- Quarterly Report (10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2011

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

For the transition period from __________ to __________

Commission file number: 000-31673

OHIO LEGACY CORP

(Exact name of registrant as specified in its charter)

Ohio		34-1903890
(State or other jurisdiction of incorporation or organization)		I.R.S. Employer Identification Number

600 South Main St., North Canton, Ohio 44720

(Address of principal executive offices)

(330) 499-1900

Registrant's telephone number

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the past 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 o

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 (§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 o

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

Large accelerated filer o		Accelerated filer o
Non-accelerated filer o		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 o No x

As of August 12, 2011, the latest practicable date, there were 19,714,564 shares of the issuer’s Common Stock, without par value, issued and outstanding.

OHIO LEGACY CORP

FORM 10-Q

AS OF AND FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2011

SECOND QUARTER REPORT

		Page
PART I - FINANCIAL INFORMATION

Item 1. Financial Statements		3

Item 2. Management’s Discussion and Analysis		25

Item 3. Quantitative and Qualitative Disclosures about Market Risk		37

Item 4T. Controls and Procedures		37

PART II - OTHER INFORMATION

Item 1. Legal Proceedings		37

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		37

Item 3. Defaults Upon Senior Securities		37

Item 4. Removed and Reserved		37

Item 5. Other Information		37

Item 6. Exhibits		38

SIGNATURES		38

PART 1 - FINANCIAL INFORMATION

Item 1. Financial Statements.

OHIO LEGACY CORP

CONSOLIDATED BALANCE SHEETS

(Unaudited)

As of June 30, 2011 and December 31, 2010

	June 30, 2011			December 31, 2010
ASSETS
Cash and due from banks	$	1,474,545		$	1,121,473
Federal funds sold and interest-bearing deposits in financial institutions		43,701,271			31,560,745
Cash and cash equivalents		45,175,816			32,682,218
Certificate of deposit in financial institution		100,000			100,000
Securities available for sale		18,551,152			25,206,895
Securities held to maturity (fair value June 30, 2011 - $0, December 31, 2010 - $2,885,216)		-			2,815,634
Loans held for sale		413,982			636,794
Loans, net of allowance of $2,329,745 and $3,055,766 at June 30, 2011 and December 31, 2010		93,514,462			101,146,194
Federal bank stock		1,518,000			1,557,700
Premises and equipment, net		2,272,751			3,461,455
Assets acquired in settlement of loans		2,591,175			2,351,302
Assets to be disposed of through branch sale		10,476,894			-
Accrued interest receivable and other assets		659,750			658,779
Total assets	$	175,273,982		$	170,616,971

Commitments and contingent liabilities		-			-

LIABILITIES
Deposits:
Noninterest-bearing demand	$	15,975,875		$	20,760,836
Interest-bearing demand		4,854,802			9,564,745
Savings		33,861,595			59,285,422
Certificates of deposit, net		18,970,151			53,604,644
Total deposits		73,662,423			143,215,647
Repurchase agreements		3,683,859			4,391,252
Long-term Federal Home Loan Bank advances		-			5,000,000
Capital lease obligations		-			407,593
Liabilities to be disposed of through branch sale		81,140,146			-
Accrued interest payable and other liabilities		631,824			1,131,963
Total liabilities	$	159,118,252		$	154,146,455

SHAREHOLDERS' EQUITY
Preferred stock, no par value, 500,000 shares authorized, none outstanding		-			-
Common stock, no par value;
June 30, 2011 and December 31, 2010: 22,500,000 shared authorized, 19,714,564 shares issued and outstanding		35,706,547			35,603,803
Accumulated deficit		(19,996,523	)		(19,289,011	)
Accumulated other comprehensive income		445,706			155,724
Total shareholders' equity		16,155,730			16,470,516

Total liabilities and shareholders' equity	$	175,273,982		$	170,616,971

See notes to the consolidated financial statements.

OHIO LEGACY CORP

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2011			2010			2011			2010
Interest and dividend income:
Loans, including fees	$	1,351,553		$	1,488,346		$	2,745,516		$	2,992,197
Securities, taxable		112,655			248,902			260,618			509,150
Securities, tax-exempt		27,264			28,636			54,435			57,178
Interest-bearing deposits, federal funds sold and other		22,222			19,861			40,142			32,369
Dividends on federal bank stock		18,784			18,266			38,408			33,540
Total interest and dividend income		1,532,478			1,804,011			3,139,119			3,624,434

Interest expense:
Deposits		280,308			488,707			606,278			1,008,320
Short-term Federal Home Loan Bank advances		-			-			13,754			-
Long-term Federal Home Loan Bank advances		-			70,083			-			184,570
Repurchase agreements		2,532			1,992			5,124			3,076
Capital leases		15,941			17,370			32,273			35,060
Investor notes		-			-			-			9,693
Total interest expense		298,781			578,152			657,429			1,240,719
Net interest income		1,233,697			1,225,859			2,481,690			2,383,715
Provision for loan losses		(49,967	)		(223,479	)		(26,195	)		(146,707	)
Net interest income after provision for loan losses		1,283,664			1,449,338			2,507,885			2,530,422
Noninterest income:
Service charges and other fees		152,589			189,078			305,782			358,508
Trust and brokerage fee income		179,212			17,361			345,051			17,361
Gain on sales of securities available for sale, net		-			31,229			32,999			31,229
Other than temporary impairment on securities available for sale
Total impairment loss		-			(47,200	)		-			(47,200	)
Loss recognized in other comprehensive income		-			-			-			-
Net impairment loss recognized in earnings		-			(47,200	)		-			(47,200	)
Gain on sale of loans		21,493			1,864			48,240			5,328
Gain (loss) on disposition of other real estate owned		-			(201,168	)		(35,299	)		(189,624	)
Loss on disposition of fixed assets		1,000			(7,193	)		(337	)		(8,699	)
Other income		18,166			19,656			28,379			34,505
Total noninterest income		372,460			3,627			724,815			201,408

Noninterest expense:
Salaries and benefits		1,035,359			897,383			2,080,909			1,867,245
Occupancy and equipment		249,829			234,274			495,665			448,973
Professional fees		164,257			144,472			298,908			416,319
Franchise tax		52,500			6,500			106,300			15,550
Data processing		181,879			170,171			361,874			322,877
Marketing and advertising		16,410			29,968			39,359			95,055
Stationery and supplies		16,285			22,410			34,733			39,290
Deposit expense and insurance		94,539			93,799			207,748			294,618
Investor expenses		-			-			-			517,222
Other expenses		233,394			434,656			464,099			625,039
Total noninterest expense		2,044,452			2,033,633			4,089,595			4,642,188
Net loss before income taxes		(388,328	)		(580,668	)		(856,895	)		(1,910,358	)
Income tax benefit		(149,384	)		-			(149,384	)		-

Net loss	$	(238,944	)	$	(580,668	)	$	(707,511	)	$	(1,910,358	)

Basic loss per share	$	(0.01	)	$	(0.03	)	$	(0.04	)	$	(0.13	)
Diluted loss per share	$	(0.01	)	$	(0.03	)	$	(0.04	)	$	(0.13	)

See notes to the consolidated financial statements.

OHIO LEGACY CORP

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

(Unaudited)

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2011			2010			2011			2010

Balance, beginning of period	$	16,061,764		$	17,881,925		$	16,470,516		$	2,366,511

Stock based compensation expense		51,650			-			102,744			2,143

Proceeds on sale of common stock, net		-			-			-			16,714,781

Comprehensive loss:
Net loss		(238,944	)		(580,668	)		(707,511	)		(1,910,358	)
Net unrealized income (loss) on securities available for sale arising during the period, including effect of reclassifications		281,260			517,658			289,981			645,838
Total comprehensive income (loss)		42,316			(63,010	)		(417,530	)		(1,264,520	)

Balance, end of period	$	16,155,730		$	17,818,915		$	16,155,730		$	17,818,915

See notes to the consolidated financial statements.

OHIO LEGACY CORP

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	For the Six Months Ended June 30,
	2011			2010

Cash flows from operating activities:
Net loss	$	(707,511	)	$	(1,910,358	)
Adjustments to reconcile net loss to net cash from operating activities:
Provision for loan losses		(26,195	)		(146,707	)
Depreciation and amortization		186,103			180,967
Loss on disposition of fixed assets		337			8,699
Securities amortization and accretion, net		145,567			100,228
Origination of loans held for sale		(2,709,250	)		(159,272	)
Proceeds from sales of loans held for sale		3,394,307			295,575
Loss (gain) on disposition or direct write-down of real estate owned		35,299			189,624
Gain on sale of securities available for sale		(32,999	)		(31,229	)
Other than temporary impairment of securities		-			47,200
Gain on sale of loans held for sale		(48,240	)		(5,328	)
Stock based compensation expense		102,744			2,143
Net change in:
Accrued interest receivable and other assets		(150,355	)		(57,143	)
Accrued interest payable and other liabilities		(500,139	)		(116,623	)
Deferred loan fees		46,325			8,795
Net cash from operating activities		(264,007	)		(1,593,429	)

Cash flows from investing activities:
Purchases of securities available for sale		(2,998,639	)		(3,460,975	)
(Purchases) or redemptions of federal bank stock		39,700			(290,450	)
Maturities, calls and paydowns of securities available for sale		7,844,970			2,350,575
Sales of securities available for sale		4,951,844			2,897,908
Proceeds from sale of other real estate owned		191,101			1,106,448
Participation loans purchased		(725,000	)		-
Net change in loans		(1,971,509	)		6,096,136
Proceeds from sale of premises and equipment		14,250			-
Acquisition of premises and equipment		(61,048	)		(331,927	)
Other investing activities		-			3,080
Net cash from investing activities		7,285,669			8,370,795

Cash flows from financing activities
Net change in deposits		10,638,213			(807,699	)
Net change in repurchase agreements		(145,268	)		2,729,884
Repayment of capital lease obligations		(21,009	)		(15,931	)
Repayments of FHLB advances		(5,000,000	)		(8,500,000	)
Net proceeds from issuance of common stock		-			16,714,780
Net cash from financing activities		5,471,936			10,121,034

Net change in cash and cash equivalents		12,493,598			16,898,400
Cash and cash equivalents at beginning of period		32,682,218			24,165,790

Cash and cash equivalents at end of period	$	45,175,816		$	41,064,190

See notes to the consolidated financial statements.

	For the Six Months Ended June 30,
	2011		2010
Supplemental disclosures of cash flow information:
Cash received during the period:
Federal income tax refund	$	-	$	-

Cash paid during the period for:
Interest		703,411		1,293,859
Federal income taxes		-		-
Non-cash transactions:
Transfer of loans to assets acquired in settlement of loans		466,273		212,510
Reclassification of securities to available-for-sale from held-to-maturity		2,816,058		-
Reclassification of asset balances to assets to be disposed of through branch sale:
Loans, net		9,427,832		-
Premises and equipment, net		1,049,062		-
Reclassification of liability balances to liabilities to be disposed of through branch sale:
Deposits		80,191,437		-
Repurchase agreements		562,125		-
Capital lease obligation		386,584		-

See notes to the consolidated financial statements.

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations and Principles of Consolidation : The consolidated financial statements include Ohio Legacy Corp (“the Company”) and its wholly-owned subsidiary, Premier Bank & Trust, National Association (“Bank”) (formerly known as Ohio Legacy Bank, National Association). Ohio Legacy Corp is approximately 76% owned by Excel Bancorp, LLC, a registered bank holding company. Intercompany transactions and balances are eliminated in consolidation. References to the Company include Ohio Legacy, consolidated with its subsidiary, the Bank.

Ohio Legacy is a bank holding company incorporated on July 1, 1999 under the laws of the State of Ohio. The Bank began operations on October 3, 2000. The Bank provides financial services through its full-service offices in Wooster and Canton, Ohio. Its primary deposit products are checking, savings and certificate of deposit accounts, and its primary lending products are residential mortgage, commercial and installment loans. Substantially all loans are secured by specific items of collateral including business and consumer assets and real estate. Commercial loans are expected to be repaid from cash flow from operations of businesses. Real estate loans are secured by residential and commercial real estate. Other financial instruments that potentially represent concentrations of credit risk include deposit accounts in other financial institutions and federal funds sold. On March 23, 2010, the Bank received approval from the Comptroller of the Currency of its application to commence fiduciary powers pursuant to 12 USC 92a. Subsequently, the Bank opted to include “Trust” in its name and announced a name change to Premier Bank and Trust, N.A. effective April 2010. The Bank also began to offer investment brokerage services in April 2010.

