North Central Bancshares 10Q 2011 Q3 Quarterly report

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 September 30, 2011

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

For the transition period from __________________ to __________________.

Commission File Number: 0-27672

NORTH CENTRAL BANCSHARES, INC.

(Exact name of registrant as specified in its charter)

Iowa 42-1449849

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

825 Central Avenue, Fort Dodge, Iowa 50501

(Address of principal executive offices) (Zip Code)

515-576-7531

(Registrant’s telephone number, including area code)

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

Yes þ

No ¨

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 þ

No ¨

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

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

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

Yes ¨

No þ

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

Class		Outstanding at November 9, 2011
Common Stock, $.01 par value		1,355,073

NORTH CENTRAL BANCSHARES, INC.

INDEX

		Page
Part I. Financial Information
	Item 1. Financial Statements (Unaudited)	1

	Consolidated Statements of Financial Condition at September 30, 2011 and December 31, 2010	1

	Consolidated Statements of Operations for the Three Months and Nine Months Ended September 30, 2011 and 2010	2

	Consolidated Statements of Comprehensive Income for the Three Months and Nine Months Ended September 30, 2011 and 2010	3

	Consolidated Statements of Stockholders’ Equity for the Nine Months Ended September 30, 2011 and 2010	4

	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2011 and 2010	5

	Notes to Consolidated Financial Statements	7

	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	22

	Item 3. Quantitative and Qualitative Disclosures About Market Risk	32

	Item 4. Controls and Procedures	32
Part II. Other Information
	Item 1. Legal Proceedings	33

	Item 1A. Risk Factors	33

	Item 6. Exhibits	34

	Signatures	35

INDEX

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited)

	September 30,			December 31,
	2011			2010
ASSETS

Cash and due from banks:
Interest-bearing	$	9,109,508		$	13,563,234
Noninterest-bearing		7,850,991			7,040,574
Total cash and due from banks		16,960,499			20,603,808
Investments in certificates of deposit		4,576,000			12,689,000
Securities available-for-sale		68,098,767			48,435,771
Restricted equity securities		3,430,600			3,017,200

Loans receivable		313,505,691			340,607,428
Allowance for loan losses		(5,066,312	)		(6,146,861	)
Loans receivable, net		308,439,379			334,460,567

Loans held for sale		469,720			332,178
Accrued interest receivable		1,622,117			1,754,292
Foreclosed real estate		1,386,542			4,586,399
Premises and equipment, net		11,544,541			11,498,583
Rental real estate		2,061,907			2,144,400
Title plant		671,704			671,704
Deferred taxes		1,155,197			2,151,594
Bank-owned life insurance		5,966,416			5,787,864
Prepaid FDIC assessment		1,025,686			1,353,121
Prepaid expenses and other assets		2,310,543			2,777,185

Total assets	$	429,719,618		$	452,263,666


LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES
Deposits	$	347,025,034		$	349,832,904
Borrowed funds		27,250,000			49,250,000
Advances from borrowers for taxes and insurance		951,954			1,828,430
Accrued expenses and other liabilities		2,355,444			2,177,042

Total liabilities		377,582,432			403,088,376


STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, authorized 3,000,000
shares; 10,200 shares were issued and outstanding		10,152,134			10,137,381
Common stock, $.01 par value, authorized 15,500,000
shares; at September 30, 2011 and at December 31,
2010 1,355,073 and 1,351,448 shares were
issued and outstanding, respectively		13,528			13,502
Additional paid-in capital		18,111,147			18,066,437
Retained earnings, substantially restricted		22,871,535			21,047,295
Accumulated other comprehensive income (loss)		988,842			(89,325	)

Total stockholders' equity		52,137,186			49,175,290

Total liabilities and stockholders' equity	$	429,719,618		$	452,263,666


See Notes to Consolidated Financial Statements.

INDEX

NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2011		2010		2011		2010

Interest income:
Loans receivable	$	4,479,035	$	5,141,320	$	13,837,868	$	15,988,721
Securities and cash deposits		507,877		335,154		1,444,540		869,374
		4,986,912		5,476,474		15,282,408		16,858,095

Interest expense:
Deposits		1,097,864		1,344,400		3,531,080		4,029,366
Borrowed funds		236,856		597,899		932,935		1,899,492
		1,334,720		1,942,299		4,464,015		5,928,858

Net interest income		3,652,192		3,534,175		10,818,393		10,929,237

Provision for loan losses		350,000		168,000		1,135,000		2,578,000
Net interest income after provision for loan losses		3,302,192		3,366,175		9,683,393		8,351,237

Noninterest income:
Fees and service charges		1,247,141		1,266,139		3,627,806		3,559,002
Abstract fees		141,193		175,187		424,698		481,871
Mortgage banking income		247,421		350,701		471,488		591,656
Loan prepayment fees		1,904		2,273		15,359		29,477
Other income		322,943		403,768		894,897		1,074,966
Total noninterest income		1,960,602		2,198,068		5,434,248		5,736,972

Investment securities gains, net:
Total other-than-temporary impairment losses		-		-		-		-
Portion of loss recognized in other comprehensive
income (loss) before taxes		-		-		-		-
Net impairment losses recognized in earnings		-		-		-		-
Realized securities gains, net		85,614		-		115,655		7,652
Total securities gains, net		85,614		-		115,655		7,652

Noninterest expense:
Compensation and employee benefits		2,033,066		1,928,708		5,823,421		5,698,440
Premises and equipment		438,977		460,204		1,386,763		1,445,629
Data processing		218,950		217,465		651,850		660,445
FDIC insurance expense		95,635		135,248		353,707		419,078
Foreclosed real estate impairment		64,251		7,147		453,422		323,605
Other expenses		1,148,464		1,138,599		3,607,424		3,296,100
Total noninterest expense		3,999,343		3,887,371		12,276,587		11,843,297

Income before income taxes		1,349,065		1,676,872		2,956,709		2,252,564

Provision for income taxes		325,000		511,900		694,600		588,000

Net income	$	1,024,065	$	1,164,972	$	2,262,109	$	1,664,564


Preferred stock dividends and accretion of discount	$	132,482	$	132,230	$	397,253	$	396,508

Net income available to common stockholders	$	891,583	$	1,032,742	$	1,864,856	$	1,268,056


Basic earnings per common share	$	0.66	$	0.77	$	1.38	$	0.94

Dilluted earnings per common share	$	0.65	$	0.76	$	1.37	$	0.94

Dividends declared per common share	$	0.01	$	0.01	$	0.03	$	0.03

See Notes to Consolidated Financial Statements.

INDEX

NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2011			2010			2011			2010
Net Income	$	1,024,065		$	1,164,972		$	2,262,109		$	1,664,564
Other comprehensive income:
Securities for which a portion of an other-than-temporary impairment has been recorded in
earnings:
Unrealized holding gain arising during the period		-			-			-			851
(Gains) recognized in earnings		-			-			-			(7,652	)
Net unrealized (gains) on securities with other-than-temporary impairment before tax expense		-			-			-			(6,801	)
Tax expense		-			-			-			-
Net unrealized (losses) on securities with other-than-temporary impairment, net of tax in other
comprehensive (income) loss		-			-			-			(6,801	)

Other securities:
Unrealized holding gains arising during the period		763,935			477,039			1,835,219			652,134
Realized net (gains) recognized into net income		(85,614	)		-			(115,655	)		-
Net unrealized gains on other securities before tax (expense)		678,321			477,039			1,719,564			652,134
Tax (expense)		(253,013	)		(177,936	)		(641,397	)		(243,246	)
Net unrealized gains on other securities, net of tax in other comprehensive income		425,308			299,103			1,078,167			408,888
Other comprehensive income		425,308			299,103			1,078,167			402,087
Comprehensive income	$	1,449,373		$	1,464,075		$	3,340,276		$	2,066,651


See Notes to Consolidated Financial Statements

INDEX

NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Unaudited)
Nine Months Ended September 30, 2010 and 2011

										Accumulated
					Additional					Other			Total
	Preferred		Common		Paid-in		Retained			Comprehensive			Stockholders'
	Stock		Stock		Capital		Earnings			Income (Loss)			Equity

Balance, January 1, 2010	$	10,118,581	$	13,471	$	18,009,468	$	19,924,798		$	212,500		$	48,278,818
Net income		-		-		-		1,664,564			-			1,664,564
Other comprehensive income		-		-		-		-			402,087			402,087
Dividends on preferred stock		-		-		-		(382,500	)		-			(382,500	)
Dividends on common stock		-		-		-		(40,512	)		-			(40,512	)
Employee stock-based compensation		-		23		42,922		-			-			42,945
Accretion of discount on preferred stock		14,008		-		-		(14,008	)		-			-
Balance, September 30, 2010	$	10,132,589	$	13,494	$	18,052,390	$	21,152,342		$	614,587		$	49,965,402

Balance, January 1, 2011	$	10,137,381	$	13,502	$	18,066,437	$	21,047,295		$	(89,325	)	$	49,175,290
Net income		-		-		-		2,262,109			-			2,262,109
Other comprehensive income		-		-		-		-			1,078,167			1,078,167
Dividends on preferred stock		-		-		-		(382,500	)		-			(382,500	)
Dividends on common stock		-		-		-		(40,616	)		-			(40,616	)
Employee stock-based compensation		-		26		44,710		-			-			44,736
Accretion of discount on preferred stock		14,753		-		-		(14,753	)		-			-
Balance, September 30, 2011	$	10,152,134	$	13,528	$	18,111,147	$	22,871,535		$	988,842		$	52,137,186


See Notes to Consolidated Financial Statements

INDEX

NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)	Nine Months Ended
	September 30,
	2011			2010
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	2,262,109		$	1,664,564
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses		1,135,000			2,578,000
Depreciation		631,888			692,495
Amortization and accretion		266,069			174,491
Deferred taxes		355,000			(373,000	)
Stock-based compensation		44,736			42,945
(Gain) on sale of foreclosed real estate and loans, net		(457,707	)		(572,142	)
Write-down of other real estate owned		453,422			323,605
(Gain) on sale of investments		(115,655	)		(7,652	)
Increase in value of bank-owned life insurance		(178,552	)		(183,564	)
Proceeds from sales of loans held-for-sale		24,170,240			30,991,488
Originations of loans held-for-sale		(23,836,294	)		(29,835,087	)
Change in assets and liabilities:
Accrued interest receivable		132,175			114,688
Prepaid expenses and other assets		787,597			531,720
Accrued expenses and other liabilities		155,970			(1,611,140	)

Net cash provided by operating activities		5,805,998			4,531,411

CASH FLOWS FROM INVESTING ACTIVITIES
Net change in loans		23,510,824			31,641,392
Purchase of investments in certificates of deposit		(1,988,000	)		(16,473,000	)
Proceeds from maturities on investments in certificates of deposits		10,101,000			2,193,000
Purchase of securities available-for-sale		(32,153,829	)		(29,481,954	)
Proceeds from sale of securities available-for-sale		3,379,805			207,732
Proceeds from maturities and calls of securities available-for-sale		10,730,752			10,576,962
Purchase of resticted equity securities		(1,426,700	)		(173,200	)
Proceeds from redemption of restricted equity securities		1,013,300			717,600
Purchase of premises, equipment and rental real estate		(589,853	)		(319,236	)
Net proceeds from sale of foreclosed real estate		4,080,820			939,177

Net cash provided by investing activities		16,658,119			(171,527	)

CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits		(2,807,870	)		14,334,681
Net (decrease) in advances from borrowers for taxes
and insurance		(876,476	)		(989,956	)
Proceeds from other borrowed funds		3,000,000			5,250,000
Payments of other borrowed funds		(25,000,000	)		(18,000,000	)
Common and preferred dividends paid		(423,080	)		(422,983	)

Net cash (used in) financing activities		(26,107,426	)		171,742

Net decrease in cash		(3,643,309	)		4,531,626

CASH AND DUE FROM BANKS
Beginning		20,603,808			21,766,170
Ending	$	16,960,499		$	26,297,796

INDEX

NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
(Unaudited)	Nine Months Ended
	September 30,
	2011		2010
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash payments for:
Interest	$	4,579,876	$	6,032,399
Income taxes		9,162		1,584,693

SUPPLEMENTAL DISCLOSURE OF NONCASH OPERATING,
INVESTING AND FINANCING ACTIVITIES
Transfers from loans to other real estate owned	$	1,331,270	$	3,268,407


See Notes to Consolidated Financial Statements.

