the time periods specified in the SEC’s rules and forms. As of ~~March~~June 3130, 2012 the Corporation carried out an evaluation, under the supervision and with the participation of management, including its Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Corporation’s disclosure controls and procedures pursuant to Rule 13a-15(e) and 15d-15(e) of the Exchange Act. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer of the Corporation concluded that the Corporation’s disclosure controls and procedures are effective as of the end of the period covered by this report.

There have been no changes in the Corporation’s internal control over financial reporting identified in connection with the evaluation discussed above that occurred during the quarter ended ~~March~~June 3130, 2012 that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

3842

PART II - OTHER INFORMATION

ITEM 1 - LEGAL PROCEEDINGS

There have been no material changes to the discussion in response to Item 3 of Part I of the 2011 Form 10-K.

ITEM 1A - RISK FACTORS

There have been no material changes to the risk factors previously disclosed in response to Item 1A to Part I of the 2011 Form 10-K.

3943

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

The Corporation did not sell any unregistered securities, nor purchase any of its own securities during the period covered by this ~~form~~Form 10-Q.

ITEM 3 - DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4 – MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5 - OTHER INFORMATION

Not applicable

ITEM 6 – EXHIBITS

31.1

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

31.2

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

32.1

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

32.2

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

101.INS

**XBRL Instance

101.SCH

**XBRL Taxonomy Extension Schema

101.CAL

**XBRL Taxonomy Extension Calculation

101.DEF

**XBRL Taxonomy Extension Definition

101.LAB

**XBRL Taxonomy Extension Labels

101.PRE

**XBRL Taxonomy Extension Presentation

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

4044

SIGNATURES

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

TRI CITY BANKSHARES CORPORATION

DATE: May 11, 2012		/s/ Ronald K. Puetz
DATE: August 10 , 2012		/s/ Ronald K. Puetz
Ronald K. Puetz
President, Chief Executive Officer
(Principal Executive Officer)
DATE: May 11, 2012		/s/ Frederick R. Klug
DATE: August 10 , 2012		/s/ Frederick R. Klug
Frederick R. Klug
Senior Vice President
(Chief Financial Officer)

4145

Tri City Bankshares Corporation

Index of Exhibits

Exhibit No.

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

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

32.1

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

32.2

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

101.INS

**XBRL Instance

101.SCH

**XBRL Taxonomy Extension Schema

101.CAL

**XBRL Taxonomy Extension Calculation

101.DEF

**XBRL Taxonomy Extension Definition

101.LAB

**XBRL Taxonomy Extension Labels

101.PRE

**XBRL Taxonomy Extension Presentation

4246

Filing Compare · TRI CITY BANKSHARES CORP