These consolidated financial statements are prepared without audit and reflect all adjustments that, in the opinion of management, are necessary to present fairly the financial position of the Company at June 30, 2011, and its results of operations and cash flows for the periods presented. All such adjustments are normal and recurring in nature. The accounting principles used to prepare the consolidated financial statements are in compliance with U.S. GAAP. However, the financial statements were prepared in accordance with the instructions of Form 10-Q and, therefore, do not purport to contain all necessary financial and note disclosures required by U.S. GAAP.

The financial information presented in this report should be read in conjunction with the Company’s Form 10-K for the year ended December 31, 2010, which includes information and disclosures not presented in this report. Reference is made to the accounting policies of the Company described in Note 1 of the Notes to Consolidated Financial Statements. The Company has consistently followed those policies in preparing this Form 10-Q.

Use of Estimates : To prepare financial statements in conformity with U.S. GAAP, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and actual results could differ. The allowance for loan losses, judgments about the other than temporary impairment of securities, fair value of financial instruments, valuation of deferred tax assets and the fair value of assets acquired in settlement of loans are particularly subject to change.

Reclassifications : Some items in the prior year financial statements were reclassified to conform to the current presentation. The reclassifications had no impact on reported net income or shareholders’ equity.

Adoption of New Accounting Pronouncements:

Improving Disclosures About Fair Value Measurements: In January 2010, the FASB issued an amendment to Fair Value Measurements and Disclosures, Topic 820, Improving Disclosures About Fair Value Measurements. This amendment requires new disclosures regarding significant transfers in and out of Level 1 and 2 fair value measurements and the reasons for the transfers. This amendment also requires that a reporting entity present separately information about purchases, sales, issuances and settlements, on a gross basis rather than a net basis for activity in Level 3 fair value measurements using significant unobservable inputs. This amendment also clarifies existing disclosures on the level of disaggregation, in that the reporting entity needs to use judgment in determining the appropriate classes of assets and liabilities, and that a reporting entity should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements for Level 2 and 3. The new disclosures and clarifications of existing disclosures for ASC 820 are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The adoption of ASC 820 did not have a material effect on the Company’s consolidated financial statements.

Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses : In July 2010, FASB issued Accounting Standards Update 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses (ASU 2010-20), to address concerns about the sufficiency, transparency, and robustness of credit risk disclosures for finance receivables and the related allowance for credit losses. This ASU requires new and enhanced disclosures at disaggregated levels, specifically defined as “portfolio segments” and “classes”. Among other things, the expanded disclosures include roll-forward schedules of the allowance for credit losses and information regarding the credit quality of receivables as of the end of a reporting period. New and enhanced disclosures are required for interim and annual periods ending after December 15, 2010, although the disclosures of reporting period activity are required for interim and annual periods beginning after December 15, 2010. The adoption of the new guidance had no impact to the financial statements except for the additional disclosures.

No. 2011-01 | Receivables (Topic 310) Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20: In January 2011, FASB issued Accounting Standards Update 2011-01, Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20 (ASU 2011-01). ASU 2011-01 was issued as a result of concerns raised from stakeholders that the introduction of new disclosure requirements (paragraphs 310-10-50-31 through 50-34 of the FASB Accounting Standards Codification) about troubled debt restructurings in one reporting period followed by a change in what constitutes a troubled debt restructuring shortly thereafter would be burdensome for preparers and may not provide financial statement users with useful information.

No. 2011-02 | Receivables (Topic 310) A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring: In April 2011, the FASB amended existing guidance for assisting a creditor in determining whether a restructuring is a troubled debt restructuring. The amendments clarify the guidance for a creditor’s evaluation of whether it has granted a concession and whether a debtor is experiencing financial difficulties. With regard to determining whether a concession has been granted, the ASU clarifies that creditors are precluded from using the effective interest method to determine whether a concession has been granted. In the absence of using the effective interest method, a creditor must now focus on other considerations such as the value of the underlying collateral, evaluation of other collateral or guarantees, the debtor’s ability to access other funds at market rates, interest rate increases and whether the restructuring results in a delay in payment that is insignificant. This guidance is effective for interim and annual reporting periods beginning after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. For purposes of measuring impairment on newly identified troubled debt restructurings, the amendments should be applied prospectively for the first interim or annual period beginning on or after June 15, 2011. Management is currently working through the guidance to determine the impact, if any .

No. 2011-04 | Fair Value Measurement (Topic 820) Amendments to Achieve Common Fair Value Measurement and Disclosure Requirement in U.S. GAAP and IFRSs : In May 2011, FASB issued Accounting Standards Update 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirement in U.S. GAAP and IFRSs (ASU 2011-04). The new guidance in this ASU results in common fair value measurement and disclosure requirements in U.S. GAAP and IFRSs. Certain amendments clarify the FASBs intent about the application of existing fair value measurement requirements. Other amendments change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. These amendments also enhance disclosure requirements surrounding fair value measurement. Most significantly, an entity will be required to disclose additional information regarding Level 3 fair value measurements including quantitative information about unobservable inputs used, a description of the valuation processes used by the entity, and a qualitative discussion about the sensitivity of the measurements. The new guidance is effective for interim and annual periods beginning on or after December 15, 2011. Management is currently working through the guidance to determine the impact, if any, to the consolidated financial statements.

No 2011-05 | Presentation of Comprehensive Income: In June 2011, FASB issued Accounting Standards Update 2011-05, Presentation of Comprehensive Income (ASU 2011-05) : The ASU eliminates the option to report other comprehensive income and its components in the statement of changes in equity. An entity can elect to present the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The ASU does not change the items that must be reported in other comprehensive income, when an item of other comprehensive income must be reclassified to net income, or how earnings per share is calculated or presented. The new guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011 and must be applied retrospectively. The adoption of the new guidance will impact the presentation of the consolidated financial statements.

NOTE 2 – STOCK ISSUANCE

On November 15, 2009, the Company and the Bank entered into a Stock Purchase Agreement (the “Stock Purchase Agreement”) with Excel Financial, LLC (“Excel Financial”). Under the terms of the Stock Purchase Agreement, Excel Financial agreed to purchase 15.0 million of the Company’s common shares at a price of $1.00 per share. As a condition to Excel Financial’s purchase of the Company’s common shares, the Company agreed to sell a minimum of 1.5 million of its common shares to investors other than Excel Financial in a private offering, and to use its best efforts to sell an additional 1.0 million of its common shares in the same private offering, all at a purchase price of $1.00 per share.

At a special meeting held January 8, 2010, the Company’s shareholders approved the issuance and sale of up to 17,500,000 additional shares of Ohio Legacy common stock. Shareholder approval was obtained in conjunction with the Stock Purchase Agreement. At the special meeting, shareholders approved: (1) an amendment to Ohio Legacy’s articles of incorporation to increase the number of authorized shares of common stock from 5,000,000 to 22,500,000; (2) the issuance of 15,000,000 shares of common stock to Excel Bancorp LLC (“Excel Bancorp”), an Ohio limited liability company formed to acquire the shares of Ohio Legacy’s common stock, pursuant to the Stock Purchase Agreement, and the issuance of up to 2,500,000 additional shares to other investors in a private offering made in connection with the sale of shares to Excel Bancorp; and (3) the control share acquisition by Excel Bancorp of 15,000,000 shares of common stock.

Excel Financial had engaged consultants and advisors to assist it in this endeavor and had no other business activity. Although the Company entered into the Stock Purchase Agreement with Excel Financial, Excel Financial assigned the agreement to its assignee, Excel Bancorp. The Federal Reserve Board approved Excel Bancorp’s application to become a registered bank holding company on February 12, 2010, in connection with its acquisition of Ohio Legacy’s common stock. Following regulatory approval, Ohio Legacy issued 15,000,000 shares of common stock to Excel Bancorp and 2,500,000 shares of common stock in a private offering on February 19, 2010, at an issue price of $1.00 per share (the “Closing”).

The net proceeds to the Company of the stock offering were $16,714,781 after payment of various costs totaling $785,219. Net proceeds were used by the Company to increase the capital level of the Bank in the amount of $16,184,135 and to repay notes payable and accrued interest to the organizers of Excel Bancorp and Excel Financial in the amount of $526,915 for advances made to Excel Financial for organization and operating expenses related to its pursuit of a bank acquisition. The Company accepted the assignment of the notes payable to the organizers of Excel Bancorp and Excel Financial in exchange for their agreement to waive a closing condition that required the Bank to maintain a minimum tier 1 capital level of $5.7 million. Since the notes to the organizers were an obligation to reimburse expenses not directly related to the stock offering, the cost was expensed rather than deducted from the stock offering proceeds.

As discussed in Note 9, the Bank entered into a Consent Order in 2009 that specified achievement of higher capital ratios. Following the Closing, the Bank exceeded the minimum capital ratios required under the Consent Order with the OCC of tier 1 capital of at least 8.75% of adjusted total assets and total risk-based capital of at least 13.25% of risk-weighted assets. However, until the Consent Order is terminated, the Bank cannot be classified as well-capitalized under prompt corrective action provisions.

Various management and board changes also took place as contemplated by the Stock Purchase Agreement.

The issuance of common stock to Excel Bancorp resulted in an “ownership change” of the Company, as broadly defined in Section 382 of the Internal Revenue Code. As a result of the ownership change, utilization of the Company’s net operating loss carryforwards and certain built-in losses under federal income tax laws will be subject to annual limitation. The annual limitation placed on the Company’s ability to utilize these potential tax deductions will equal the product of an applicable interest rate mandated under federal income tax laws and the Company’s value immediately before the ownership change. The annual limitation imposed under Section 382 would limit the deduction for both the carryforward tax attributes and the built-in losses realized within five years of the date of the ownership change to approximately $93,000 per year. Given the limited carryforward period assigned to these tax deductions in excess of this annual limit, some portion of these potential deductions will be lost and, consequently, the related tax benefits will not be recorded in the financial statements. See Note 10 for additional information regarding net operating loss carryforwards.

NOTE 3 – EARNINGS (LOSS) PER SHARE

Basic earnings (loss) per share is equal to net income (loss) divided by the weighted average number of shares outstanding during the period. Diluted earnings (loss) per share includes the dilutive effect of additional potential common shares that may be issued upon the exercise of stock options and stock warrants. The following table details the calculation of basic and diluted earnings (loss) per share:

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2011			2010			2011			2010
BASIC:
Net loss	$	(238,944	)	$	(580,668	)	$	(707,511	)	$	(1,910,358	)
Weighted average common shares outstanding		19,714,564			19,714,564			19,714,564			14,976,995
Basic loss per share	$	(0.01	)	$	(0.03	)	$	(0.04	)	$	(0.13	)

DILUTED:
Net loss	$	(238,944	)	$	(580,668	)	$	(707,511	)	$	(1,910,358	)
Weighted average common shares outstanding		19,714,564			19,714,564			19,714,564			14,976,995
Dilutive effect of stock options		-			-			-			-
Dilutive effect of stock warrants		-			-			-			-
Total common shares and dilutive potential common shares		19,714,564			19,714,564			19,714,564			14,976,995
Diluted loss per common share	$	(0.01	)	$	(0.03	)	$	(0.04	)	$	(0.13	)

The dilutive potential common shares that were excluded from the computation of diluted earnings per share because the effect of their exercise was anti-dilutive were as follows:

	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2011		2010		2011		2010
Stock options		1,329,804		-		1,330,023		43,938
Stock warrants		-		35,500		-		66,497

NOTE 4 – INVESTMENT SECURITIES

The fair value of available for sale securities and the related gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) were as follows:

Available for sale, carried at fair value: June 30, 2011	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
U.S. Government-sponsored enterprises	$	3,763,540	$	3,403	$	-		$	3,766,943
Mortgage-backed securities issued by U.S. Government-sponsored enterprises		10,844,064		482,042		(90	)		11,326,016
Other mortgage-backed securities		289,998		-		(58,163	)		231,835
Municipal securities		2,816,058		134,550		-			2,950,608
Equity securities		39,900		235,850		-			275,750
Total	$	17,753,560	$	855,845	$	(58,253	)	$	18,551,152

December 31, 2010
U.S. Government-sponsored enterprises	$	8,261,724	$	3,424	$	(1,722	)	$	8,263,426
Mortgage-backed securities issued by U.S. Government-sponsored enterprises		16,228,702		396,481		-			16,625,183
Other mortgage-backed securities		316,644		-		(69,078	)		247,566
Equity securities		41,600		29,120		-			70,720
Total	$	24,848,670	$	429,025	$	(70,800	)	$	25,206,895

All mortgage-backed securities at both period ends are residential mortgage-backed securities.