INDEX

NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. BASIS OF PRESENTATION

The consolidated financial statements for the three and nine month periods ended September 30, 2011 and 2010 are unaudited. In the opinion of the management of North Central Bancshares, Inc. (the “Company”), these financial statements reflect all adjustments, including normal recurring accruals, necessary to present fairly these consolidated financial statements. The results of operations for the interim periods are not necessarily indicative of results that may be expected for an entire year. Certain information and footnote disclosures normally included in complete financial statements prepared in accordance with generally accepted accounting principles have been omitted in accordance with the requirements for interim financial statements. The financial statements and notes thereto should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.

Effective June 29, 2011, First Federal Savings Bank of Iowa (the “Bank”) received regulatory approval from the Iowa Division of Banking and completed its conversion to a state-chartered commercial bank from a federally-chartered stock savings bank. In connection with the conversion of the Bank, the Company also received approval from the Board of Governors of the Federal Reserve System and completed reorganization to a bank holding company from a savings and loan holding company. The Federal Reserve Bank of Chicago has also approved the Bank’s application for membership in the Federal Reserve System.

In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expense during the reporting periods. Significant estimates include the determination of the allowance for loan losses, other-than-temporary declines in the fair value of securities, and fair value measurements. Actual results could differ from those estimates.

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

Accounting policy for loans receivable, net: Loans that management has the intent and ability to hold for the foreseeable future, or until payoff or maturity occurs, are classified as held for investment. These loans are stated at the amount of unpaid principal adjusted for charge-offs, the allowance for estimated losses on loans, any unamortized net deferred fees and/or costs on originated loans and net unearned premiums (discounts), with interest income recognized on the interest method based upon those outstanding loan balances. Loan origination fees net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the interest method. Premiums (discounts) on first mortgage loans purchased are amortized to income using the interest method over the remaining period to contractual maturity, adjusted for anticipated prepayments. As assets are held for and used in the production of services, the origination and collection of these loans are classified as investing activities in the statement of cash flows.

Loans are placed on nonaccrual status when the full and timely collection of interest and principal becomes uncertain, or when the loan becomes 90 days past due (unless the loan is both well-secured and in the process of collection). When a loan is placed on nonaccrual status, the accrued unpaid interest receivable is reversed against interest income. Income is subsequently recognized on a cash or cost recovery basis until, in management’s judgment, the borrower’s ability to make periodic interest and principal payments is no longer in doubt. Generally, a loan is returned to accrual status when (a) all delinquent interest and principal payments become current under the terms of the loan agreement or (b) the loan is both well-secured and in the process of collection and collectability is no longer doubtful.

The allowance for loan losses is an amount that management believes will be adequate to absorb probable losses on existing loans that may become uncollectible. A disciplined process and methodology are used to establish the allowance for loan losses. While the methodology attributes portions of the allowance to specific portfolios, the entire allowance for loan losses is available to absorb credit losses in the total loan portfolio. To determine the total allowance for loan losses, a reserve is estimated for each component of the portfolio, including loans analyzed individually and loans analyzed on a pooled basis.

INDEX

The allowance for loan losses consists of amounts applicable to: (1) commercial real estate, (2) construction and land development, (3) multi-family real estate, (4) residential real estate, and (5) consumer loans. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as updated information becomes available.

To determine the residential real estate and consumer portfolio components of the allowance, loans are pooled by portfolio and losses are estimated using historical loss experience and management’s evaluation of the impact of risks associated with trends in delinquencies, concentrations of credit and regional and macro economic factors. An individual impairment assessment is performed for residential real estate and consumer loans whose terms have been modified in a troubled debt restructuring (TDR). These loans are excluded from the pooled analysis.

The component of the allowance for the non-impaired commercial portfolio is estimated through the application of loss factors to loans grouped as nonresidential, multifamily and construction and development. Loss factors are derived from historical loss experience, trends in delinquencies, concentrations of credit and regional and macro economic factors.

The commercial component of the allowance also includes an amount for the estimated impairment in individually identified impaired loans and commercial loans whose terms have been modified in a TDR.

For loans that are classified as impaired, including those loans modified in a TDR, a specific allowance is established when the discounted cash flows or collateral value or observable market price of the impaired loan is lower than the carrying value of that loan. The general component covers non-impaired loans and is based on historical loss experience adjusted for qualitative and environmental factors.

A loan is considered impaired when, based on current information and events, it is probable the Company will be unable to collect all contractual principal and interest payments due in accordance with the terms of the loan agreement. Management evaluates loans for indicators of impairment upon substandard classification. Impaired loans are measured based on the present value of expected future cash flows discounted at the loan's effective interest rate or, as a practical expedient, at the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. The amount of impairment, if any and any subsequent changes are included in the allowance for loan losses.

Reflected in all components of the allowance for loan losses is an amount for imprecision or uncertainty, which represents management’s judgment of risks inherent in the process and assumptions used in establishing the allowance. This imprecision considers economic environmental factors and other subjective factors.

Loans are generally charged off, fully or partially, when management judges the asset to be uncollectible or repayment is deemed to extend beyond a reasonable time frame.

2. EARNINGS PER COMMON SHARE

Basic earnings per common share is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Income available to common stockholders is net income less preferred stock dividends and accretion of discount on preferred stock, treated as preferred stock dividends. Diluted earnings per common share reflects the potential dilution that would occur if the Company’s outstanding stock options and warrants were exercised and converted into common stock and the Company’s outstanding restricted stock was vested. The dilutive effect is computed using the treasury stock method, which assumes all outstanding stock options and warrants are exercised. The incremental shares issuable upon exercise of the stock options and warrants, to the extent they would have been dilutive, are included in the denominator of the diluted earnings per common share calculation. The calculation of earnings per common share and diluted earnings per common share for the three and nine months ended September 30, 2011 and 2010 is presented below.

INDEX


	Three Months Ended September 30,				Nine Months Ended September 30,
	2011		2010		2011		2010
Basic earnings per common share:
Net Income	$	1,024,065	$	1,164,972	$	2,262,109	$	1,664,564
Preferred stock dividends and accretion of discount		132,482		132,230		397,253		396,508
Net income available to common stockholders	$	891,583	$	1,032,742	$	1,864,856	$	1,268,056
Weighted average common shares outstanding - basic		1,350,948		1,347,948		1,349,717		1,346,612
Basic earnings per common share	$	0.66	$	0.77	$	1.38	$	0.94

Diluted earnings per common share:
Net income available to common stockholders		891,583		1,032,742		1,864,856		1,268,056
Weighted average common shares outstanding - basic		1,350,948		1,347,948		1,349,717		1,346,612
Effect of dilutive securities:
Stock Options(1)		-		-		-		-
Restricted Stock		4,125		3,500		3,882		3,605
Common stock warrant(2)		8,686		-		7,105		2,819
Total diluted average common shares issued and		1,363,759		1,351,448		1,360,704		1,353,036
outstanding		1,363,759		1,351,448		1,360,704		1,353,036
Diluted earnings per common share	$	0.65	$	0.76	$	1.37	$	0.94


1For the three and nine months ending September 30, 2011 and 2010, outstanding options to purchase common stock totaled 45,500 and
65,200, respectively. These options were not dilutive because the exercise price of the options exceeded the average closing price for the
Company's common stock.
2For the three months ending September 30, 2010, 99,157 shares of common stock warrants were not dilutive because the excerise price of the
common stock warrants exceeded the average closing price for the Company's common stock.

3. SECURITIES


Securities available-for-sale as of September 30, 2011 were as follows:

			Gross		Gross
	Amortized		Unrealized		Unrealized
	Cost		Gains		(Losses)			Fair Value

Debt securities:
State and local obligations	$	8,858,725	$	247,374	$	(70,386	)	$	9,035,713
Mortgage-backed securities(1)		19,106,968		670,937		-			19,777,905
Collateralized mortgage obligations (1)		28,063,675		611,398		(3,054	)		28,672,019
Corporate bonds		3,360,138		15,458		(6,366	)		3,369,230
U.S. Government agencies		7,132,162		111,738		-			7,243,900
Total	$	66,521,668	$	1,656,905	$	(79,806	)	$	68,098,767


Securities available-for-sale as of December 31, 2010 were as follows:

			Gross		Gross
	Amortized		Unrealized		Unrealized
	Cost		Gains		(Losses)			Fair Value

Debt securities:
State and local obligations	$	5,103,472	$	25,888	$	(139,697	)	$	4,989,663
Mortgage-backed securities (1)		13,735,714		290,895		(163,780	)		13,862,829
Collateralized mortgage obligations (1)		19,469,375		59,302		(240,553	)		19,288,124
Corporate bonds		1,622,912		-		(21,676	)		1,601,236
U.S. Government agencies		8,646,763		93,659		(46,503	)		8,693,919
Total	$	48,578,236	$	469,744	$	(612,209	)	$	48,435,771

(1) All mortgage backed securities and collateralized mortgage obligations consist of securities issued by FNMA, FHLMC or
GNMA and are backed by residential mortgage loans.

INDEX

Gross unrealized losses and estimated fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, as of September 30, 2011 and December 31, 2010, are summarized as follows:



	September 30, 2011
	Less than 12 Months					12 Months or More				Total
			Unrealized					Unrealized				Unrealized
	Fair Value		Losses			Fair Value		Losses		Fair Value		Losses
Debt securities:
State and local obligations	$	3,415,202	$	(70,386	)	$	-	$	-	$	3,415,202	$	(70,386	)
Collateralized mortgage obligations		1,579,408		(3,054	)		-		-		1,579,408		(3,054	)
Corporate bonds		1,597,755		(6,366	)		-		-		1,597,755		(6,366	)
Total	$	6,592,365	$	(79,806	)	$	-	$	-	$	6,592,365	$	(79,806	)


	December 31, 2010
	Less than 12 Months					12 Months or More				Total
			Unrealized					Unrealized				Unrealized
	Fair Value		Losses			Fair Value		Losses		Fair Value		Losses
Debt securities:
State and local obligations	$	3,096,965	$	(139,697	)	$	-	$	-	$	3,096,965	$	(139,697	)
Mortgage-backed securities		5,810,547		(163,780	)		-		-		5,810,547		(163,780	)
Collateralized mortgage obligations		12,776,228		(240,553	)		-		-		12,776,228		(240,553	)
Corporate bonds		1,601,236		(21,676	)		-		-		1,601,236		(21,676	)
U.S. Government agencies		1,577,870		(46,503	)		-		-		1,577,870		(46,503	)
Total	$	24,862,846	$	(612,209	)	$	-	$	-	$	24,862,846	$	(612,209	)

The total number of securities in the investment portfolio in an unrealized loss position at September 30, 2011 was 22 compared to 35 at December 31, 2010. The Company conducts quarterly reviews to identify and evaluate each investment that has an unrealized loss. The unrealized losses for the above investment securities are generally due to changes in interest rates and, as such, are considered to be temporary by the Company. The review takes into consideration the Company’s lack of intent to sell the security or whether it is more-likely-than-not that the Company will be required to sell the security before its anticipated recovery, as well as other qualitative factors.

The amortized cost and fair value of debt securities as of September 30, 2011 by contractual maturity is shown below. Certain securities have call features, which allow the issuer to call the security prior to maturity. Maturities may differ from contractual maturities in mortgage-backed securities and collateralized mortgage obligations because the mortgage underlying the securities may be called or repaid without any penalties. Therefore, these securities are not included in the maturity categories in the following maturity summary:


	Debt Securities Available-for-Sale
	September 30, 2011
	Amortized
	Cost		Fair Value

Due in one year or less	$	50,000	$	49,301
Due from one to five years		8,241,980		8,320,310
Due from five to ten years		5,455,695		5,574,975
Due after ten years		5,603,349		5,704,257
Mortgage-backed securities and
collateralized mortgage obligations		47,170,643		48,449,924
	$	66,521,667	$	68,098,767

INDEX

Gross security gains from the sale of securities was $85,614 and $115,655 for the three and nine months ended September 30, 2011 compared to gross security gains from the sale of securities of none and $7,652 for the three and nine months ended September 30, 2010. There were no losses on the sales of securities during the reporting periods.

4. LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES

Loans receivable at September 30, 2011 and December 31, 2010 are summarized as follows:

	September 30, 2011			December 31, 2010
First mortgage loans:
Secured by:
One-to four-family residences	$	135,652,156		$	141,061,321
Multifamily properties		51,830,217			57,461,170
Commercial properties		61,659,444			69,253,792
Construction and land development loans		2,090,560			4,193,756
Total first mortgage loans		251,232,377			271,970,039

Consumer loans:
Automobile		13,770,676			13,548,710
Second mortgage		46,615,734			51,349,053
Other		3,875,990			4,282,717
Total consumer loans		64,262,400			69,180,480

Total loans		315,494,777			341,150,519

Undisbursed portion of construction loans		(1,711,322	)		(295,609	)
Unearned premiums, net		53,926			83,528
Net deferred loan origination fees		(331,690	)		(331,010	)
	$	313,505,691		$	340,607,428

Activity in the allowance for loan losses by segment for the three and nine months ended September 30, 2011 is summarized in the following table.


	For the Three Months Ended September 30, 2011
	Commercial Real Estate			Construction and Land Development			Multi-Family Real Estate			1-4 Family Residential Real Estate			Consumer			Total
Allowance for Loan Losses:
Beginning balance	$	2,531,734		$	277,362		$	572,505		$	1,017,879		$	1,472,978		$	5,872,458
Charge-offs		(913,540	)		-			-			(88,563	)		(161,408	)		(1,163,511	)
Recoveries		-			-			-			-			7,365			7,365
Provisions		214,875			8,624			(25,947	)		104,292			48,156			350,000
Ending balance	$	1,833,069		$	285,986		$	546,558		$	1,033,608		$	1,367,091		$	5,066,312

	For the Nine Months Ended September 30, 2011
	Commercial Real Estate			Construction and Land Development			Multi-Family Real Estate			1-4 Family Residential Real Estate			Consumer			Total
Allowance for Loan Losses:
Beginning balance	$	2,555,094		$	354,911		$	803,850		$	1,009,630		$	1,423,376		$	6,146,861
Charge-offs		(1,286,350	)		(70,000	)		(278,387	)		(129,769	)		(470,664	)		(2,235,170	)
Recoveries		-			-			-			127			19,494			19,621
Provisions		564,325			1,075			21,095			153,620			394,885			1,135,000
Ending balance	$	1,833,069		$	285,986		$	546,558		$	1,033,608		$	1,367,091		$	5,066,312

INDEX

Activity in the allowance for loan losses for the three and nine months ended September 30, 2010 is summarized as follows:

	Three Months			Nine Months
	Ended September 30,			Ended September 30,
	2010			2010

Balance at beginning of period	$	8,992,716		$	7,170,595
Charge-offs		(1,496,146	)		(2,090,121	)
Recoveries		6,976			13,072
Provision charged to operations		168,000			2,578,000
Balance at end of period	$	7,671,546		$	7,671,546

The following table presents the balance in the allowance for loan losses and recorded investment in loans by portfolio segment and based on impairment method as of September 30, 2011 and December 31, 2010.


	September 30, 2011
	Commercial Real Estate		Construction and Land Development		Multi-Family Real Estate		1-4 Family Residential Real Estate		Consumer		Total
Allowance for Loan Losses:
Individually evaluated for impairment	$	210,800	$	177,000	$	-	$	91,400	$	111,041	$	590,241
Collectively evaluated for impairment		1,622,269		108,986		546,558		942,208	$	1,256,050		4,476,071
Total ending allowance balance	$	1,833,069	$	285,986	$	546,558	$	1,033,608	$	1,367,091	$	5,066,312

Loans:
Individually evaluated for impairment	$	7,571,823	$	1,839,186	$	-	$	3,977,405	$	660,836	$	14,049,250
Collectively evaluated for impairment		54,087,621		251,374		51,830,217		131,674,751		63,601,564		301,445,527
Total ending balance	$	61,659,444	$	2,090,560	$	51,830,217	$	135,652,156	$	64,262,400	$	315,494,777

	December 31, 2010
	Commercial Real Estate		Construction and Land Development		Multi-Family Real Estate		1-4 Family Residential Real Estate		Consumer		Total
Allowance for Loan Losses:
Individually evaluated for impairment	$	1,121,500	$	237,000	$	201,500	$	85,111	$	115,683	$	1,760,794
Collectively evaluated for impairment		1,433,594		117,911		602,350		924,519		1,307,693		4,386,067
Total ending allowance balance	$	2,555,094	$	354,911	$	803,850	$	1,009,630	$	1,423,376	$	6,146,861

Loans:
Individually evaluated for impairment	$	12,194,848	$	3,301,345	$	1,558,628	$	5,167,369	$	607,064	$	22,829,254
Collectively evaluated for impairment		57,058,944		892,411		55,902,542		135,893,952		68,573,416		318,321,265
Total ending balance	$	69,253,792	$	4,193,756	$	57,461,170	$	141,061,321	$	69,180,480	$	341,150,519

INDEX

The following table summarizes the recorded investment in impaired loans by segment, including loans for which no impairment is recorded, loans for which an impairment is recorded, and the resulting allowance for the impairment by segment as of September 30, 2011 and December 31, 2010.


	September 30, 2011						December 31, 2010
	Carrying Amount		Unpaid Principal Balance		Associated Allowance		Carrying Amount		Unpaid Principal Balance		Associated Allowance
With no specific allowance recorded:
Commercial Real Estate	$	1,564,681	$	2,433,148	$	-	$	1,584,352	$	1,852,852	$	-
Construction and Land Development		-		-		-		892,017		2,962,017		-
Multi-Family Real Estate		-		-		-		-		-		-
1-4 Family Residential Real Estate		3,269,042		3,492,673		-		4,560,823		4,872,752		-
Consumer		430,612		439,605		-		433,793		442,786		-
With an allowance recorded:
Commercial Real Estate		6,007,142		6,007,142		210,800		10,610,496		10,610,496		1,121,500
Construction and Land Development		1,839,186		1,839,186		177,000		2,409,328		2,409,328		237,000
Multi-Family Real Estate		-		-		-		1,558,628		1,558,628		201,500
1-4 Family Residential Real Estate		708,363		708,363		91,400		606,546		606,546		85,111
Consumer		230,224		230,224		111,041		173,271		173,271		115,683
Total:
Commercial Real Estate		7,571,823		8,440,290		210,800		12,194,848		12,463,348		1,121,500
Construction and Land Development		1,839,186		1,839,186		177,000		3,301,345		5,371,345		237,000
Multi-Family Real Estate		-		-		-		1,558,628		1,558,628		201,500
1-4 Family Residential Real Estate		3,977,405		4,201,036		91,400		5,167,369		5,479,298		85,111
Consumer		660,836		669,829		111,041		607,064		616,057		115,683
	$	14,049,250	$	15,150,341	$	590,241	$	22,829,254	$	25,488,676	$	1,760,794

The following table summarizes the average balances and interest income recognized related to impaired loans for the nine months ended September 30, 2011.

	Average Balance		Interest Income
Commercial Real Estate	$	9,524,040	$	321,853
Construction and Loan Development		2,689,228		-
Multi-Family Real Estate		519,543		-
1-4 Family Residential Real Estate		5,080,837		205,366
Consumer		882,549		32,816
	$	18,696,197	$	560,035

Credit Quality Indicators

Credit quality indicators are used by management in determining the allowance for loan losses. The primary credit quality indicators used by management include loan classification and delinquency status. These indicators are used to identify and evaluate trends and deterioration in the loan portfolio.

The primary credit quality indicator used by management in the commercial real estate, construction and land development, and multi-family real estate loan portfolios is the internal classification of the loans. Loans in these portfolios that are over $500,000 are reviewed annually at which time they are assigned a classification. Loans may also be reviewed prior to the annual review cycle based on current information that becomes available regarding the borrower’s ability to service the loan. Loans may be classified as watch, special mention, substandard, or doubtful. An asset is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Substandard assets include those characterized by the distinct possibility that the bank will sustain some loss if the deficiencies are not corrected. Assets classified as doubtful have all of the weaknesses inherent in those classified substandard, with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. Assets that do not expose the Bank to risk sufficient to warrant classification in one of the aforementioned categories, but which possess potential weaknesses that deserve management’s close attention are designated as special mention.