The carrying amount, unrecognized gains and losses, and fair value of securities held to maturity were as follows:

Held to maturity, carried at amortized cost June 30, 2011	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
None	$	-	$	-	$	-	$	-

December 31, 2010
Municipal securities	$	2,815,634	$	69,582	$	-	$	2,885,216

At June 30, 2011, the Company reclassified its municipal securities to the available-for-sale category from held-to-maturity since management no longer intends to hold these securities maturity. At the time of the transfer, the municipal securities were carried at amortized cost totaling $2,816,058 and the estimated fair value was $2,950,608. The unrealized gain included as a component of accumulated other comprehensive income related to the reclassification was $134,550. The securities were reclassified because the Company may sell the municipal securities to assist in funding the branch sale described in Note 11. No purchases will be classified as held-to-maturity for the next two years.

Proceeds from the sale of securities available-for-sale totaled $4,951,844 and $2,897,908 for the six months ended June 30, 2011 and 2010, respectively. Proceeds from the sale of securities available-for-sale totaled $0 and $2,897,908 for the three months ended June 30, 2011 and 2010, respectively.

The fair value of debt securities and the carrying amount, if different, at June 30, 2011 by expected maturity are depicted in the following table. Expected maturities may differ from contractual maturities because the loans underlying the mortgage-backed securities generally can be prepaid without penalty.

	Available for sale Fair Value

Due in one year or less		-
Due from one to five years	$	2,677,484
Due from five to ten years		2,424,686
Due after ten years		1,615,381
Equity securities		275,750
Mortgage-backed securities		11,557,851
Total	$	18,551,152

The following summarizes the investment securities with unrealized losses by aggregated major security type and length of time in a continuous unrealized loss position:

	Less than 12 months					12 Months or More					Total
June 30, 2011:	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
Available for sale:
Mortgage-backed securities issued by U.S. Government-sponsored enterprises	$	13,753	$	(90	)	$	-	$	-		$	13,753	$	(90	)
Other mortgage-backed securities		-		-			231,835		(58,163	)		231,835		(58,163	)
Total	$	13,753	$	(90	)	$	231,835	$	(58,163	)	$	245,588	$	(58,253	)

	Less than 12 months					12 Months or More					Total
December 31, 2010:	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
Available for sale:
U.S. Government agencies	$	2,555,180	$	(1,722	)	$	-	$	-		$	2,555,180	$	(1,722	)
Other mortgage-backed securities		-		-			247,566		(69,078	)		247,566		(69,078	)
Total	$	2,555,180	$	(1,722	)	$	247,566	$	(69,078	)	$	2,802,746	$	(70,800	)

Other-Than-Temporary-Impairment

Management evaluates securities for other-than-temporary impairment (“OTTI”) at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation.

As of June 30, 2011, the Company’s security portfolio consisted of 36 securities, one of which was in an unrealized loss position for 12 months or longer.

Mortgage-backed securities

The Company’s mortgage-backed securities portfolio includes one non-agency security with a fair value of $231,835 which represents an unrealized loss of approximately $58,163 at June 30, 2011; the estimated fair value has been less than its amortized cost for twelve months or more. This non-agency mortgage-backed security was rated Ba2 by Moody’s on April 21, 2011 and BBB- on July 12, 2011 by Standard & Poor’s rating services. This security is senior to several subordinate classes of securities that together are collateralized by a pool of residential mortgages. No losses incurred on the mortgages in the pool have been assigned to the senior classes. Although the borrowers are not required to make principal payments during the initial 10 year period, 70% of the original principal has been repaid as of June 30, 2011. There are no negative amortization loans in the pool and none of the loans are subprime, Alt A or similar type of high-default product. Based on these factors, as of June 30, 2011, the Company believes there is no OTTI and does not have the intent to sell this security and it is likely that it will not be required to sell the security before its anticipated recovery.

NOTE 5 – LOANS

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

	June 30, 2011						December 31, 2010
	Balance			Percent			Balance			Percent
Residential real estate	$	29,852,037			29.1	%	$	30,320,666			29.1	%
Multifamily real estate		4,834,356			5.0	%		7,465,237			7.2	%
Commercial real estate		37,799,485			40.6	%		42,222,715			40.4	%
Construction		3,046,372			2.9	%		2,137,849			2.1	%
Commercial		12,557,828			14.8	%		15,114,240			14.5	%
Consumer and home equity		7,780,246			7.6	%		7,013,694			6.7	%
Total Loans		95,870,324			100.0	%		104,274,401			100.0	%
Less: Allowance for loan losses		(2,329,745	)					(3,055,766	)
Net deferred loan fees		(26,117	)					(72,441	)
Loans, net	$	93,514,462					$	101,146,194

At June 30, 2011, loans with an aggregate balance of $9,859,589 were classified as “assets to be disposed of through branch sale” and are not included in the table above. The amount of the allowance for loan loss allocated to these loans, also not included in the table above, was $431,757.

Approximately $23,374,000 and $23,966,000 of residential real estate loans were pledged as collateral to support available borrowing capacity at the Federal Home Loan Bank at June 30, 2011 and for advances outstanding and additional borrowing capacity at December 31, 2010, respectively. Approximately $27,096,000 and $30,177,000 of commercial and home equity loans were pledged as collateral at the Federal Reserve Bank of Cleveland for available discount window borrowing at June 30, 2011 and December 31, 2010.

Activity in the allowance for loan losses for the three months and six months ended June 30 was as follows:

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2011			2010			2011			2010
Balance, beginning of period	$	3,110,033		$	4,033,006		$	3,055,766		$	3,945,670
Provision for loan losses		(49,967	)		(223,479	)		(26,195	)		(146,707	)
Loans charged-off		(317,875	)		(387	)		(318,048	)		(4,283	)
Recoveries of charged-off loans		19,311			8,556			49,979			23,016
Transfer of allowance for loans to be disposed of through branch sale		(431,757	)		-			(431,757	)		-

Balance, end of period	$	2,329,745		$	3,817,696		$	2,329,745		$	3,817,696

Balance as a percentage of total loans		2.43	%		3.87	%		2.43	%		3.87	%

Activity in the allowance for loan loss by portfolio segment for the each quarter of 2011 was as follows:

	1-4 family residential			1-4 family rental			Multi-family real state			Home Equity			Consumer			Commercial			Commercial Secured by Trust Assets
Balance, December 31, 2010	$	183,507		$	331,184		$	454,670		$	93,187		$	10,818		$	275,473		$	12,095
Provision for loan losses		9,963			(115,792	)		71,951			2,873			2,116			45,004			9
Charge-offs		-			-			-			-			(174	)		-			-
Recoveries		-			-			-			-			498			473			-
Balance, March 31, 2011		193,470			215,392			526,621			96,060			13,258			320,950			12,104
Provision for loan losses		29,018			(15,593	)		(116,017	)		(7,905	)		(2,908	)		39,529			(310	)
Charge-offs		(48,077	)											(342	)		(81,263	)
Recoveries		-			-			-			-			375			955			-
Subtotal		174,411			199,799			410,604			88,155			10,383			280,171			11,794
Transfer of allowance for loans to be disposed of through branch sale		(4,002	)		(11,527	)		(33,036	)		(2,076	)		(1,208	)		(92,773	)		-
Balance, June 30, 2011	$	170,409		$	188,272		$	377,568		$	86,079		$	9,175		$	187,398		$	11,794

	Commercial real estate
	Non-owner occupied			Owner Occupied			Construction		Total

Balance, December 31, 2010	$	509,739		$	1,043,458		$	141,635	$	3,055,766
Provision for loan losses		27,878			(20,409	)		179		23,772
Charge-offs		-			-			-		(174	)
Recoveries		-			23,698			6,000		30,669
Balance, March 31, 2011		537,617			1,046,747			147,814		3,110,033
Provision for loan losses		(80,941	)		95,744			9,416		(49,967	)
Charge-offs		(29,089	)		(159,104	)				(317,875	)
Recoveries		-			11,981			6,000		19,311
Subtotal		427,587			995,368			163,230		2,761,502
Transfer of allowance for loans to be disposed of through branch sale		(8,758	)		(278,377	)		-		(431,757	)
Balance, June 30, 2011	$	418,829		$	716,991		$	163,230	$	2,329,745

Loans individually considered impaired and nonaccrual loans were as follows at June 30, 2011 and December 31, 2010:

	June 30, 2 011		December 31, 2010
Loans past due over 90 days still on accrual	$	25,343	$	11,495
Nonaccrual loans, includes smaller balance homogeneous loans		2,564,257		3,452,602
Impaired loans, included in nonaccrual loans		2,531,359		3,409,242
Impaired loans with no allowance for loan losses allocated		2,284,686		3,371,759
Amount of the allowance for loan losses allocated		39,701		6,435

No interest income was recognized during impairment for the year to date period ending June 30, 2011 or 2010.

The recorded investment in loans is defined as the sum of the unpaid principal balance, accrued interest receivable and net deferred fees and deferred costs. Because the recorded investment in loans is not materially different than the unpaid principal balance, the tables below are presented using the unpaid principal balance.

The following tables present the balance in the allowance for loan losses and the recorded investment of loans by portfolio segment and based on impairment method.

	Loans Collectively Evaluated for Impairment				Loans Individually Evaluated for Impairment				Total
June 30, 2011	Allowance for Loan Loss		Recorded Investment		Allowance for Loan Loss		Recorded Investment		Allowance for Loan Loss		Recorded Investment
1-4 family residential mortgage	$	170,409	$	25,716,108	$	-	$	276,354	$	170,409	$	25,992,462
1-4 family rental property		180,111		3,665,210		8,161		194,365		188,272		3,859,575
Multi-family real estate		377,568		4,834,356		-		-		377,568		4,834,356
Home equity		86,079		6,810,012		-		-		86,079		6,810,012
Consumer		9,175		970,234		-		-		9,175		970,234
Commercial		182,710		6,468,211		4,688		192,786		187,398		6,660,997
Commercial secured by trust assets		11,794		5,896,831		-		-		11,794		5,896,831
Commercial real estate:												-
Non-owner occupied		418,829		18,113,767		-		40,121		418,829		18,153,888
Owner occupied		690,139		18,808,893		26,852		836,704		716,991		19,645,597
Construction and development		163,230		2,055,343		-		991,029		163,230		3,046,372
Total	$	2,290,044	$	93,338,965	$	39,701	$	2,531,359	$	2,329,745	$	95,870,324

	Loans Collectively Evaluated for Impairment				Loans Individually Evaluated for Impairment				Total
December 31, 2010	Allowance for Loan Loss		Recorded Investment		Allowance for Loan Loss		Recorded Investment		Allowance for Loan Loss		Recorded Investment
1-4 family residential mortgage	$	177,072	$	23,716,528	$	6,435	$	164,170	$	183,507	$	23,880,698
1-4 family rental property		331,184		6,161,295		-		278,673		331,184		6,439,968
Multi-family real estate		454,670		7,396,465		-		68,772		454,670		7,465,237
Home equity		93,187		6,277,141		-		-		93,187		6,277,141
Consumer		10,818		736,553		-		-		10,818		736,553
Commercial		275,473		8,818,892		-		247,731		275,473		9,066,623
Commercial secured by trust assets		12,095		6,047,617		-		-		12,095		6,047,617
Commercial real estate:
Non-owner occupied		509,739		18,112,082		-		174,750		509,739		18,286,832
Owner occupied		1,043,458		22,594,876		-		1,341,007		1,043,458		23,935,883
Construction and development		141,635		1,003,710		-		1,134,139		141,635		2,137,849
Total	$	3,049,331	$	100,865,159	$	6,435	$	3,409,242	$	3,055,766	$	104,274,401

The following table presents loans individually evaluated for impairment by loan class.