INDEX

If left uncorrected, these potential weaknesses could increase the level of risk to the Bank in the future. Commercial loans to borrowers whose most recent financial information shows deterioration in the earliest stages and warrant greater than routine attention and monitoring by management are designated as watch.

The primary credit quality indicator used by management in the residential real estate and consumer loan portfolios is the delinquency status of the loans.

The following table summarizes the recorded investment in loan segments by credit quality indicator as of September 30, 2011 and December 31, 2010. Past due status is reported as of September 30, 2011 and December 31, 2010. Internal classification ratings reflect the most recent classification assigned generally based on an annual review.


Commercial Loans
Credit risk profile by internally assigned grade

	September 30, 2011								December 31, 2010
	Commercial Real Estate		Construction and Land Development		Multi-Family Real Estate		Total		Commercial Real Estate		Construction and Land Development		Multi-Family Real Estate		Total
Grade:
Pass	$	46,381,751	$	251,374	$	47,595,337	$	94,228,462	$	53,092,384	$	892,411	$	53,291,156	$	107,275,951
Watch		5,257,137		-		4,234,880		9,492,017		3,966,560		-		2,611,386		6,577,946
Special Mention		2,448,733		-		-		2,448,733		-		-		-		-
Substandard		7,361,023		1,662,186		-		9,023,209		11,073,348		3,064,345		1,357,128		15,494,821
Doubtful		210,800		177,000		-		387,800		1,121,500		237,000		201,500		1,560,000
	$	61,659,444	$	2,090,560	$	51,830,217	$	115,580,221	$	69,253,792	$	4,193,756	$	57,461,170	$	130,908,718


Residential Real Estate and Consumer Loans
Credit risk profile based on delinquency status

	September 30, 2011								December 31, 2010
	1-4 Family Residential Real Estate		Second Mortgage		Other Consumer Loans		Total		1-4 Family Residential Real Estate		Second Mortgage		Other Consumer Loans		Total
Current	$	132,486,662	$	45,710,813	$	17,374,361	$	195,904,479	$	137,430,650	$	50,136,653	$	17,590,417	$	205,157,720
Past due 30-89 days		868,253		469,409		221,844		1,408,172		1,473,094		786,900		203,341		2,463,335
Past due 90 days and greater		2,297,241		435,512		50,461		2,601,905		2,157,577		425,500		37,669		2,620,746
	$	135,652,156	$	46,615,734	$	17,646,666	$	199,914,556	$	141,061,321	$	51,349,053	$	17,831,427	$	210,241,801

INDEX

An aging analysis of the recorded investment in loans by segment at September 30, 2011 and December 31, 2010 is summarized as follows.

	30-89 Days		90 Days Past Due
	Past Due		and Greater		Total Past Due		Current		Total
September 30, 2011
Commercial Loans:
Commercial Real Estate	$	27,304	$	1,162,500	$	1,189,804	$	60,496,944	$	61,686,748
Construction and Land Development		-		-		-		2,090,560		2,090,560
Multi-Family Real Estate		-		-		-		51,830,217		51,830,217
1-4 Family Residential Real Estate		716,919		2,115,932		2,832,851		132,819,305		135,652,156
Consumer:
Second mortgage		469,409		435,512		904,921		45,710,813		46,615,734
Other consumer loans		221,844		50,461		272,305		17,374,361		17,646,666
	$	1,435,476	$	3,764,405	$	5,199,881	$	310,322,200	$	315,522,081

December 31, 2010
Commercial Loans:
Commercial Real Estate	$	-	$	440,193	$	440,193	$	68,813,599	$	69,253,792
Construction and Land Development		-		1,411,752		1,411,752		2,782,004		4,193,756
Multi-Family Real Estate		373,518		1,558,628		1,932,146		55,529,024		57,461,170
1-4 Family Residential Real Estate		1,473,094		2,157,577		3,630,671		137,430,650		141,061,321
Consumer:
Second mortgage		786,900		425,500		1,212,400		50,136,653		51,349,053
Other consumer loans		203,341		37,669		241,010		17,590,417		17,831,427
	$	2,836,853	$	6,031,319	$	8,868,172	$	332,282,347	$	341,150,519

Nonaccrual loans at September 30, 2011 and December 31, 2010 by segment are summarized below:



Commercial Loans:	September 30, 2011		December 31, 2010
Commercial Real Estate	$	1,312,549	$	5,408,650
Construction and Land Development		1,839,186		1,679,839
Multi-Family Real Estate		-		1,558,628
1-4 Family Residential Real Estate		2,115,931		2,459,406
Consumer:
Second mortgage		434,548		425,500
Other consumer loans		50,461		37,669
	$	5,752,675	$	11,569,692

Troubled debt restructurings (TDR) are loans on which, due to the borrower’s financial difficulties, a concession has been granted that would not otherwise be considered. In most cases, modifications of loan terms that could potentially qualify as a TDR include reduction of contractual interest rate, extension of the maturity date or a reduction of the principal balance. A TDR is placed on accrual status when both principal and interest are current and it is probable that we will be able to collect all amounts due (both principal and interest) according to the terms of the loan agreement. All loans classified as TDR’s are considered to be impaired.

INDEX

The following table summarizes loans that have been restructured during the three and nine months ended September 30, 2011:

	Three Months Ended September 30, 2011						Nine Months Ended September 30, 2011
	Number of Loans		Pre-restructuring Outstanding Recorded Investment		Post-restructuring Outstanding Recorded Investment		Number of Loans		Pre-restructuring Outstanding Recorded Investment		Post-restructuring Outstanding Recorded Investment
Troubled debt restructurings:
Commercial Real Estate		-	$	-	$	-	$	3	$	5,919,269	$	5,919,269
Construction and Land Development		1		743,761		743,761		1		743,761		743,761
Multi-Family Real Estate		-		-		-		-		-		-
1-4 Family Residential Real Estate		4		353,542		359,830		13		2,610,345		2,652,836
Consumer		3		63,440		64,485		11		359,441		338,432
Total:		8	$	1,160,743	$	1,168,076		29	$	9,632,816	$	9,654,298

The TDR's described above increased the allowance for loan losses by none and $120,501 for the three and nine months ended September 30, 2011, respectively and resulted in chargeoffs none and $33,500 for the three and nine months ended September 30, 2011, respectively. The TDR’s generally include terms to reduce the interest rate and extend payment terms. The difference between the post-restructuring recorded investment compared to the pre-restructuring recorded investment is due to charge-offs or capitalization of interest. One 1-4 family residential real estate loan received an advance of additional funds of approximately $26,000.

A restructured loan is considered to be in payment default once it is 30 days contractually past due under the modified terms. The following table summarizes, as of September 30, 2011, loans that were restructured within the last 12 months that have subsequently defaulted during the reported period:


	Three Months Ended September 30, 2011				Nine Months Ended September 30, 2011
	Number of Loans		Principal Balance of Defaulted Loans		Number of Loans		Principal Balance of Defaulted Loans



Commercial Real Estate		-	$	-		-	$	-
Construction and Land Development		-		-		-		-
Multi-Family Real Estate		-		-		-		-
1-4 Family Residential Real Estate		2		326,508		4		1,839,403
Consumer		2		158,008		2		158,008
Total:		4	$	484,516		6	$	1,997,411

5. FAIR VALUE

Fair Value Measurements

ASC 820, Fair Value Measurements and Disclosures, define fair value, establish a framework for measuring fair value and expand disclosures about fair value measurements. The Company uses fair value measurements to record fair value adjustments to certain assets and to determine fair value disclosures. The Company did not have any liabilities that were measured at fair value at September 30, 2011 or December 31, 2010. The Company’s securities available-for-sale are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets or liabilities on a non-recurring basis, such as other real estate owned and impaired loans. These non-recurring fair value adjustments involve the application of lower-of-cost-or-fair value accounting or write-downs of individual assets.

INDEX

In accordance with ASC 820, the Company groups its assets at fair value in three levels, based on the markets in which the assets are traded and the reliability of the assumptions used to determine fair value. These levels are:

	1.		Level 1 – Valuation is based upon quoted prices for identical instruments traded in active markets.

	2.		Level 2 – Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.

	3.		Level 3 – Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect the Company’s own estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include the use of option pricing models, discounted cash flow models, and similar techniques. The results cannot be determined with precision and may not be realized in an actual sale or immediate settlement of the asset or liability.

Fair value measurements for assets measured at fair value on a recurring basis were as follows:


	Fair Value Measurements at September 30, 2011

	Quoted Prices
	in Active Markets		Significant Other		Significant
	for Identical Assets		Observable Inputs		Unobservable Inputs
Description	(Level 1)		(Level 2)		(Level 3)		Total
Debt securities:
State and local obligations	$	-	$	9,035,713	$	-	$	9,035,713
Mortgage-backed securities		-		19,777,905		-		19,777,905
Collateralized mortgage obligations		-		28,672,019		-		28,672,019
Corporate bonds		3,369,230		-		-		3,369,230
U.S. Government agencies		-		7,243,900		-		7,243,900
Total securities available-for-sale	$	3,369,230	$	64,729,537	$	-	$	68,098,767


	Fair Value Measurements at December 31, 2010

	Quoted Prices
	in Active Markets		Significant Other		Significant
	for Identical Assets		Observable Inputs		Unobservable Inputs
Description	(Level 1)		(Level 2)		(Level 3)		Total
Securities available-for-sale
State and local obligations	$	-	$	4,989,663	$	-	$	4,989,663
Mortgage-backed securities		-		13,862,829		-		13,862,829
Collateralized mortgage obligations		-		19,288,124		-		19,288,124
Corporate bonds		1,601,236		-		-		1,601,236
U.S. Government agencies		-		8,693,919		-		8,693,919
Total securities available-for-sale	$	1,601,236	$	46,834,535	$	-	$	48,435,771

When available, quoted market prices are used to determine the fair value on investment securities and such items are classified within Level 1 of the fair value hierarchy. Examples include equity securities, U.S. Treasury securities and certain corporate bonds. For other securities, the Company determines fair value based on various sources and may apply matrix pricing with observable prices for similar bonds where a price for the identical bond is not observable. Securities measured at fair value by such methods are classified as Level 2. The fair values of Level 2 securities are determined by matrix pricing models that consider observable market data, such as interest rate volatilities, LIBOR yield curve, credit spreads and prices from market makers, and live trading systems. Certain securities are not valued based on observable inputs and are, therefore, classified as Level 3.

INDEX

The fair value of these securities is based on management’s best estimates. The Company’s policy is to recognize transfer between levels at the end of each reporting period, if applicable. There were no transfers between levels during the nine months ended September 30, 2011.

Fair value measurements for assets measured at fair value on a non-recurring basis were as follows:


	Fair Value Measurements at September 30, 2011

	Quoted Prices
	in Active Markets		Significant Other		Significant
	for Identical Assets		Observable Inputs		Unobservable Inputs
Description	(Level 1)		(Level 2)		(Level 3)		Total
Impaired loans	$	-	$	-	$	8,194,674	$	8,194,674
Foreclosed real estate		-		-		1,386,542		1,386,542
Total	$	-	$	-	$	9,581,216	$	9,581,216


	Fair Value Measurements at December 31, 2010

	Quoted Prices
	in Active Markets		Significant Other		Significant
	for Identical Assets		Observable Inputs		Unobservable Inputs
Description	(Level 1)		(Level 2)		(Level 3)		Total
Impaired loans	$	-	$	-	$	13,597,475	$	13,597,475
Foreclosed real estate		-		-		4,586,399		4,586,399
Total	$	-	$	-	$	18,183,874	$	18,183,874

Impaired loans are evaluated and valued at the time the loan is identified as impaired, at the lower of cost or fair value. Fair value is measured based on the value of the collateral securing these loans or discounted cash flows and is classified at a Level 3 in the fair value hierarchy. Collateral may be real estate and/or business assets including equipment, inventory and/or accounts receivable. Such collateral’s fair value is determined based on appraisals by qualified licensed appraisers hired by the Company, and/or management’s expertise and knowledge of the client and client’s business.

Foreclosed real estate is initially recorded at fair value less estimated selling costs. Subsequently it is carried at the lower of cost or fair value less estimated selling costs. Fair value is estimated through current appraisals or listing prices. Estimated fair values may be adjusted by management to reflect current economic and market conditions and, as such, are classified as Level 3.

Fair Value Disclosures

Generally accepted accounting principles require disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis. The methodologies for estimating the fair value of financial assets and financial liabilities that are measured at fair value on a recurring or non-recurring basis are discussed above. The methodologies for other financial assets and financial liabilities are discussed below:

	Cash and due from banks: The carrying amount of cash and due from banks represents the fair value.

	Investments in certificates of deposit: The fair value of investments in certificates of deposit is estimated based on discounted cash flows using current market interest rates.

	Restricted equity securities: The fair value of this untraded stock is estimated at its carrying value because the Company is able to redeem the stock with the Federal Home Loan Bank and Federal Reserve Bank at par value.

INDEX

	Loans held for sale: Fair values are based on quoted market prices of similar loans sold on the secondary market.

	Loans: For variable-rate loans that reprice frequently and have experienced no significant change in credit risk, fair values are based on carrying values. Fair values for all other loans are estimated basedon discounted cash flows, using interest rates currently being offered for loans with similar terms to borrowers with similar credit quality.

	Deposits: Fair values disclosed for demand, negotiable order of withdrawal (NOW), savings and money market savings deposits equal their carrying amounts, which represent the amount payable on demand. Fair values for certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregate expected monthly maturities on time deposits.

	Borrowed funds: The fair value of borrowed funds is estimated based on discounted cash flows using currently available borrowing rates.

	Accrued interest receivable and payable: The fair values of both accrued interest receivable and payable are their carrying amounts.

	Commitments to extend credit: The fair values of commitments to extend credit are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and creditworthiness of the counterparties. At September 30, 2011 and December 31, 2010, the carrying amount and fair value of the commitments were not significant.


	September 30, 2011				December 31, 2010
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
			(nearest 000)				(nearest 000)
Financial assets:
Cash and due from banks	$	16,960,499	$	16,960,000	$	20,603,808	$	20,604,000
Investments in certificates of deposit		4,576,000		4,576,000		12,689,000		12,689,000
Securities available-for-sale		68,098,767		68,099,000		48,435,771		48,436,000
Restricted equity securities		3,430,600		3,431,000		3,017,200		3,017,000
Loans, net		308,439,379		321,063,000		334,460,567		341,055,000
Loans held for sale		469,720		470,000		332,178		332,000
Accrued interest receivable		1,622,117		1,622,000		1,754,292		1,754,000
Financial liabilities:
Deposits		347,025,034		349,855,000		349,832,904		353,328,000
Borrowed funds		27,250,000		28,290,000		49,250,000		51,118,000
Accrued interest payable		46,176		46,000		162,034		162,000

6. OPERATING SEGMENTS

An operating segment is generally defined as a component of a business for which discrete financial information is available and whose results are reviewed by the chief operating decision-maker. The Company has determined that it has two reportable segments: a traditional banking segment and a nonbank segment. The traditional banking segment consists of the Company and its banking subsidiary, First Federal Savings Bank of Iowa. Following its recent conversion from a federal savings bank to an Iowa state chartered bank, the Bank operates as a state commercial bank providing deposit, loan and other related products to individuals and small businesses, primarily in the communities where their offices are located. The nonbank segment, which is set forth under the caption “All Others” below, consists of the operations of the subsidiaries under the Bank, and includes real estate abstracting services, insurance and investment services, and ownership of low-income housing tax credit apartment complexes.

INDEX

Transactions between affiliates, the resulting revenues of which are shown in the inter-segment revenue category, are conducted at market prices that would be paid if the companies were not affiliates.


	Three Months Ended September 30, 2011							Nine Months Ended September 30, 2011
	Traditional							Traditional
	Banking		All Others			Total		Banking		All Others			Total

Interest income	$	4,986,912	$	-		$	4,986,912	$	15,282,408	$	-		$	15,282,408
Interest expense		1,308,084		26,636			1,334,720		4,383,237		80,778			4,464,015
Net interest income (loss)		3,678,828		(26,636	)		3,652,192		10,899,171		(80,778	)		10,818,393
Provision for loan losses		350,000		-			350,000		1,135,000		-			1,135,000
Net interest income (loss) after
provision for loan losses		3,328,828		(26,636	)		3,302,192		9,764,171		(80,778	)		9,683,393
Noninterest income		1,528,845		431,757			1,960,602		4,149,373		1,284,875			5,434,248
Securities gains, net		85,614		-			85,614		115,655		-			115,655
Noninterest expense		3,593,532		405,811			3,999,343		11,044,296		1,232,291			12,276,587
Income (loss) before income taxes		1,349,755		(690	)		1,349,065		2,984,903		(28,194	)		2,956,709
Provision for income taxes		318,500		6,500			325,000		676,400		18,200			694,600
Net income (loss)	$	1,031,255	$	(7,190	)	$	1,024,065	$	2,308,503	$	(46,394	)	$	2,262,109
Inter-segment revenue (expense)	$	153,012	$	(153,012	)	$	-	$	428,072	$	(428,072	)	$	-
Total assets	$	426,207,491	$	3,512,127		$	429,719,618	$	426,207,491	$	3,512,127		$	429,719,618
Total deposits	$	347,025,034	$	-		$	347,025,034	$	347,025,034	$	-		$	347,025,034

	Three Months Ended September 30, 2010							Nine Months Ended September 30, 2010
	Traditional							Traditional
	Banking		All Others			Total		Banking		All Others			Total

Interest income	$	5,476,474	$	-		$	5,476,474	$	16,858,095	$	-		$	16,858,095
Interest expense		1,914,529		27,770			1,942,299		5,844,982		83,876			5,928,858
Net interest income (loss)		3,561,945		(27,770	)		3,534,175		11,013,113		(83,876	)		10,929,237
Provision for loan losses		168,000		-			168,000		2,578,000		-			2,578,000
Net interest income (loss) after
provision for loan losses		3,393,945		(27,770	)		3,366,175		8,435,113		(83,876	)		8,351,237
Noninterest income		1,787,587		410,481			2,198,068		4,462,737		1,274,235			5,736,972
Securities gains, net		-		-			-		7,652		-			7,652
Noninterest expense		3,499,150		388,221			3,887,371		10,601,520		1,241,777			11,843,297
Income (loss) before taxes		1,682,382		(5,510	)		1,676,872		2,303,982		(51,418	)		2,252,564
Provision for income taxes		503,400		8,500			511,900		583,700		4,300			588,000
Net income	$	1,178,982	$	(14,010	)	$	1,164,972	$	1,720,282	$	(55,718	)	$	1,664,564
Inter-segment revenue (expense)	$	172,138	$	(172,138	)	$	-	$	525,334	$	(525,334	)	$	-
Total assets	$	451,792,043	$	3,582,560		$	455,374,603	$	451,792,043	$	3,582,560		$	455,374,603
Total deposits	$	349,147,741	$	-		$	349,147,741	$	349,147,741	$	-		$	349,147,741

7. CURRENT ACCOUNTING DEVELOPMENTS

In January 2010, the FASB issued ASU 2010-06, Improving Disclosures About Fair Value Measurements, which amends ASC 820-10 to require new disclosures about transfers in and out of Level 1 and Level 2 fair value measurements and the roll forward activity in Level 3 fair value measurements. ASU 2010-06 also clarifies existing disclosure requirements regarding the level of disaggregation of each class of assets and liabilities within a line item in the statement of financial condition and clarifies 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 that fall in either Level 2 or Level 3 fair value measurements. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the new disclosures about the roll forward of activity in Level 3 fair value measurements which are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. The Company’s adoption of this guidance did not have an impact on its financial statements.

INDEX

In July 2010, the FASB issued ASU 2010-20, Disclosures about Credit Quality of Financing Receivables and the Allowance for Credit Losses, which amends ASC 310, Receivables, by requiring more robust and disaggregated disclosures about the credit quality of an entity’s financing receivables and its allowance for credit losses. The objective of enhancing these disclosures is to improve a financial statement user’s understanding of (1) the nature of an entity’s credit risk associated with its financing receivables and (2) the entity’s assessment of that risk in estimating its allowance for credit losses as well as changes in the allowance and the reasons for those changes. The new and amended disclosures that relate to information as of the end of a reporting period are effective for the first interim or annual reporting periods ending on or after December 15, 2010, which for the Company was the annual reporting period ending December 31, 2010. However, the disclosures that include information for activity that occurs during a reporting period are effective for the first interim or annual periods beginning after December 15, 2010, which for the Company was the quarterly period beginning January 1, 2011. Those disclosures include the activity in the allowance for credit losses for each period. In January 2011, the FASB temporarily delayed the effective date of the disclosures required for troubled debt restructured loans (TDR) for public companies. Since the provisions of ASU 2010-20 are disclosure related, the Company’s adoption of this guidance has not and is not expected to have an impact on its financial statements.

In April 2011, the FASB issued ASU 2011-02, A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring, which amended guidance clarifying for creditors which restructured loans are considered TDR. To qualify as a TDR, a creditor must separately conclude that the restructuring constitutes a concession and that the debtor is experiencing financial difficulty. The amended guidance is effective for public companies for the first interim or annual period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. The Company adopted this guidance effective July 1, 2011. The adoption did not have a material impact on the Company’s consolidated financial statements.

In June 2011, FASB issued ASU No. 2011-05, Amendments to Topic 220, Comprehensive Income. Under the amendments in this ASU, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. This ASU eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders' equity. The amendments in this ASU do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The amendments in this ASU should be applied retrospectively. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Early adoption is permitted, because compliance with the amendments is already permitted. The amendments do not require any transition disclosures. The Company adopted this guidance effective September 30, 2011. The adoption did not have a material impact on the Company's consolidated financial statements.