	June 30, 2011						December 31, 2010
	Average Recorded Investment		Recorded Investment		Allowance for Loan Losses Allocated		Recorded Investment		Allowance for Loan Losses Allocated
With no related allowance recorded:
1-4 family residential mortgage	$	299,888	$	276,354	$	-	$	126,687	$	-
1-4 family rental property		141,273		33,462		-		278,673		-
Multi-family real estate		-		-		-		68,772		-
Home equity		7,960		-		-		-		-
Commercial		156,558		188,098		-		247,731		-
Commercial real estate:						-
Non-owner occupied		70,824		40,121		-		174,750		-
Owner occupied		1,053,639		755,622		-		1,341,007		-
Construction and development		991,420		991,029		-		1,134,139		-

With an allowance recorded:
1-4 Single family residential mortgage		20,699		-		-		37,483		6,435
1-4 family rental property		50,914		160,903		8,161
Commercial		47,779		4,688		4,688		-		-
Commercial real estate:
Non-owner occupied		30,414		-		-		-		-
Owner occupied		54,498		81,082		26,852		-		-
	$	2,925,866	$	2,531,359	$	39,701	$	3,409,242	$	6,435

The following table presents information for loans individually evaluated for impairment as of June 30, 2010:

	June 30, 2010
Average of impaired loans during the period	$	5,663,892
Interest income recognized during impairment		-
Cash-basis income recognized during impairment		-

The following tables present the aging of the recorded investment in past due loans by class of loans.

			Days Past Due
June 30, 2011	Loans Not Past Due		30-59 Days		60-89 Days		90 Days or Greater & Still Accruing		90 Days or Greater & Non-Accruing		Total Past Due		Total
1-4 family residential mortgage	$	25,716,108	$	-	$	-	$	-	$	276,354	$	276,354	$	25,992,462
1-4 family rental property		3,665,210		-		-		-		194,365		194,365		3,859,575
Multi-family real estate		4,834,356		-		-		-		-		-		4,834,356
Home equity loans		6,736,822		73,190		-		-				73,190		6,810,012
Consumer		903,010		2,980		6,003		25,343		32,898		67,224		970,234
Commercial		6,435,211		33,000		-		-		192,786		225,786		6,660,997
Secured by trust assets		5,896,831		-		-		-		-		-		5,896,831
Commercial real estate:
Non-owner occupied		18,017,847		95,920		-		-		40,121		136,041		18,153,888
Owner occupied		18,808,893		-		-		-		836,704		836,704		19,645,597
Construction and development		2,055,343		-		-		-		991,029		991,029		3,046,372
Total	$	93,069,631	$	205,090	$	6,003	$	25,343	$	2,564,257	$	2,800,693	$	95,870,324

			Days Past Due
December 31, 2010	Loans Not Past Due		30-59 Days		60-89 Days		90 Days or Greater & Still Accruing		90 Days or Greater & Non-Accruing		Total Past Due		Total
1-4 family residential mortgage	$	23,367,952	$	207,521	$	141,055	$	-	$	164,170	$	512,746	$	23,880,698
1-4 family rental property		6,161,295		-		-		-		278,673		278,673		6,439,968
Multi-family real estate		7,396,465		-		-		-		68,772		68,772		7,465,237
Home equity loans		6,192,016		74,621		10,504		-		-		85,125		6,277,141
Consumer		676,801		4,898		-		11,495		43,359		59,752		736,553
Commercial		8,751,090		8,889		58,913		-		247,731		315,533		9,066,623
Commercial secured by trust assets		6,047,617		-		-		-				-		6,047,617
Commercial real estate:												-		-
Non-owner occupied		18,050,282		61,800		-		-		174,750		236,550		18,286,832
Owner occupied		22,594,876		-		-		-		1,341,007		1,341,007		23,935,883
Construction and development		1,003,709		-		-		-		1,134,140		1,134,140		2,137,849
Total	$	100,242,103	$	357,729	$	210,472	$	11,495	$	3,452,602	$	4,032,298	$	104,274,401

Credit Quality Indicators:

The Company classifies all non-homogeneous loans such as commercial and commercial real estate loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk into four non-classified categories (i.e. passing grade loans) and three categories of classified loans. This analysis is performed on a quarterly basis. The Company uses the following definitions for risk ratings:

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

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

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

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans. Loans not analyzed as part of homogeneous groups include commercial, commercial real estate, multi-family real estate, construction and development loans. Homogeneous groups of loans are not typically risk rated unless the loan is placed on nonaccrual status. A loan may also be separated from the homogeneous pool and individually risk rated due to recurrent delinquency problems, typically 60 to 89 days past due. The risk category of loans by class of loans was as follows:

June 30, 2011	Not Rated		Pass		Special Mention		Substandard		Doubtful		Total
1-4 family residential mortgage	$	21,907,625	$	2,990,871	$	432,841	$	549,580	$	111,545	$	25,992,462
1-4 family rental property		181,731		2,950,463		338,014		389,367		-		3,859,575
Multi-family real estate		-		3,509,275		533,420		791,661		-		4,834,356
Home equity loans		6,721,837		79,633		2,037		6,505		-		6,810,012
Consumer		970,234		-		-		-		-		970,234
Commercial		-		6,439,352		44,044		102,658		74,943		6,660,997
Commercial secured by trust assets		-		5,896,831		-		-		-		5,896,831
Commercial real estate:												-
Non-owner occupied		-		14,472,583		2,859,202		822,103		-		18,153,888
Owner occupied		-		17,002,772		1,550,076		974,569		118,180		19,645,597
Construction and development		1,039,795		985,723		29,825		991,029		-		3,046,372
Total	$	30,821,222	$	54,327,503	$	5,789,459	$	4,627,472	$	304,668	$	95,870,324

December 31, 2010	Not Rated		Pass		Special Mention		Substandard		Doubtful		Total
1-4 family residential mortgage	$	23,135,647	$	392,160	$	-	$	197,341	$	155,550	$	23,880,698
1-4 family rental property		-		5,413,008		453,930		573,030		-		6,439,968
Multi-family real estate		91,908		4,350,194		1,591,890		1,431,245		-		7,465,237
Home equity loans		6,055,818		200,000		2,582		18,741		-		6,277,141
Consumer		736,553		-		-		-		-		736,553
Commercial		-		8,403,145		311,832		281,043		70,603		9,066,623
Commercial secured by trust assets		-		6,047,617		-		-		-		6,047,617
Commercial real estate:												-
Non-owner occupied		-		13,879,607		3,434,311		972,914		-		18,286,832
Owner occupied		-		18,659,084		1,722,292		3,427,262		127,245		23,935,883
Construction and development		262,922		592,301		32,824		1,249,802		-		2,137,849
Total	$	30,282,848	$	57,937,116	$	7,549,661	$	8,151,378	$	353,398	$	104,274,401

The Company considers the performance of the loan portfolio and its impact on the allowance for loan losses. For residential and consumer loan classes, the Company also evaluates credit quality based on the aging status of the loan, which was previously presented, and by payment activity. The following table presents the current principal balance of residential and consumer loans based on payment activity:

	Residential
June 30, 2011	1-4 family		Home Equity		Consumer		Total
Performing	$	25,716,108	$	6,810,012	$	937,336	$	33,463,456
Nonperforming		276,354		-		32,898		309,252
Total	$	25,992,462	$	6,810,012	$	970,234	$	33,772,708

	Residential
December31, 2010	1-4 Family		Home Equity		Consumer		Total
Performing	$	23,716,528	$	6,277,141	$	693,194	$	30,686,863
Nonperforming		164,170		-		43,359		207,529
Total	$	23,880,698	$	6,277,141	$	736,553	$	30,894,392

NOTE 6 – ASSETS ACQUIRED IN SETTLEMENT OF LOANS

Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. If fair value declines, a valuation allowance is recorded through expense. Costs after acquisition are expensed. Expenditures that improve the fair value of the property are capitalized. The Company makes periodic reassessments of the value of assets held in this category and record valuation adjustments or write-downs as the reassessments dictate.

Assets acquired in settlement of loans were as follows:

	June 30, 2011		December 31, 2010
Interest in limited liability company	$	1,305,437	$	1,305,437
Residential real estate		243,484		401,111
Commercial real estate		339,000		-
Multi-family real estate		320,753		320,753
Construction and development		382,501		324,001
Total	$	2,591,175	$	2,351,302

The interest in the limited liability company was obtained through a U.S. Bankruptcy Code 363 sale. The limited liability company was formed by the lead bank for the banks participating in the project financing to acquire title to the real estate, conduct the operation of the facility, and market the real estate and the operations of the business for sale. The carrying value of its interest is based upon the estimated fair value of the real estate less costs to sell.

Direct write-downs of assets acquired in settlement of loans totaled $0 and $219,797 for the six months ended June 30, 2011 and 2010, respectively.

NOTE 7 – FAIR VALUE

ASC 820-10 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820-10 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair values:

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

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

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

The Company used the following methods and significant assumptions to estimate the fair value of each type of financial asset:

Securities : The fair values for securities are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using matrix pricing, which is a mathematical technique used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2).

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

Assets measured at fair value on a recurring basis are summarized in the following table:

	June 30, 2011		December 31, 2010
Available for sale securities	$	18,551,152	$	25,206,895

Quoted prices on active markets for identical assets (Level 1)
Equity securities		275,750		70,720
Significant other observable inputs (Level 2)
U.S. government sponsored enterprises		3,766,943		8,263,426
Mortgage-backed securities issued by U.S. Government-
sponsored enterprises		11,326,016		16,625,183
Other mortgage backed securities		231,835		247,566
Municipal securities		2,950,608		-
Significant unobservable inputs (Level 3)		-		-

Assets measured at fair value on a non-recurring basis are summarized in the following table:

	Fair Value Measurements Using
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
June 30, 2011:
Impaired loans:
1-4 family residential mortgage		-		-	$	22,028	$	22,028
1-4 family rental property		-		-		66,531		66,531
Home equity								-
Multi-family real estate		-		-				-
Commercial		-		-		43,000		43,000
Commercial real estate:
Non-owner occupied		-		-				-
Owner occupied		-		-		-		-
Construction and development		-		-		306,447		306,447

Assets acquired in settlement of loans:
Residential		-		-		174,711		174,711
Construction		-		-		324,001		324,001

December 31, 2010:
Impaired loans:
1-4 family residential mortgage		-		-	$	157,735	$	157,735
1-4 family rental property		-		-		278,673		278,673
Multi-family real estate		-		-		68,772		68,772
Commercial		-		-		247,731		247,731
Commercial real estate:
Non-owner occupied		-		-		174,750		174,750
Owner occupied		-		-		1,341,007		1,341,007
Construction and development		-		-		1,134,139		1,134,139

Assets acquired in settlement of loans:
Residential		-		-		401,112		401,112
Construction		-		-		324,001		324,001

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a principal balance of $2,531,359, with a valuation allowance of $39,701 at June 30, 2011, resulting in an additional provision for loan losses of $8,161 for the three months ending June 30, 2011, and $127,056 for the six months ending June 30, 2011. At December 31, 2010, impaired loans had a principal balance of $3,409,242 with a valuation allowance of $6,435, resulting in an additional provision for loan losses of $718,750 in 2010, of which $290,555 was provided for during the three months ended June 30, 2010 and $441,695 was provided for the six months ended June 30, 2010.

Assets acquired in settlement of loans, measured at fair value less costs to sell, had a carrying value of $2,591,175 at June 30, 2011 and $2,351,302 at December 31, 2010. There were no direct write-downs in the value of these assets during the six months ended June 30, 2011. Gross write-downs totaling $542,490 were recorded on assets acquired in settlement of loans during 2010. Direct write-downs for the three and six months ended June 30, 2010 totaled $219,797.