In September 2011, FASB issued ASU No. 2011-09, Disclosures about an Employer’s Participation in a Multiemployer Plan. For employers that participate in multiemployer pension plans, this guidance requires an employer to provide additional quantitative and qualitative disclosures. The amended disclosures provide users with more detailed information about an employer’s involvement in multiemployer pension plans. For public entities, this guidance is effective for annual periods for fiscal years ending after December 15, 2011, which for the Company is December 31, 2011 and should be applied retrospectively for all prior periods presented. The adoption of this guidance is not expected to have a material impact on the Company’s financial statements.

8. SUBSEQUENT EVENT

Subsequent events have been evaluated through the date financial statements included herein are filed with the Securities and Exchange Commission. Through that date, there were no events requiring recognition or disclosure.

INDEX

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

This Quarterly Report on Form 10-Q contains forward-looking statements consisting of estimates with respect to the consolidated financial condition, results of operations and business of the Company and its subsidiaries, including the Bank, that are subject to various factors which could cause actual results to differ materially from these estimates, including those set forth in Part I, Item 1A — Risk Factors included in the Company’s 2010 Annual Report on Form 10-K and in Part II, Item 1A — Risk Factors included in this Quarterly Report on Form 10-Q. These factors include changes in general, economic, market, legislative and regulatory conditions, and the development of an interest rate environment that adversely affects the interest rate spread or other income anticipated from the Company’s operations and investments. The Company’s actual results may differ from the results discussed in the forward-looking statements. The Company disclaims any obligation to publicly announce future events or developments that may affect the forward-looking statements contained herein.

Overview

The purpose of this overview is to provide a summary of the items management focuses on when evaluating the condition of the Company and its success in implementing its business and shareholder value strategies. The Company’s business strategy is to operate the Bank as a well-capitalized, profitable and independent community oriented commercial bank. The Company’s shareholder value strategy has three major themes: (1) enhancing shareholders’ value; (2) making its banking franchise more valuable; and (3) efficiently utilizing its capital.

Management believes the following were important factors in the Company’s performance during the three and nine month periods ended September 30, 2011:

	•		The Bank completed its conversion to a state-chartered commercial bank from a federally-chartered stock savings bank and has become a member of The Federal Reserve Bank of Chicago. The Company completed a reorganization to a bank holding company from a savings and loan holding company.
	•		Loans amounted to $313.5 million as of September 30, 2011 compared to $340.6 million as of December 31, 2010, representing a decrease of 8.0%. The decline in the loan portfolio is primarily the result of a decrease in loan volume due to low demand for new loans as payments and prepayments exceeded originations in most loan categories.
	•		Nonperforming assets decreased $9.0 million from $16.2 million at December 31, 2010 to $7.2 million at September 30, 2011. The Bank recorded a provision for loan losses of $350,000 and $1.1 million for the three and nine months ended September 30, 2011 compared to $168,000 and $2.6 million for the same periods in 2010. The Company continues to monitor its loan portfolio with the objective of minimizing defaults or write-downs. Despite these actions, the possibility of additional losses in loans and losses in the value of real estate owned can not be eliminated.
	•		Capital remains strong with stockholders equity as a percentage of total assets increasing to 12.1% at September 30, 2011 from 10.9% at December 31, 2010. The Bank continues to be considered “well capitalized” under regulatory capital requirements with a total risk based capital ratio of 18.2% at September 30, 2011.
	•		The Company has increased liquidity as it continues investing funds in securities available-for-sale.

Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”)

Major financial reform legislation, known as the Dodd-Frank Act, was signed into law by the President in July 2010. Among other things, the Dodd-Frank Act significantly impacts the rules governing the provision of consumer financial products and services, and implementation of the many requirements of the legislation will entail new mandatory and discretionary rulemakings by numerous federal regulatory agencies over the next several years. Many of the provisions of the Dodd-Frank Act affecting the Company and Bank have effective dates ranging from immediately upon enactment of the legislation to several years following enactment of the Dodd-Frank Act.

INDEX

Of particular significance is that on July 21, 2011, the Dodd-Frank Act marked its one year anniversary, at which time certain important provisions pertaining to the operations of depository institutions became effective. For example, effective on July 21, 2011, the Dodd-Frank Act repealed the federal prohibition on the payment of interest on demand deposits, thereby permitting (but not requiring) depository institutions to pay interest on commercial transaction and other accounts. The ultimate impact of this change in law on the operations of the Company and Bank has not yet been determined, as it will largely depend on market activity.

July 21, 2011 was also the designated transfer date under the Dodd-Frank Act for the formal transfer of rulemaking functions under the federal consumer financial laws from each of the various federal banking agencies to a new governmental entity known as the Consumer Financial Protection Bureau (“CFPB”) that is charged with the mission of protecting consumer interests. The CFPB is responsible for administering and carrying out the purposes and objectives of the “Federal consumer financial laws, and to prevent evasions thereof,” with respect to all financial institutions that offer financial products and services to consumers. The CFPB is also authorized to prescribe rules applicable to any covered person or service provider identifying and prohibiting acts or practices that are “unfair, deceptive, or abusive” in connection with any transaction with a consumer for a consumer financial product or service, or the offering of a consumer financial product or service. With its broad rulemaking powers, the new CFPB has the potential to reshape the consumer financial laws through rulemaking and enforcement of rules concerning unfair, deceptive or abusive practices, which may directly impact the business operations of financial institutions offering consumer financial products or services including the Bank.

Other recent developments under the Dodd-Frank Act include the Federal Reserve’s issuance of a final rule under the so-called Durbin Amendment establishing standards for debit card interchange fees and prohibiting network exclusivity arrangements and routing restrictions for electronic debit transactions. Under the final rule, the maximum permissible interchange fee that an issuer may receive for an electronic debit transaction will be the sum of 21 cents per transaction and 5 basis points multiplied by the value of the transaction. This provision regarding debit card interchange fees became effective on October 1, 2011. Among other provisions, the final rule also prohibits all issuers and networks from restricting the number of networks over which electronic debit transactions may be processed to less than two unaffiliated networks. The effective date for the network exclusivity prohibition is April 1, 2012. A statutory exemption from the debit card interchange fee standards is provided for the Bank and other issuers that, together with their affiliates, have assets of less than $10 billion. Notwithstanding the availability of this exemption, the ultimate impact and effectiveness of this exemption for small issuers such as the Bank, with respect to the debit card interchange fee standards, remains to be seen.

The Company and Bank are continuing to closely monitor and evaluate developments under the Dodd-Frank Act with respect to our business, financial condition, results of operations and prospects.

CRITICAL ACCOUNTING POLICIES

This “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the disclosures included elsewhere in this report, are based on the Company’s consolidated financial statements. These statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The financial information contained in these statements is, for the most part, based on approximate measures of the financial effects of transactions and events that have already occurred. However, the preparation of these statements requires management to make certain estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses.

The Company’s accounting policies are described in the “Notes to Consolidated Financial Statements” of the Company’s 2010 Annual Report on Form 10-K. Based on its consideration of accounting policies that involve the most complex and subjective estimates and judgments, management has identified its most critical accounting policies to be those related to the allowance for loan losses and asset impairment judgments.

The allowance for loan losses is established through a provision for loan losses charged to expense. Loans are charged off against the allowance for loan losses when management believes that collectibility of the principal is unlikely. The Company has policies and procedures for evaluating the overall credit quality of its loan portfolio, including timely identification of potential problem credits.

INDEX

On a quarterly basis, management reviews the appropriate level for the allowance for loan losses, incorporating a variety of risk considerations, both quantitative and qualitative. Quantitative factors include the Company’s historical loss experience, delinquency and charge-off trends, collateral values, known information about individual loans and other factors. Qualitative factors include the general economic environment in the Company’s market area and the trends of those economic conditions. To the extent that actual results differ from forecasts and management’s judgment, the allowance for loan losses may be greater or less than future charge-offs.

Asset impairment judgments include evaluating the decline in fair value of available-for-sale securities below their cost. Declines in fair value of available-for-sale securities below their cost that are deemed to be other-than-temporary are reflected in earnings as realized losses for the credit related portion of the loss, while the noncredit-related portion of the reduction in fair value is recorded in other comprehensive income. In estimating other-than-temporary impairment losses, management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the lack of intent of the Company to sell the security and whether it is more-likely-than-not that the Company will be required to sell the security before its anticipated recovery.

Asset impairment judgments also include evaluation of fair value of foreclosed real estate. Foreclosed real estate is initially recorded at fair value less estimated selling costs. Subsequently it is carried at the lower of cost or fair value less estimated selling costs. Fair value is estimated through current appraisals or listing prices. Estimated fair values may be adjusted by management to reflect current economic and market conditions.

INDEX

FINANCIAL CONDITION

Total assets decreased $22.5 million, or 5.0%, to $429.7 million at September 30, 2011, from $452.3 million at December 31, 2010. The decrease in assets was primarily due to a decrease in net loans receivable, cash and due from banks, investments in certificates of deposits and foreclosed real estate, offset in part by an increase in securities available-for-sale. During the nine months ended September 30, 2011, cash balances and cash provided by loan payments and prepayments, securities sales, maturities, and paydowns, as well as maturities of investments in certificates of deposit were used in part to purchase $32.2 million of securities available-for-sale. These cash flows were also utilized in reducing the amount of outstanding borrowed funds.

Net loans receivable decreased by $26.0 million, or 7.8%, to $308.4 million at September 30, 2011, from $334.5 million at December 31, 2010, primarily due to payments and prepayments of $74.7 million and loan sales of $23.7 million during the nine months ended September 30, 2011. These payments, prepayments, and loan sales were offset in part by the origination of $54.0 million of first mortgage loans primarily secured by one-to-four family residences and commercial real estate, and the origination of $20.2 million of consumer loans during the nine months ended September 30, 2011. The Company generally sells fixed-rate residential loans originated with maturities of more than 15 years in the secondary mortgage market in order to reduce interest rate risk. The decrease in the loan portfolio was primarily due to general decreases in demand for new loans.

The Company has also significantly restricted any new out-of-state lending due to prevailing market conditions. At September 30, 2011, the Company’s loan portfolio included $77.1 million of loans secured by out-of-state properties, compared to $91.5 million at December 31, 2010. These loans represented 24.4% of the Company’s total loan portfolio at September 30, 2011 compared to 26.9% at December 31, 2010 and are primarily multifamily and commercial real estate loans. The Company originated $5.5 million of new out-of-state loan originations secured by multi-family and commercial real estate for the nine months ended September 30, 2011. There were no purchases of commercial loans secured by out-of-state properties during the nine months ended September 30, 2011.

INDEX

The following table provides information regarding nonaccrual loans and nonperforming assets.


	September 30,			December 31,
	2011			2010
	(Dollars in thousands)

First mortgage loans:
One- to four-family residential	$	2,115		$	2,460
Multifamily and commercial properties		3,152			8,647
Consumer loans		485			463
Total nonaccrual loans		5,752			11,570

90 days past due loans (still
accruing interest)		-			-
Other nonperforming loans		-			-
Total nonperforming loans		5,752			11,570

Total foreclosed real estate		1,387			4,586
Other nonperforming assets		20			-
Total nonperforming assets	$	7,159		$	16,156

Total nonaccrual loans to net loans receivable		1.87	%		3.46	%
Total nonaccrual loans to total assets		1.34	%		2.56	%
Total nonperforming assets to total assets		1.67	%		3.57	%

The allowance for loan loss was $5.1 million at September 30, 2011, compared to $6.1 million at December 31, 2010. The allowance for loan losses at September 30, 2011 was 1.6% of loans and 88.1% of nonperforming loans, compared to 1.8% of loans and 53.1% of nonperforming loans at December 31, 2010.

The improvement in nonperforming assets for the nine months ended September 30, 2011 is primarily the result of the sale of foreclosed commercial real estate and the sales of commercial properties collateralizing certain nonperforming commercial loans resulting in the settlement of the loan balance and a decline in the identification of new impaired loans and further impairments. Two commercial foreclosed real estate properties with total balances of $2.2 million were sold. Three nonperforming commercial loans with total balances of $5.1 million were settled with sales of the underlying collateral.

Management believes that the allowance for loan losses was adequate as of September 30, 2011. While management estimates loan losses using the best available information, such as independent appraisals for significant collateral properties, no assurance can be made that future adjustments to the allowance will not be necessary based on changes in economic and real estate market conditions, further information obtained regarding problem loans, identification of additional problem loans, and other factors, both within and outside of management’s control. Due to potential changes in the real estate markets, it is at least reasonably possible that management’s assessment will change in the near term and that such changes could materially affect the amounts reported in the Company’s financial statements.

Deposits decreased $2.8 million, or 0.8%, to $347.0 million at September 30, 2011, from $349.8 million at December 31, 2010, primarily reflecting decreases in certificates of deposits and interest bearing demand deposits of $5.6 million and $1.5 million, respectively, offset in part by increases in noninterest bearing deposits, money market and savings accounts of $1.5 million, $1.1 million and $1.7 million, respectively. Borrowings, which consist of FHLB advances, decreased $22.0 million, or 44.7%, to $27.3 million at September 30, 2011, from $49.3 million at December 31, 2010. This decrease was due to the normal repayment of borrowings upon maturity.

INDEX

Total stockholders’ equity increased $3.0 million, or 6.0%, to $52.1 million at September 30, 2011, from $49.2 million at December 31, 2010, primarily due to earnings for the 2011 period and an increase in accumulated other comprehensive gains, offset in part by dividends paid to stockholders.

RESULTS OF OPERATIONS

The following table shows selected financial results and ratios.

	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010
Net income	$	1,024,065		$	1,164,972		$	2,262,109		$	1,664,564

Average assets		436,601,917			459,220,298			447,354,057			457,264,518
Average stockholders equity		51,412,009			49,249,927			50,387,357			48,956,687

Return on assets		0.94	%		1.01	%		0.67	%		0.49	%

Return on equity		7.97	%		9.46	%		5.99	%		4.53	%

Efficiency ratio		71.25	%		67.82	%		75.54	%		71.06	%


Definitions of ratios:

Return on assets - annualized net income divided by average assets.
Return on equity - annualized net income divided by average stockholders equity.
Efficiency ratio - noninterest expense divided by the sum of noninterest income plus net interest income.

Net Income. Net income decreased by $141,000 to $1.0 million for the quarter ended September 30, 2011, compared to $1.2 million for the quarter ended September 30, 2010. The decrease in net income was primarily due to an increase in provision for loan losses and noninterest expenses and a decrease in noninterest income, offset in part by an increase in net interest income and securities gains.

Net income increased by $598,000 to $2.3 million for the nine months ended September 30, 2011, compared to $1.7 million for the nine months ended September 30, 2010. The increase in net income was primarily due to a decrease in provision for loan losses and increase in securities gains, offset in part by a decrease in net interest income and noninterest income and an increase in noninterest expenses.

Net Interest Income. The following table sets forth certain information relating to the Company’s net interest income and average balance sheet and reflects the average yield on assets and average cost of liabilities for the periods indicated. Such yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods presented.

INDEX


	Three months ended September 30,
	2011							2010
	Average Balance		Interest		Average Yield/Rate			Average Balance		Interest		Average Yield/Rate
Assets:
Interest-earning assets:
Loans	$	318,578,101	$	4,479,035		5.60	%	$	353,016,079	$	5,141,320		5.80	%
Securities		71,179,231		483,212		2.72	%		43,673,555		277,478		2.54	%
Investments in certificates of deposit		6,813,889		18,907		1.11	%		13,855,079		47,427		1.37	%
Interest-bearing cash		10,216,280		5,758		0.22	%		18,690,576		10,249		0.22	%
Total interest-earning assets		406,787,501		4,986,912		4.86	%		429,235,289		5,476,474		5.04	%
Noninterest-earning assets		29,814,416							29,985,009
Total assets	$	436,601,917						$	459,220,298

Liabilities and Equity:
Interest-bearing liabilities:
Demand and money market savings	$	151,125,088	$	257,968		0.68	%	$	136,633,563	$	270,415		0.79	%
Savings		32,689,711		7,955		0.10	%		30,378,618		12,214		0.16	%
Certificates of Deposit		146,245,461		831,941		2.26	%		165,400,775		1,061,771		2.55	%
Borrowed funds		30,061,649		236,856		3.13	%		54,704,301		597,899		4.34	%
Total interest-bearing liabilities		360,121,909		1,334,720		1.47	%		387,117,257		1,942,299		1.99	%
Noninterest-bearing liabilities		25,067,999							22,853,114
Total liabilities		385,189,908							409,970,371
Equity		51,412,009							49,249,927
Total liabilities and equity	$	436,601,917						$	459,220,298


Net interest income			$	3,652,192						$	3,534,175

Net interest rate spread						3.39	%						3.05	%
Net interest margin						3.57	%						3.26	%

Ratio of average interest-earnings assets to
average interest-bearing liabilities						112.96	%						110.88	%



	Nine months ended September 30,
	2011							2010
	Average Balance		Interest		Average Yield/Rate			Average Balance		Interest		Average Yield/Rate
Assets:
Interest-earning assets:
Loans	$	325,793,773	$	13,837,868		5.66	%	$	364,346,611	$	15,988,721		5.85	%
Securities		64,553,592		1,338,254		2.76	%		35,761,476		753,531		2.81	%
Investments in certificates of deposit		8,750,816		77,926		1.19	%		8,077,388		84,714		1.40	%
Interest-bearing cash		16,894,188		28,360		0.22	%		19,405,024		31,129		0.21	%
Total interest-earning assets		415,992,369		15,282,408		4.90	%		427,590,499		16,858,095		5.26	%
Noninterest-earning assets		31,361,688							29,674,019
Total assets	$	447,354,057						$	457,264,518

Liabilities and Equity:
Interest-bearing liabilities:
Demand and money market savings	$	154,386,948	$	916,871		0.79	%	$	126,609,624	$	680,146		0.72	%
Savings		32,506,907		29,797		0.12	%		30,361,994		42,658		0.19	%
Certificates of Deposit		149,988,670		2,584,412		2.30	%		170,609,619		3,306,562		2.59	%
Borrowed funds		35,858,138		932,935		3.48	%		58,029,770		1,899,492		4.38	%
Total interest-bearing liabilities		372,740,663		4,464,015		1.60	%		385,611,007		5,928,858		2.06	%
Noninterest-bearing liabilities		24,226,037							22,696,824
Total liabilities		396,966,700							408,307,831
Equity		50,387,357							48,956,687
Total liabilities and equity	$	447,354,057						$	457,264,518


Net interest income			$	10,818,393						$	10,929,237

Net interest rate spread						3.30	%						3.20	%
Net interest margin						3.46	%						3.40	%

Ratio of average interest-earnings assets to
average interest-bearing liabilities						111.60	%						110.89	%

INDEX

Fluctuations in net interest income can result from the combination of changes in the balances of asset and liability categories and changes in interest rates. Interest rates earned and paid are also affected by general economic conditions, particularly changes in market interest rates, and by competitive factors, government policies, and the actions of regulatory authorities. Net interest income before provision for loan losses increased by $118,000, or 3.3%, to $3.7 million for the quarter ended September 30, 2011, from $3.5 million for the quarter ended September 30, 2010. The increase was primarily due to an increase in net interest rate spread (i.e., the difference in the average yield on assets and average cost of liabilities) and a decrease in the average balance of interest-bearing liabilities, principally offset by a decrease in the average balance of interest-earning assets. The interest rate spread increased to 3.39% for the quarter ended September 30, 2011, from 3.05% for the quarter ended September 30, 2010. The increase in interest rate spread reflects a decrease in cost of funds, offset in part by a decrease in the yield on interest-earning assets.

Net interest income before provision for loan losses decreased by $111,000, or 1.0%, to $10.8 million for the nine months ended September 30, 2011, from $10.9 million for the nine months ended September 30, 2010. The slight decrease was primarily due to a decrease in the average balance of interest-earning assets, offset by a decrease in the average balance of interest-bearing liabilities and increase in net interest rate spread. The interest rate spread increased to 3.30% for the nine months ended September 30, 2011, from 3.20% for the nine months ended September 30, 2010. The increase in interest rate spread reflects a decrease in the cost of funds, offset in part by a decrease in the yield on interest-earning assets.

Provision for Loan Losses. The Company establishes provisions for loan losses, which are charged to operations, in order to maintain the allowance for loan losses at a level which is deemed to be appropriate based upon an assessment of prior loss experience, a review of classified loans, a realistic determination of value and adequacy of underlying collateral, levels and trends of loan categories, industry standards, past due loans, economic conditions, the volume and type of loans in the Company’s portfolio, and other factors related to the collectibility of the Company’s loan portfolio. The Company’s provision for loan losses was $350,000 and $168,000 for the quarters ended September 30, 2011 and 2010, respectively, representing an increase of $182,000, or 108.3%. The provision for loan loss for the three months ended September 30, 2010 was favorably impacted as a result of a reduction of an impairment taken in a prior period based on new information resulting in an increase in probability of collection of the loan. The Company’s provision for loan losses was $1.1 million and $2.6 million for the nine months ended September 30, 2011 and 2010, respectively, representing a decrease of $1.4 million, or 56.0%. The provision for loan loss for the three and nine months ended September 30, 2011 was impacted in part by the overall reduction in the size of the loan portfolio and the reduction in the identification of new impaired loans and further impairments.

Noninterest Income. The following table shows the changes in the components of noninterest income.