The carrying amounts and estimated fair values of financial assets and liabilities are as follows:

	June 30, 2011						December 31, 2010
	Carrying Amounts			Estimated Fair Value			Carrying Amounts			Estimated Fair Value
Financial assets
Cash and cash equivalents	$	45,176,000		$	45,176,000		$	32,682,000		$	32,682,000
Certificate of deposit in financial institution		100,000			100,000			100,000			100,000
Securities available for sale		18,551,000			18,551,000			25,207,000			25,207,000
Securities held to maturity		-			-			2,816,000			2,885,000
Loans held for sale		414,000			415,000			637,000			637,000
Loans, net		93,514,000			94,359,000			101,146,000			100,206,000
Federal bank stock		1,518,000		NA				1,557,700		NA
Financial assets to be disposed of through branch sale		9,428,000			9,428,000			-			-
Accrued interest receivable		391,000			391,000			429,000			429,000

Financial liabilities
Deposits		(73,662,000	)		(73,739,000	)		(143,216,000	)		(143,669,000	)
Repurchase agreements		(3,684,000	)		(3,684,000	)		(4,391,000	)		(4,391,000	)
Financial liabilities to be disposed of through branch sale		(81,140,000	)		(80,360,000	)		-			-
Federal Home Loan Bank advances		-			-			(5,000,000	)		(5,013,000	)
Accrued interest payable		(40,000	)		(40,000	)		(69,000	)		(69,000	)

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

Carrying amount is the estimated fair value for cash and cash equivalents, accrued interest receivable and payable, noninterest-bearing demand deposits and variable-rate loans, deposits that reprice frequently and fully, repurchase agreements, certificates of deposit in financial institutions and overnight FHLB advances. Security fair values are determined as previously described. For fixed-rate loans or deposits and for variable-rate loans or deposits with infrequent repricing or repricing limits, fair value is based on discounted cash flows using current market rates applied to the estimated life. The fair value of borrowings is based upon current rates for similar financing over the remaining terms of the borrowings. It was not practicable to determine the fair value of federal bank stock due to restrictions placed on its transferability. The estimated fair value for other financial instruments and off-balance sheet loan commitments are considered nominal.

NOTE 8 – STOCK BASED COMPENSATION

Shareholders adopted the Ohio Legacy Corp 2010 Cash and Equity Incentive Plan in May 2010. The Plan permits the grant of share-based awards for a maximum of 2,000,000 shares of common stock. The Plan provides for awards of options, restricted stock, stock appreciation rights, and other stock-based awards to employees, directors and consultants. Option awards are generally granted with an exercise price equal to the market price of the Company’s common stock at the date of grant. Options awards have vesting periods as determined by the Compensation Committee of the Board of Directors. All options currently outstanding have an original vesting period of five years.

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

The following table depicts the activity under this Plan:

	2011
	Options			Weighted Average Exercise Price
Outstanding, January 1		1,330,400		$	2.30
Granted		-			-
Forfeited		(750	)		2.30
Exercised		-			-
Outstanding, June 30		1,329,650		$	2.30

The weighted average remaining contractual life of the options outstanding at June 30, 2011 was 9.03 years. The intrinsic value of options outstanding was $0.

No options were granted during 2011. The fair market value of options granted during 2010 was determined using the following weighted-average assumptions as of grant date:

	2010
Risk-free interest rate		1.11% - 1.83	%
Expected term	6.5 years
Expected stock price volatility		0.298
Dividend yield		0	%

The weighted average fair value of options granted during 2010 was $0.78. The Company has a policy of using authorized by unissued common shares to satisfy option exercises.

The compensation cost yet to be recognized for stock options that have been awarded but not vested is as follows:

For the remainder of 2011	$	104,406
2012		207,131
2013		207,151
2014		207,151
2015		103,127
Total	$	828,966

NOTE 9 – REGULATORY MATTERS

Banks are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and prompt corrective action regulations involve quantitative measures of assets, liabilities and certain off-balance sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Prompt corrective action regulations provide five classifications: (i) well capitalized; (ii) adequately capitalized; (iii) undercapitalized; (iv) significantly undercapitalized; and (v) critically undercapitalized, although these terms are not used to represent overall financial condition. Failure to meet capital requirements can initiate regulatory action.

The Bank, through its Board of Directors, agreed to a Consent Order (the “Consent Order”) with the Bank’s primary federal regulator, the Office of the Comptroller of the Currency (the “OCC”), dated February 17, 2009. The Consent Order required the Board of Directors to submit a capital plan to the Assistant Deputy Comptroller that included specific plans to achieve and maintain Tier 1 capital of at least 8.75% of adjusted total assets and total risk-based capital of at least 13.25% of risk-weighted assets.

The Consent Order provides that the OCC has the ability to take any action it deems appropriate in fulfilling its regulatory and supervisory responsibilities during the term of the Consent Order or upon the failure of the Bank to comply with the terms of the Consent Order. Among the actions that may be taken by the OCC is the placing of the Bank into receivership.

As described in Note 2, the Company and the Bank entered into a Stock Purchase Agreement with Excel Financial. At December 31, 2009, the Bank met the definition of critically undercapitalized. The transactions contemplated by the Stock Purchase Agreement were approved by the Company’s shareholders at a special meeting of shareholders held on January 8, 2010. After the closing of the Stock Purchase Agreement and the private sale, the Company contributed approximately $16.2 million to the capital of the Bank, improving the Bank’s capital to levels sufficient to meet the capital minimums required by the Consent Order. However, until the Consent Order is terminated, the Bank cannot be classified as well-capitalized under prompt corrective action provisions.

Actual and required capital amounts (in thousands) and ratios are presented below at June 30, 2011 and December 31, 2010:

																To Be Well-
																Capitalized Under
						Consent Order					For Capital					Prompt Corrective
	Actual					Requirement					Adequacy Purposes					Action Provisions
(Dollars in thousands)	Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio
June 30, 2011:
Total capital to risk-weighted assets
Premier Bank & Trust	$	16,773		15.6	%	$	14,263		13.25	%	$	8,612		8.0	%	$	10,765		10.0	%

Tier 1 capital to risk-weighted assets
Premier Bank & Trust		15,410		14.3	%	na		na				4,306		4.0	%		6,459		6.0	%

Tier 1 capital to average assets
Premier Bank & Trust		15,410		9.2	%	$	14,686		8.75	%		6,714		4.0	%		8,392		5.0	%

December 31, 2010:
Total capital to risk-weighted assets
Premier Bank & Trust	$	17,507		17.1	%	$	13,552		13.25	%	$	8,182		8.0	%	$	10,228		10.0	%

Tier 1 capital to risk-weighted assets
Premier Bank & Trust		16,207		15.8	%	na		na				4,091		4.0	%		6,137		6.0	%

Tier 1 capital to average assets
Premier Bank & Trust		16,207		9.6	%	$	14,716		8.75	%		6,727		4.0	%		8,409		5.0	%

Note 10 – Income Taxes

A valuation allowance of $5,513,716 at June 30, 2011 and $5,453,661 at December 31, 2010, was recorded to reduce the carrying amount of the Company’s net deferred tax assets to zero as a result of the Company’s net operating losses. As a result, income tax benefits related to net operating losses are not typically recorded. The amount of income tax expense or benefit allocated to operations is generally determined without regard to the tax effects of other categories of income or loss, such as other comprehensive income (loss). However, an exception to the general rule is provided when, in the presence of a valuation allowance against deferred tax assets, there is a pretax loss from operations and pretax income from other categories of comprehensive income (such as the appreciation in the market value of securities classified as available-for-sale) in the current period. In such instances, income from other categories offsets the current loss from operations, and the tax benefit of such offset is reflected in operations. The amount of the tax benefit recognized for the six months ending June 30, 2011 totaled $149,384 and was the result of the tax allocation in the current period between other comprehensive income and the deferred tax asset valuation allowance.

Internal Revenue Code section 382 places a limitation on the amount of taxable income that can be offset by net operating loss carryforwards after a change in control (generally greater than 50% change in ownership) of a loss corporation. Accordingly, utilization of net operating loss carryforwards may be subject to an annual limitation regarding their utilization against future taxable income upon change in control.

At February 19, 2010, a Stock Purchase Agreement between Ohio Legacy Corp and Excel Bancorp resulted in a section 382 limitation against pre-transaction Ohio Legacy Corp net operating loss carryforwards. The Company reduced the deferred tax asset related to NOL carryforwards and the valuation allowance by $1,367,000, of which $1,039,000 was reflected in 2010 and an additional $328,000 in the second quarter of 2011, based on actions taken in the quarter with the 2010 income tax return.

After the actions taken on the 2010 income tax return, as of December 31, 2010, after consideration of the reduction to pre-transaction net operating losses due to the section 382 limitation, the Company had net operating loss carryforwards of approximately $8,987,000 that will expire as follows: $1,419,000 on December 31, 2027, $132,000 on December 31, 2028, $1,694,000 on December 31, 2029, and $5,742,000 on December 31, 2030.

In addition, the Company has approximately $46,000 of alternative minimum tax credits that may be carried forward indefinitely.

Note 11 – Branch Sale Agreement

On June 23, 2011, the Bank entered into an Office Purchase and Assumption Agreement (the “Agreement”), with The Commercial and Savings Bank of Millersburg, Ohio (“CSB”), a wholly owned subsidiary of CSB Bancorp, Inc., that provides for the sale of certain assets and the transfer of certain liabilities relative to two Premier branches located in Wooster, Ohio. Under the terms of the Agreement, CSB will purchase certain assets of the branches at book value, including real estate, fixtures and equipment associated with the branch locations, and approximately $8.5 million in loans, while assuming the deposits associated with the branches (which are anticipated to be between $70 and $77 million) and a lease obligation associated with one of the acquired branch locations. New or recent loan production generated in these offices until the transaction closes may also be sold to CSB, subject to their credit approval. CSB will pay a premium of 5% based on the average amount of assumed deposits during a specified period prior to the closing, with a minimum premium of $3.5 million and a maximum premium of $3.85 million.

The transaction, which is subject to regulatory approvals and certain closing conditions, is expected to be completed during the fourth quarter of 2011. The Company intends to fund the transaction from operating liquidity, cash flow from the securities portfolio including the sale of selected securities, and advances from the Federal Home Loan Bank. The carrying values of assets and liabilities in the Disposal Groups as of June 30, 2011 were as follows:

Assets:
Loans, net	$	9,427,832
Premises and equipment, net		1,049,062
Total assets to be disposed of through branch sale	$	10,476,894

Liabilities:
Deposits
Noninterest-bearing demand	$	9,232,812
Interest-bearing demand		9,034,066
Savings		29,136,061
Certificates of deposit		32,788,498
Total deposits (1)		80,191,437
Repurchase agreements (1)		562,125
Capital lease obligation		386,584
Total liabilities to be disposed of through branch sale	$	81,140,146

(1)

The Agreement limits the maximum amount of deposits and other borrowings subject to acquisition to $77 million.

Item 2. Management’s Discussion and Analysis.

In the following section, management presents an analysis of Ohio Legacy Corp's financial condition as of June 30, 2011, and results of operations as of and for the three and six months ended June 30, 2011 and 2010. This discussion is provided to give shareholders a more comprehensive review of the issues facing management than could be obtained from an examination of the financial statements alone. This analysis should be read in conjunction with the consolidated financial statements and the accompanying notes included in this Form 10-Q and the Company’s annual report on Form 10-K for the year ended December 31, 2010.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This Form 10-Q, including Management’s Discussion and Analysis of Financial Condition and Results of Operations, includes “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act which can be identified by the use of forward-looking terminology, such as “may,” “might,” “could,” “would,” “believe,” “expect,” “intend,” “plan,” “seek,” “anticipate,” “estimate,” “project,” or “continue” or the negative version of such terms or comparable terminology. All statements other than statements of historical fact included in this Form 10-Q, including statements regarding our outlook, financial position, results of operation, liquidity, capital resources and interest rate sensitivity are forward-looking statements.

The Private Securities Litigation Reform Act provides a “safe harbor” for forward-looking statements to encourage companies to provide prospective information so long as those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those discussed in the forward-looking statements. We desire to take advantage of the “safe harbor” provisions of that Act.

Forward-looking statements speak only as of the date on which they are made and, except as may be required by law, we undertake no obligation to update any forward-looking statement to reflect events or circumstances occurring after the date on which the statement is made.

Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause our actual results to be materially different from any future results expressed or implied by such forward-looking statements. Although we believe the assumptions, judgments and expectations reflected in such forward-looking statements are reasonable, we can give no assurance such assumptions, judgments and expectations will prove to have been correct. Important factors that could cause actual results to differ materially from those in the forward-looking statements included in this Form 10-Q include, but are not limited to:

competition in the industry and markets in which we operate;

rapid changes in technology affecting the financial services industry;

changes in government regulation;

general economic and business conditions;

changes in industry conditions created by state and federal legislation and regulations;

changes in general interest rates and the impact of future interest rate changes on our profitability, capital adequacy and the fair value of our financial assets and liabilities;

our ability to retain existing customers and attract new customers;

our development of new products and services and their success in the marketplace;

the adequacy of our allowance for loan losses; and

our anticipated loan and deposit account growth, expense levels, liquidity and capital resources and projections of earnings.

OVERVIEW OF STRATEGIC DEVELOPMENTS

During June 2011, Premier Bank & Trust entered into an agreement with The Commercial and Savings Bank of Millersburg, Ohio (“CSB”), a wholly owned subsidiary of CSB Bancorp, Inc., to sell certain assets and transfer certain liabilities relative to two bank branches located in Wooster, Ohio. Under the terms of the Agreement, CSB will purchase certain assets of the branches at book value, including real estate, fixtures and equipment associated with the branch locations, and approximately $8.5 million in loans, while assuming the deposits associated with the branches (which are anticipated to be between $70 and $77 million) and a lease obligation associated with one of the acquired branch locations. CSB will pay a premium of 5% based on the average amount of assumed deposits during a specified period prior to the closing, with a minimum premium of $3.5 million and a maximum premium of $3.85 million. The transaction, which is subject to regulatory approvals and certain closing conditions, is expected to be completed during the fourth quarter of 2011. This transaction positions the Company to focus on our core market of Stark County, Ohio, and provides future expansion potential.

The following key factors summarize the Company’s financial condition at June 30, 2011 compared to December 31, 2010:

Total assets increased $4.7 million to $175.3 million from $170.6 million.

Assets and liabilities associated with the branch sale to CSB were segregated on the Consolidated Balance Sheets as of June 30, 2011, reflecting the intention of the Company to dispose of these assets and liabilities through the branch sale. These assets and liabilities are collectively referred to as the “Disposal Group”.

Liquidity remained high with cash and cash equivalents increasing $12.5 million to $45.2 million. Liquidity is expected to increase as the Company prepares to sell the deposits associated with two branch offices (estimated deposits ranging from $70 million to $77 million) and $9.4 million in loans during the fourth quarter of 2011.

Net loans decreased $7.6 million to $93.5 million due to the reclassification of $9.4 million in loans identified for the branch sale. Excluding this reclassification, total loans increased $1.8 million to $102.9 million.

Total deposits decreased $69.6 million to $73.7 million due to the reclassification of $80.2 million in deposits identified for the branch sale. Excluding this reclassification, total deposits increased $10.7 million from $143.2 million to $153.9 million. Depositors continued the trend toward investing in money market fund and savings deposit balances and reducing time deposit balances.

Debt with the Federal Home Loan Bank totaling $5 million was repaid.

Total shareholders’ equity decreased $315,000 from $16.5 million to $16.2 million principally due to the operating loss recorded by the Company for the six months ending June 30, 2011.

The Bank’s capital ratios exceeded the minimum ratios required by the Consent Order;

The following key factors summarize our results of operations for the six months ending June 30, 2011:

The Company incurred a net loss of $707,511 in 2011 compared to a loss of $1,910,358 for the same period in 2010.

Net interest income improved $97,975 in 2011 compared to the same period in 2010.

The Company reduced its allowance for loan loss through a negative loan loss provision of $26,195 in 2011 compared to a negative loan loss provision of $146,707 for the same period in 2010.

Noninterest income increased $523,407. Trust and brokerage services fee income increased $327,690—the largest contributor toward this increase. Trust and brokerage services were new services offered by the Company during the second quarter of 2010.

Noninterest expense decreased by $552,593 principally due to the absence of investor expenses of $517,222 recorded in the first quarter of 2010 in connection with the assignment of promissory notes from Excel Financial to the Company in connection with the assignment of the Stock Purchase Agreement to Excel Bancorp by Excel Financial.

The following forward-looking statements describe our near term outlook:

Assets are expected to decrease and capital will increase during the fourth quarter of 2011 due to the sale of deposits associated with two branch offices in Wayne County, Ohio, announced in June 2011;

Liquidity will increase until the closing of the transaction involving the sale of the Wayne County branch offices is complete during the fourth quarter of 2011;

Credit quality is expected to remain a primary focus of the Company, and costs associated with credit administration and collection efforts will remain high;

Commercial lending, with an emphasis on commercial and industrial lending, and new services in trust, brokerage and wealth management are expected to expand;

Operating expenses associated with the change in management during 2010 and new services are expected to be higher than the historical compensation costs at the Company;

The Bank’s costs associated with its regulatory risk profile including FDIC insurance and regulatory examination costs will remain high until asset quality and earnings improve.

CRITICAL ACCOUNTING POLICIES

The preparation of consolidated financial statements and related disclosures in accordance with U.S. generally accepted accounting principles requires us to make judgments, assumptions and estimates at a specific point in time that affect the amounts reported in the accompanying consolidated financial statements and related notes. In preparing these financial statements, we have utilized available information including our past history, industry standards and the current economic environment, among other factors, in forming our estimates and judgments of certain amounts included in the consolidated financial statements, giving due consideration to materiality. It is possible that the ultimate outcome as anticipated by management in formulating our estimates inherent in these financial statements may not materialize. Application of the critical accounting policies described below involves the exercise of judgment and the use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates. In addition, other companies may utilize different estimates, which may impact the comparability of our results of operation to similar businesses.

Allowance for loan losses . The allowance for loan losses is a valuation allowance for probable incurred credit losses, increased by the provision for loan losses and recoveries, and decreased by charge-offs. We estimate the allowance balance by considering the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in our judgment, should be charged off. Loan losses are charged against the allowance when we believe the loan balance cannot be collected.

We consider various factors, including portfolio risk, economic environment and loan delinquencies, when determining the level of the provision for loan losses. We monitor loan quality monthly and use an independent third party each quarter to review our loan grading system.

Valuation allowance for deferred tax assets . Another critical accounting policy relates to valuation of the deferred tax asset for net operating losses. Net operating loss carryforwards of approximately $8,022,000 will expire as follows: $1,419,000 on December 31, 2027, $132,000 on December 31, 2028, $1,694,000 on December 31, 2029, and $4,777,000 on December 31, 2030. A valuation allowance has been recorded for the related deferred tax asset for these carryforwards and other net deferred tax assets recorded by the Company to reduce the carrying amount of these assets to zero. Additional information is included in Note 10 to our consolidated financial statements.

FINANCIAL CONDITION – June 30, 2011 compared to December 31, 2010

Assets. At June 30, 2011, total assets increased to $175.3 million, up $4.7 million from $170.6 million at December 31, 2010. The asset increase was principally due to an increase in deposits of $10.6 million (including deposits in the Disposal Group) which was partially offset by the repayment from operating liquidity of Federal Home Loan Bank advances totaling $5 million during the first quarter of 2011.

Cash and Cash Equivalents . Cash and cash equivalents increased to $45.2 million at June 30, 2011, up $12.5 million from $32.7 million at year-end 2010. The increase in cash was due to proceeds received from sales and calls of securities available for sale that were not reinvested and proceeds from an increase in deposits. The sale of deposits associated with two branch offices in Wayne County, Ohio will require a substantial use of cash when the transaction closes in the fourth quarter of 2011.

Securities. Total securities available for sale had an estimated fair value of $18.6 million at June 30, 2011, compared to $25.2 million at year-end 2010. Sales of securities available for sale totaled $5.0 million and maturities, calls and principal repayments totaled $7.8 million. Securities sales consisted principally of GNMA mortgage-backed securities issued in 2009 with an original term of 30 years and a coupon rate of 4.5%. These securities were sold as a defensive move to reduce the market price sensitivity of the portfolio to rising interest rates. The net unrealized gain on the securities portfolio was $797,592 at June 30, 2011 compared to a net unrealized gain of $358,225 at December 31, 2010. At June 30, 2011, the Company reclassified its municipal securities portfolio from the held-to-maturity classification to the available-for-sale sale classification, since it no longer intends to hold these securities to maturity. Management expects to sell the municipal securities to provide additional liquidity for the sale of deposits associated with the Wayne County branches.

Loans and Asset Quality . Total loans, net of the allowance for loan loss and deferred loan fees, decreased $7.6 million to $93.5 million due to the reclassification of $9.4 million in loans identified for the branch sale. Excluding this reclassification, total loans, net of the allowance for loan loss and deferred loan fees, increased $1.8 million at June 30, 2011.

Loans classified by management as special mention, substandard, doubtful and not deemed impaired represented 8.5% of total loans at June 30, 2011, compared to 12.5% at December 31, 2010. Impaired loans represented 2.6% of total loans at June 30, 2011, and totaled $2,531,359, down $877,883 from year-end 2010. Loan balances classified as special mention or substandard that are included in the Disposal Group total approximately $2.3 million. Improving asset quality continues to be a prime objective for management. Aside from this pending sale, outstanding loan balances are expected to increase over the remainder of the year through business development efforts. However expected loan growth may be constrained by continued economic weakness in the markets served by the Company.

Allowance for loan losses. The balance of the allowance for loan loss at June 30, 2011, was $2,329,745 excluding the portion of the allowance allocated to loans in the Disposal Group compared to $3,055,766 at year-end 2010. For the six months ending June 30, 2011, the allowance for loan loss was reduced by a negative loan loss provision of $26,195. Recoveries on loans previously charged-off totaled $49,979. The amount of the allowance for loan loss is based on a combination of actual experiential factors such as historical losses for each category of loans, information about specific borrowers, and other factors, including delinquencies, general economic conditions and the outlook for specific industries, which are more subjective in nature.

The reduction to the allowance is directionally consistent with the trends in the criticized loan portfolio. Criticized loans decreased as a result of loan risk upgrades on specific loans and principal reductions from payments. Another contributing factor was a decrease in the historical loss percentages. These loss rates were updated to reflect the most recent three years of loss experience. The loss rate for special mention and substandard loans for the first two quarters in 2011 (added to the loss experience calculation during the quarter) were lower than the loss experience for the first two quarters of 2008 that were eliminated from the calculation.

The general allowance allocated to loans not classified by management totaled 1.78% of non-classified loans at June 30, 2011, compared to 1.90% at year-end 2010. As a percentage of total loans, the allowance decreased to 2.43% at June 30, 2011, compared to 2.93% at year-end 2010. The allowance for loan loss as a percentage of loans not individually identified as impaired and that excludes the amount of the allowance specifically allocated to impaired loans totaled 2.45% at June 30, 2011, compared to 3.02% at year-end 2010. Specific allocations of the allowance for impaired loans increased to $39,701 at June 30, 2011 compared to $6,435 at year-end 2010.

Assets acquired in settlement of loans. These assets include other real estate owned (“OREO”) and an interest in a limited liability company acquired during 2010 that owns the real estate and operations of an indoor waterpark and resort obtained through a U.S. Bankruptcy Code 363 sale. The limited liability company was formed by the lead bank for the banks participating in the project financing to acquire title to the real estate, conduct the operation of the facility, and market the real estate and the operations of the business for sale. The carrying value of its interest is $1.3 million and is based upon the estimated fair value of the real estate less costs to sell.

Other real estate owned consisted of nine properties and totaled $1.3 million at June 30, 2011 compared to $1.0 million at year-end 2010. One property was sold for a loss of $35,299, and three properties with an estimated value of $466,000 were transferred to OREO during 2011.

Deposits. Total deposits increased $10.6 million to $153.9 million at June 30, 2011, compared to year-end 2010. Core deposits increased to $102.1 million at June 30, 2011, compared to $89.6 million at year-end 2010. Certificates of deposit decreased to $51.8 million from $53.6 million at December 31, 2010. The decrease in certificates of deposit was largely the result of promotional certificates renewing without reinvestment into currently offered certificate of deposit products. Interest-bearing deposit funds have tended to migrate into money market funds as customers anticipate higher interest rates in the near term reflecting an unwillingness to lengthen deposit maturities.

Federal Home Loan Bank Advances. Debt remaining from the Federal Home Loan Bank was repaid during the first quarter of 2011. The weighted average interest rate on $5.0 million in matured advances was 2.43%. The advances were repaid from excess operating liquidity.

Shareholders’ Equity. Shareholders’ Equity decreased $315,000 to $16.2 million at June 30, 2011. The decrease was due to the operating loss of $708,000 incurred for the six months of 2011. Stock-based compensation expense of $103,000 increased equity as well as $290,000 in other comprehensive income related to the appreciation in market value of securities available for sale including the impact of the reclassification of securities to the available-for-sale classification from the held-to-maturity classification.

RESULTS OF OPERATIONS – THREE MONTHS ENDED JUNE 30, 2011

The net loss for the three months ending June 30, 2011, totaled $238,944 or a loss of $0.01 per diluted share compared to a net loss of $580,668, or $0.03 per diluted share during the second quarter of 2010. Average diluted shares outstanding were unchanged at 19,714,564 shares for the second quarter of 2011 compared to the same quarter of 2010.

The following table sets forth information relating to the average balance sheet and reflects the average yield on interest-earning assets and the average cost of interest-bearing liabilities for the periods indicated. These yields and costs are derived by dividing income or expense, on an annualized basis, by the average balances of interest-earning assets or interest-bearing liabilities for the periods presented.

	Three Months Ended June 30,
	2011							2010
(Dollars in Thousands)	Average Balance		Interest Earned/ Paid		Yield/ Rate			Average Balance		Interest Earned/ Paid		Yield/ Rate
Assets
Interest-earning assets:
Interest-bearing deposits in
other financial institutions and federal funds sold	$	39,395	$	22		0.23	%	$	35,517	$	20		0.22	%
Securities available for sale		16,458		122		2.96	%		26,795		249		3.72	%
Securities held to maturity		1,877		18		3.89	%		2,996		29		3.82	%
Federal agency stock		1,518		19		4.95	%		1,477		18		4.95	%
Loans (1)		101,246		1,351		5.35	%		94,711		1,488		6.30	%
Total interest-earning assets		160,494		1,532		3.83	%		161,496		1,804		4.48	%
Noninterest-earning assets		8,064							10,494
Total assets	$	168,558						$	171,990

Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing demand deposits	$	10,012	$	7		0.31	%	$	9,039	$	15		0.68	%
Savings accounts		12,580		11		0.34	%		16,445		36		0.87	%
Money market accounts		51,069		74		0.58	%		42,587		94		0.89	%
Certificates of deposit		51,730		188		1.46	%		56,769		344		2.43	%
Total interest-bearing deposits		125,391		280		0.90	%		124,840		489		1.57	%
Other Borrowings		3,796		18		1.95	%		12,438		89		2.88	%
Total Interest-bearing liabilities		129,187		298		0.93	%		137,278		578		1.69	%
Noninterest-bearing demand deposits		22,599							15,926
Noninterest-bearing liabilities		698							914
Total liabilities		152,484							154,118
Shareholders' equity		16,075							17,872
Total liabilities and
shareholders' equity	$	168,559						$	171,990

Net interest income; interest rate spread (2)			$	1,234		2.90	%			$	1,226		2.79	%
Net earning assets	$	31,307						$	24,218
Net interest margin (3)						3.08	%						3.05	%

Average interest-earning assets to interest-bearing liabilities		1.2		X					1.2		X

(1)	Net of net deferred loan fees and costs and loans in process. Non-accrual loans are reported in non-interest earning assets in this table.

(2)	Interest rate spread represents the difference between the yield on interest earning assets and the cost of interest bearing liabilities.

(3)	Net interest margin represents net interest income, annualized, divided by average interest-earning assets.

Net interest income. For the three months ending June 30, 2010, net interest income was $1,233,697, up $7,838 from same period in 2010 while total interest earning assets were down by $1.0 million. The yield on earning assets declined 0.65% to 3.83% for the second quarter of 2011 from 4.48% for the comparable period of 2010. The yield on interest-bearing liabilities declined 0.76% to 0.93% for the second quarter of 2011 from 1.69% for the same period in 2010. The net interest margin increased to 3.08% from 3.05%.

Interest Income. Total interest income for the second quarter of 2011 was $1.5 million, down from $1.8 million for the second quarter of 2010. A low interest rate environment combined with a larger allocation of funds to liquid assets or securities with a shorter duration contributed to lower interest income levels. Average balances in funds invested in interest-bearing deposits and federal funds sold increased to $39.4 million during the second quarter of 2011 compared to $35.5 million during the second quarter of 2010. Although average loan balances increased $6.5 million in the quarter to quarter comparison, the yield on loans decreased from 6.30% to 5.35% resulting in a reduction in loan interest of $137,000.

Interest expense. Interest on deposits declined $208,399 to $280,308 for the second quarter of 2011 compared to the same period in 2010. The average rate paid on interest-bearing deposits dropped 0.67% to 0.90%. Interest expense related to other borrowings including Federal Home Loan Bank advances declined by $70,972.

Provision for Loan Loss. A negative loan loss provision totaling $49,967 was recorded during the second quarter of 2011, compared to a negative loan loss provision of $223,479 for the same quarter last year; negative loan loss provisions provide a positive contribution to net income. The provision for loan loss will fluctuate based on management’s evaluation of the credit within the loan portfolio, changes in credit loss experience factors, and incurred losses in the loan portfolio during the period. See also the discussion above for the Allowance for Loan Losses.

Noninterest income. Noninterest income increased $368,833 to $372,460 for the second quarter of 2011 compared to $3,627 for the same quarter of 2010. The increase was driven by an increase in trust and brokerage fees and no negative impact to second quarter 2011 results for losses related to other real estate owned.

The Bank’s trust department and brokerage business generated $179,212 in gross fees during the second quarter of 2011, up from $17,361 for the comparative quarter of 2010. These services, newly introduced during the second quarter of 2010, garnered assets under management in excess of $100 million in 2011.

Service charges and other fees declined $36,489, to $152,589 for the second quarter of 2011 compared to the same period of 2010. The decline was due to lower overdraft fee income which decreased by approximately $38,000.

No gains or losses were realized on the sale of securities during the second quarter of 2011. Gains on the sale of securities available of sale resulted in revenue of $31,229 in the second quarter of 2010. However, these gains were more than offset by an “other-than-temporary” impairment charge on FNMA and FHLMC preferred stock totaling $47,200 also recorded in the second quarter of 2010.

Gains on sale of loans increased by $19,629 to $21,493 for the second quarter of 2011 compared to the same quarter of 2010. Low mortgage rates prevailed during the first half of 2011 contributing to a pickup in mortgage activity.

No losses were recorded on the disposition of other real estate owned during the second quarter of 2011, a substantial improvement over a net loss of $201,168 recorded during the second quarter of 2010 that included a direct write-down in the value of OREO for two properties totaling $219,797.

Noninterest expense. Noninterest expense increased $10,819 to $2,044,452 for the second quarter of 2011 compared to $2,033,633 for the second quarter of 2010. The significant changes are detailed below.

Salaries and benefits increased $137,976 to $1,035,359 for the second quarter of 2011 compared to $897,383 for the same period of 2010. Since the change of control in February 2010, Management has increased staff significantly in support of lending, trust and brokerage, branch management, and human resources. Benefits expense recorded during the second quarter of 2011 also included $51,650 in expense associated with incentive stock options granted during the last half of 2010.

Occupancy and equipment costs increased $15,555 to $249,829 for the second quarter of 2011. Increases in rent, property taxes and utilities were incurred while building repairs and maintenance costs declined.

Professional fees, including legal, accounting and other consulting expense, increased $19,785 to $164,257 for the second quarter of 2011. The Company outsourced its internal audit function contributing to the increase in this expense. Legal expense also increased over the comparative quarter. Partially offsetting these increases was a reduction in the Bank’s supervisory examination costs and a reduction in the cost for outside consultants.

Franchise tax increased $46,000 to $52,500 for the second quarter of 2011. Ohio franchise tax for financial institutions for the current year is based on the Bank’s net worth on the last day of the prior calendar year end; higher capital levels at year-end 2010 compared to year-end 2009 resulted in higher costs for 2011.

Data processing charges include costs for internet banking, core systems data processing and courier charges. This expense category increased $11,708 to $181,879 principally driven by the costs associated with core processing which is largely driven by transaction volumes.

Marketing costs were down $13,558 for the second quarter of 2011 to $16,410. This reduction is attributed to the difference in the timing when costs are incurred. General marketing costs for 2011, except for costs incurred related to the Bank’s name change in 2010, are expected to be similar to the costs incurred in 2010.

Other expenses decreased $201,262 during the second quarter of 2011 compared to the same period in 2010. Loan-related expense decreased $126,373 and other real estate owned expenses decreased $53,415 contributing to this cost savings.

RESULTS OF OPERATIONS – SIX MONTHS ENDED JUNE 30, 2011

The net loss for the six months ending June 30, 2011, totaled $707,511, or a loss of $0.04 per diluted share compared to a net loss of $1,910,358, or $0.13 per diluted share during the same period of 2010. Average diluted shares outstanding were 19,714,564 shares for the six months ending June 30, 2011, compared to average diluted shares of 14,976,995 for the comparative prior year period. During February 2010, 17.5 million shares were issued in connection with a common stock offering.

	Six Months Ended June 30,
	2011							2010
(Dollars in Thousands)	Average Balance		Interest Earned/ Paid		Yield/ Rate			Average Balance		Interest Earned/ Paid		Yield/ Rate
Assets
Interest-earning assets:
Interest-bearing deposits in
other financial institutions and federal funds sold	$	35,851	$	40		0.23	%	$	31,584	$	32		0.21	%
Securities available for sale		19,397		270		2.78	%		26,667		509		3.82	%
Securities held to maturity		2,347		45		3.87	%		2,997		57		3.82	%
Federal agency stock		1,537		38		5.00	%		1,372		34		4.89	%
Loans (1)		100,996		2,746		5.48	%		95,851		2,992		6.30	%
Total interest-earning assets		160,128		3,139		3.95	%		158,471	$	3,624		4.61	%
Noninterest-earning assets		8,184							10,461
Total assets	$	168,312						$	168,932

	Six Months Ended June 30,
	2011							2010
(Dollars in Thousands)	Average Balance		Interest Earned/ Paid		Yield/ Rate			Average Balance		Interest Earned/ Paid		Yield/ Rate
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing demand deposits	$	9,667	$	15		0.31	%	$	9,287	$	31		0.67	%
Savings accounts		13,564		26		0.39	%		16,662		73		0.88	%
Money market accounts		49,493		154		0.63	%		41,338		180		0.88	%
Certificates of deposit		51,873		411		1.60	%		56,869		724		2.57	%
Total interest-bearing deposits		124,597		606		0.98	%		124,156		1,008		1.64	%
Other Borrowings		5,045		51		2.03	%		14,482		232		3.21	%
Total Interest-bearing liabilities		129,642		657		1.02	%		138,638	$	1,240		1.80	%
Noninterest-bearing demand deposits		21,692							15,623
Noninterest-bearing liabilities		790							865
Total liabilities		152,124							155,127
Shareholders' equity		16,188							13,805
Total liabilities and
shareholders' equity	$	168,312						$	168,932

Net interest income; interest rate spread (2)			$	2,482		2.90	%			$	2,384		2.81	%
Net earning assets	$	30,486						$	19,833
Net interest margin (3)						3.13	%						3.04	%

Average interest-earning assets to interest-bearing liabilities		1.2		X					1.1		X

(1)	Net of net deferred loan fees and costs and loans in process. Non-accrual loans are reported in non-interest earning assets in this table.

(2)	Interest rate spread represents the difference between the yield on interest earning assets and the cost of interest bearing liabilities.

(3)	Net interest margin represents net interest income, annualized, divided by average interest-earning assets.

Net interest income . For the six months ended June 30, 2011, net interest income was $2.5 million, up $97,975 from the same period in 2010. Total interest and dividend income decreased $485,315. This decrease in revenue was offset by a decrease of $583,290 in total interest expense. The net interest margin improved to 3.13% from 3.04%.

Interest income . Interest income decreased by $485,315 for the first half of 2011 compared to 2010. The average balance of funds invested in interest-bearing deposits and federal funds sold increased by $4.3 million to $35.9 million representing 22.4% of earning asset balances and yielded 0.23% during the first half of 2011. Lower yields on the investment and loan portfolios contributed about $527,000 to the decline in interest income. The average balance of the investment portfolio decreased $7.9 million contributing about $150,000 to the decline in interest income. The average loan balances increased by $5.1 million contributing about $161,000 in interest income partially offsetting the reductions to interest income.

Interest expense . A sustained low interest rate environment was evident in the decline in the Company’s cost of interest-bearing liabilities to 1.02% from 1.80% for the first half of 2011. The cost of every funding category declined. The volume of average interest-bearing liabilities declined $9.0 million. The average balances of certificates of deposit balances declined $5.0 million and borrowings declined $9.4 million, while money market balances increased $8.2 million. Advances owed to the Federal Home Loan Bank totaling $5.0 million were repaid during 2011.

Provision for loan losses . A negative loan loss provision totaling $26,195 was recorded for the six months ended June 30, 2011; this had a positive effect on earnings. During the same period of 2010, the Company recorded a negative loan loss provision of $146,707. The provision for loan loss will fluctuate based on management’s evaluation of the credits within the loan portfolio, changes in credit loss experience factors, and incurred losses in the loan portfolio during the period. See also the discussion above for the Allowance for Loan Losses.

Noninterest income . Noninterest income increased to $724,815 for the first six months of 2011 from $201,408 for the same period in 2010. Significant changes to the components of noninterest income for the six months ended June 30, 2011 compared to June 30, 2010 are discussed below.

The Bank’s trust department and brokerage business generated $345,051 in gross fees during the first six months of 2011, up from $17,361 for the comparative period of 2010.

Service charges and other fees declined $52,726 to $305,782 for the 2011 period compared to the 2010. The decline was due to lower overdraft fee income which decreased by approximately $58,000, and reflects a shift in customer behavior.

Gains on sale of securities available of sale resulted in revenue of $32,999 for the 2011 period also contributing to the increase in total noninterest income. Securities sold included $4.9 million of 30 year GNMA mortgage-backed securities issued during 2009. These securities were sold to reduce the price sensitivity of the Bank’s securities portfolio in a rising interest rate environment. Gains on the sale of securities available of sale resulted in revenue of $31,229 in the 2010 period. However, these gains were more than offset by an “other-than-temporary” impairment charge on FNMA and FHLMC preferred stock totaling $47,200.

Gains on sale of loans increased $42,912 to $48,240 for the 2011 period. Low mortgage rates prevailed during the first half of 2011 contributing to a pickup in mortgage activity, and home purchase activity has recently begun to improve in the Bank’s market area.

Net losses recorded on the disposition of other real estate owned during the 2011 period totaled $35,299 for one property compared to net losses of $189,624 for the 2010 period when direct write-downs in the value of OREO for two properties totaled $219,797 which were partially offset by a gain of $30,173 on the sale of eleven properties.

Noninterest expense. Total noninterest expense decreased $552,593 to $4.1 million compared to $4.6 million for the first half of the prior year. In 2010, substantial costs were incurred related to the change in ownership control and subsequent change in management. The Company recorded investor expenses of $517,222 in February 2010 in connection with the assignment of promissory notes from Excel Financial to the Company in connection with the assignment of the Stock Purchase Agreement to Excel Bancorp by Excel Financial. The investor expenses represent expenses incurred in connection with the pursuit of an acquisition of a financial institution and development of fiduciary services in connection with an acquisition. Other changes comparing the first six months of 2011 to the same period of 2010 are described below.

Compensation costs increased $213,664 to $2,080,910 for the first half of 2011. Benefits cost for the first half of 2011 included $102,744 in expense associated with incentive stock options that were granted during the last half of 2010. Salaries and benefits for the asset management business increased $143,938 for the first half of 2011 compared to the same period in 2010 based on a full six months of operation in 2011 compared to partial year operations in the prior period. A position for loan workout, previously outsourced to a consultant in 2010, was eliminated and replaced with internal staffing resulting in a net cost savings for the Company. Salaries expense for the first six months of 2010 included incentive payments totaling $153,000 paid to newly hired management. Salaries and benefits expense also included salary continuation for terminated staff totaling $39,993 and for departing executive management totaling $85,569. New positions were added during 2010 in trust and investment services, credit administration, and other departments within the Company.

Occupancy and equipment costs increased $46,692 for the first half of 2011. Increases in costs were incurred for rent, property taxes, insurance and depreciation expense. The increase related to opening a new trust and investment office in St. Clairsville, Ohio, in February 2010, was approximately $8,000.

Professional fees decreased $117,411 for the first half of 2011. These costs include legal, accounting and auditing, regulatory examination and consulting fees. The costs in each of these areas were lower in 2011 except for accounting and auditing fees; the internal audit and loan review functions were outsourced to CPA firms with practices in these fields resulting in this increase. Consulting fees of $140,000 were paid to Excel Financial for the period prior to closing the stock offering during the first half of 2010; no costs were incurred from Excel Financial during the first half of 2011.

Franchise tax increased $90,750 to $106,300 for the first half of 2011. Ohio franchise tax for financial institutions for the current year is based on the Bank’s net worth on the last day of the prior calendar year end; higher capital levels at year-end 2010 compared to year-end 2009 resulted in higher costs for 2011.

Data processing expense increased $38,997 to $361,874 for the first half of 2011. This cost is largely driven by transaction volumes, and costs for core processing increased $24,694 in 2011 compared to 2010. Internet banking costs increased $12,934.

Marketing and advertising expense decreased $55,696 to $39,359 for the first half of 2011. Most of this decrease relates to the absence of expense in 2011 associated with a name change for the Bank in 2010. During the first quarter of 2010, the Board of Directors of the Bank approved changing the name of the Bank to Premier Bank & Trust, National Association. The Bank opted to include “Trust” in its name in connection with obtaining fiduciary powers from the Office of the Comptroller of the Currency. The Bank also expects to conduct trust services in several states. Costs associated with the name change in 2010 were approximately $47,000 and included logo design, the reissuance of credit and debit cards, and promotional materials.

Deposit expense and insurance fees decreased $86,870 to $207,748 for the first half of 2011. An improvement in the Bank’s risk rating for FDIC insurance based partly on higher capital levels following the common stock issuance in February 2010 contributed to a reduction in deposit insurance expense totaling $78,261 for 2011.

Other expenses decreased $160,940 to $464,099 for the first half of 2011. Loan expenses declined by $100,474 and OREO related expenses decreased $71,380. These savings were partially offset by increases in other miscellaneous expenses.

CONTRACTUAL OBLIGATIONS, COMMITMENTS, CONTINGENT LIABILITIES AND OFF-BALANCE SHEET ARRANGEMENTS

On June 23, 2011, the Bank entered into an Office Purchase and Assumption Agreement (the “Agreement”), with The Commercial and Savings Bank of Millersburg, Ohio (“CSB”), a wholly owned subsidiary of CSB Bancorp, Inc., that provides for the sale of certain assets and the transfer of certain liabilities relative to two Premier branches located in Wooster, Ohio. Under the terms of the Agreement, CSB will purchase certain assets of the branches at book value, including real estate, fixtures and equipment associated with the branch locations, and approximately $8.5 million in loans, while assuming the deposits associated with the branches (which are anticipated to be between $70 and $77 million) and a lease obligation associated with one of the acquired branch locations. CSB will pay a premium of 5% based on the average amount of assumed deposits during a specified period prior to the closing, with a minimum premium of $3.5 million and a maximum premium of $3.85 million. The transaction, which is subject to regulatory approvals and certain closing conditions, is expected to be completed during the fourth quarter of 2011. A copy of the Agreement is filed as Exhibit 10.11.

At June 30, 2011, the Company had no active unconsolidated, related special purpose entities, nor did the Company engage in derivatives and hedging contracts, such as interest rate swaps, that may expose the Company to liabilities greater than the amounts recorded on the consolidated balance sheet. The investment policy prohibits engaging in derivatives contracts for speculative trading purposes; however, the Company may pursue certain contracts, such as interest rate swaps, to execute a sound and defensive interest rate risk management policy.

LIQUIDITY

Liquidity refers to our ability to fund loan demand and customers’ deposit withdrawal needs and to meet other commitments and contingencies. The purpose of liquidity management is to ensure sufficient cash flow to meet all of our financial commitments and to capitalize on opportunities for business expansion in the context of managing the Company’s interest rate risk exposure. This ability depends on our financial strength, asset quality and the types of deposit and loan instruments we offer to our customers.

Our principal sources of funds are deposits, loan and security repayments, maturities and sales of securities, borrowings from the FHLB and capital transactions. Alternative sources of funds include repurchase agreements and brokered certificates of deposit and the sale of loans. We are currently prohibited from using brokered certificates of deposit while operating under the terms of the Consent Agreement. While scheduled loan repayments and maturing investments are relatively predictable, deposit flows and early loan and security prepayments are more influenced by interest rates, general economic conditions and competition. We maintain investments in liquid assets based upon our assessment of our need for funds, our expected deposit flows, yields available on short-term liquid assets and the objectives of our asset/liability management program.

We have implemented a liquidity contingency funding plan that identifies liquidity thresholds and red flags that may provide evidence of an impending liquidity crisis. Additionally, the liquidity contingency plan details specific actions to be taken by management and the Board of Directors and identifies sources of emergency liquidity, both asset and liability-based, should we encounter a liquidity crisis. We actively monitor our liquidity position and analyze various scenarios that could impact our ability to access emergency funding in conjunction with our asset/liability and interest rate risk management activities.

The Consolidated Statement of Cash Flows provides details on sources and uses of cash for the six months ending June 30. Cash and cash equivalents increased $12.5 million to $45.2 million at June 30, 2011 since year-end 2010 and are expected to continue to increase in anticipation of the closing of the sale of deposits associated with two branch offices in Wayne County, Ohio. This transaction is expected to use between $57 million and $64 million in liquidity and is expected to fund through current liquidity, cash flow and sales from the investment portfolio, deposit gathering and borrowings at the Federal Home Loan Bank.

CAPITAL RESOURCES

Total shareholders’ equity was $16.2 million at June 30, 2011, a decrease of $315,000 from the prior year-end balance. The decrease in equity was primarily due to the net loss of $708,000 incurred by the Company for the first half of 2011. Stock-based compensation expense of $103,000 increased equity as well as $290,000 in other comprehensive income related to the appreciation in market value of securities available for sale including the impact of the reclassification of securities to the available-for-sale classification from the held-to-maturity classification.

The Bank is subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and prompt corrective action regulations involve quantitative measures of assets, liabilities and certain off-balance sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized, although these terms are not used to represent overall financial condition. Failure to meet capital requirements can initiate regulatory action. At June 30, 2011, the Bank was adequately capitalized under the provisions of prompt corrective action. Until the Consent Order is terminated, the Bank cannot be classified as well-capitalized even though its capital ratios meet the minimum capital requirements of a well capitalized institution. See Note 9 for more information regarding the Consent Order, the regulatory capital requirements for the Bank, and the Bank’s capital ratios as of June 30, 2011.

The payment of dividends by the Bank to the Company and by the Company to shareholders is subject to restrictions by regulatory agencies. These restrictions generally limit dividends to the sum of the current year’s earnings and the prior two years’ retained earnings, as defined. In addition, dividends may not reduce capital levels below the minimum regulatory requirements as described above. The Bank cannot declare dividends without prior approval from the Comptroller of the Currency in 2011.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Not applicable for Smaller Reporting Companies.

Item 4T. Controls and Procedures

As of June 30, 2011, an evaluation was conducted under the supervision and with the participation of the Company’s management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended). Based on their evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. There was no change in the Company’s internal control over financial reporting that occurred during the Company’s second fiscal quarter ended June 30, 2011, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings.

There are no matters required to be reported under this item.

Item 1A. Risk Factors

Not applicable for Smaller Reporting Companies.

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

Not applicable.

Item 3. Defaults upon Senior Securities.

There are no matters required to be reported under this item.

Item 4. (Removed and Reserved)

Not Applicable

Item 5. Other Information.

There are no matters required to be reported under this item.

Item 6. Exhibits.

INDEX TO EXHIBITS

The following exhibits are included in this Report on Form 10-Q or are incorporated herein by reference as noted in the following table:

Exhibit Number		Description of Exhibit

10.1		Office Purchase and Assumption Agreement by and between Premier Bank & Trust, National Association and The Commercial and Savings Bank of Millersburg, Ohio filed herewith

31.1		Rule 13a-14(a)/15d-14(a) Certification (Principal Executive Officer)

31.2		Rule 13a-14(a)/15d-14(a) Certification (Principal Financial Officer)

32.1		Section 1350 Certification (Principal Executive Officer and Principal Financial Officer)

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

By:	/s/ Rick L. Hull
	Rick L. Hull,
	President and Chief Executive Officer and Director (principal executive officer)

Date: August 12, 2011

By:	/s/ Jane Marsh
	Jane Marsh,
	Senior Vice President, Chief Financial Officer and Treasurer
	(principal financial officer and principal accounting officer)