	Three Months Ended September 30,												Nine Months Ended September 30,
	2011			2010			Change			Change %			2011			2010			Change			Change %
Noninterest income:
Fees and service charges	$	1,247,141		$	1,266,139		$	(18,998	)		-1.5	%	$	3,627,806		$	3,559,002		$	68,804			1.9	%
Abstract fees		141,193			175,187			(33,994	)		-19.4	%		424,698			481,871			(57,173	)		-11.9	%
Mortgage banking income		247,421			350,701			(103,280	)		-29.4	%		471,488			591,656			(120,168	)		-20.3	%
Loan prepayment fees		1,904			2,273			(369	)		-16.2	%		15,359			29,477			(14,118	)		-47.9	%
Other income:
Increase in CSV - BOLI		60,951			62,610			(1,659	)		-2.6	%		178,552			183,564			(5,012	)		-2.7	%
Investment and Insurance sales		189,575			137,274			52,301			38.1	%		557,972			484,691			73,281			15.1	%
Foreclosed real estate net earnings		(58,744	)		(34,799	)		(23,945	)		68.8	%		(254,047	)		(87,456	)		(166,591	)		190.5	%
Rental income		122,711			121,308			1,403			1.2	%		367,336			363,907			3,429			0.9	%
All other		8,450			117,375			(108,925	)		-92.8	%		45,084			130,260			(85,176	)		-65.4	%
Total other income	$	322,943		$	403,768		$	(80,825	)		-20.0	%	$	894,897		$	1,074,966		$	(180,069	)		-16.8	%

Total noninterest income	$	1,960,602		$	2,198,068		$	(237,466	)		-10.8	%	$	5,434,248		$	5,736,972		$	(302,724	)		-5.3	%

INDEX

Total noninterest income decreased by $237,000, or 10.8%, to $2.0 million for the quarter ended September 30, 2011, from $2.2 million for the quarter ended September 30, 2010. Total noninterest income decreased by $303,000, or 5.3%, to $5.4 million for the nine months ended September 30, 2011, from $5.7 million for the nine months ended September 30, 2010. Various factors account for the general decrease in noninterest income, including a decrease in abstract fees due to additional competition in our market and reduced mortgage loan demand compared to prior year levels. Mortgage banking income also decreased due to a decrease in the volume of loans sold in the secondary market. The decrease in other income was primarily a result of increases in net losses and expenses related to foreclosed real estate and a $90,000 payment that the Company received in 2010 from the Federal Deposit Insurance Corporation (“FDIC”) for uninsured balances maintained at an institution closed by the FDIC in 2008. The uninsured balance had previously been written off as uncollectible. Income from investment and insurance sales increased as a result of a larger sales staff.

Securities Gains. Gross security gains from the sale of securities of $86,000 and $116,000 were realized for the three and nine months ended September 30, 2011, respectively, compared to no sale of securities for the three months ended September 30, 2010 and $7,652 of sales for the nine months ended September 30, 2010. The realized gain for 2011 was related to the sale of five municipal bonds. The realized gain for 2010 was related to the sale of the mortgage bond mutual fund investment.

Noninterest Expense. The following table shows the changes in the components of noninterest expense.


	Three Months Ended September 30,										Nine Months Ended September 30,
	2011		2010		Change			Change %			2011		2010		Change			Change %
Noninterest expense:
Compensation and employee benefits	$	2,033,066	$	1,928,708	$	104,358			5.4	%	$	5,823,421	$	5,698,440	$	124,981			2.2	%
Premises and equipment		438,977		460,204		(21,227	)		-4.6	%		1,386,763		1,445,629		(58,866	)		-4.1	%
Data processing		218,950		217,465		1,485			0.7	%		651,850		660,445		(8,595	)		-1.3	%
FDIC insurance expense		95,635		135,248		(39,613	)		-29.3	%		353,707		419,078		(65,371	)		-15.6	%
Foreclosed real estate impairment		64,251		7,147		57,104			799.0	%		453,422		323,605		129,817			40.1	%
Other expense:
Advertising and promotions		74,181		93,863		(19,682	)		-21.0	%		331,100		252,148		78,952			31.3	%
Professional fees		207,467		142,612		64,855			45.5	%		605,047		440,219		164,828			37.4	%
Printing, postage, and supplies		103,707		109,189		(5,482	)		-5.0	%		334,606		327,859		6,747			2.1	%
Checking account charges		59,700		84,788		(25,088	)		-29.6	%		189,049		253,038		(63,989	)		-25.3	%
Insurance		35,963		42,092		(6,129	)		-14.6	%		112,278		127,594		(15,316	)		-12.0	%
Regulatory fees		14,805		34,290		(19,485	)		-56.8	%		95,396		97,951		(2,555	)		-2.6	%
Telephone		37,482		36,615		867			2.4	%		111,267		111,595		(328	)		-0.3	%
Apartment operating costs		86,436		89,265		(2,829	)		-3.2	%		275,146		263,334		11,812			4.5	%
Employee costs		56,696		44,956		11,740			26.1	%		164,502		159,275		5,227			3.3	%
Card service expenses		177,142		163,024		14,118			8.7	%		508,675		471,859		36,816			7.8	%
All other		294,885		297,905		(3,020	)		-1.0	%		880,358		791,228		89,130			11.3	%
Total other expense	$	1,148,464	$	1,138,599	$	9,865			0.9	%	$	3,607,424	$	3,296,100	$	311,324			9.4	%

Total noninterest expense	$	3,999,343	$	3,887,371	$	111,972			2.9	%	$	12,276,587	$	11,843,297	$	433,290			3.7	%

Total noninterest expense increased by $112,000, or 2.9%, to $4.0 million for the three months ended September 30, 2011, from $3.9 million for the three months ended September 30, 2010. Total noninterest expense increased by $433,000, or 3.7%, to $12.3 million for the nine months ended September 30, 2011, from $11.8 million for the nine months ended September 30, 2010. Various factors account for the general increase in noninterest expense, including an increase in compensation and employee benefits primarily due to an increase in pension plan expense and employee severance accrual. Also, foreclosed real estate impairment increased primarily as a result of further deterioration of foreclosed real estate values indicated by updated appraisals. The decrease in premises and equipment was related to a decrease in depreciation expense. FDIC insurance expense decreased as the result of a new assessment methodology and calculation which became effective for the quarter ended June 30, 2011. The increase in other expenses was primarily due to increases in legal and professional fees related to loan collection, the conversion to a state charter from a federal thrift charter and other corporate matters, and advertising costs associated with targeted loan and deposit advertising campaigns. Regulatory fees decreased in the quarter ended September 30, 2011 as a result of the conversion to a state charter.

INDEX

Income Taxes. Provision for income taxes decreased by $187,000, or 36.5%, to $325,000 for the quarter ended September 30, 2011, compared to $512,000 for the quarter ended September 30, 2010. The decrease in income taxes was primarily due to a decrease in income before taxes and the receipt of new low income housing tax credits.

Provision for income taxes increased by $107,000, or 18.1%, to $695,000 for the nine months ended September 30, 2011, compared to $588,000 for the nine months ended September 30, 2010. The increase in income taxes was primarily due to an increase in income before taxes, offset in part by the receipt of new low income housing tax credits.

LIQUIDITY AND CAPITAL RESOURCES

The objective of liquidity management is to ensure the availability of sufficient cash flows to meet all financial commitments and to capitalize on opportunities for profitable business growth. The Company’s principal source of funds is deposits. Other sources include loan principal repayments, proceeds from the maturity and sale of investment securities, advances from the FHLB, and funds provided by operations. Liquidity management is conducted on both a daily and a long-term basis. Investments in liquid assets are adjusted based on expected loan demand, projected loan maturities and payments, expected deposit flows, and the objectives set by the Company’s asset-liability management policy. The Company had liquid assets (cash and cash equivalents) of $17.0 million as of September 30, 2011, compared with $20.6 million as of December 31, 2010. The Company had additional borrowing capacity available from the FHLB of approximately $83.4 million at September 30, 2011. In addition, the Company had $5.0 million in borrowing capacity available through a line of credit with a correspondent bank as of September 30, 2011. The Company had not drawn on this line of credit as of September 30, 2011. Net cash from continuing operating activities contributed $5.8 million and $4.5 million to liquidity for the nine months ended September 30, 2011 and 2010, respectively. The combination of high levels of potentially liquid assets, cash flows from operations and additional borrowing capacity provided strong liquidity for the Company at September 30, 2011.

On January 9, 2009, the Company issued $10.2 million of our Series A Preferred Stock and an associated Warrant to purchase the Company’s common stock under a program offered by the U.S. Department of the Treasury (“Treasury”). Although the Bank would have remained “well capitalized” without these funds, this new equity investment increased the capacity to support economic activity and growth in each of the communities served by the Bank through responsible lending.

On August 15, 2011, the Company paid an aggregate cash dividend of $127,500 on the Fixed Rate Cumulative Perpetual Preferred Stock, Series A issued to the Treasury. On August 26, 2011, the Company declared a cash dividend of $0.01 per common share on its common stock, which was paid on October 7, 2011 to stockholders of record as of September 16, 2011.

During 2011, macro-economic conditions and the challenging economic environment continued to impact liquidity and credit quality across the financial markets. While the recession has impacted the local economies in which the Company operates and holds out-of-state real estate loans, our liquidity position and capital resources remain strong and the Company anticipates that it will have sufficient funds to meet its current funding commitments.

The Bank is subject to various regulatory capital requirements administered by federal and state banking agencies. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the following table) of Total and Tier I Capital to Risk-Weighted Assets and of Tier I Capital to Average Assets. Management believes the Bank met all capital adequacy requirements to which they were subject as of September 30, 2011.

INDEX

											To Be Well-Capitalized
						For Capital					Under Prompt Corrective
	Actual					Adequacy Purposes					Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(000's)					(000's)					(000's)
As of September 30, 2011:
Total Capital (to risk-weighted assets)	$	52,238		18.2	%	$	22,930		8.0	%	$	28,663		10.0	%
Tier I Capital (to risk-weighted assets)		48,637		17.0			11,465		4.0			17,198		6.0
Tier I Capital (to average assets)		48,637		11.1			17,519		4.0			21,898		5.0

As of December 31, 2010:
Total Capital (to risk-weighted assets)	$	50,029		16.5	%	$	24,194		8.0	%	$	30,242		10.0	%
Tier I Capital (to risk-weighted assets)		46,278		15.3			12,097		4.0			18,145		6.0
Tier I (Core) Capital (to adjusted assets)		46,278		10.2			18,096		4.0			22,620		5.0
Tangible Capital (to adjusted assets)(1)		46,278		10.2			6,786		1.5			-		-

(1) Under regulations as a federally-chartered stock savings bank, the Bank was also subject to minimum tangible capital requirements.

OFF-BALANCE SHEET ARRANGEMENTS

The Company is a party to financial instruments with off-statement of financial condition risk in the normal course of business to meet the financing needs of its customers. These financial instruments consist primarily of commitments to extend credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the statement of financial condition. The contract or notional amounts of those instruments reflect the extent of involvement the Company has in a particular class of financial instruments.

The Company uses the same credit policies in making commitments and conditional obligations as it does for instruments reflected in its statement of financial condition. The Company requires collateral or other security to support financial instruments with credit risks.

No material changes in the Company’s off-statement of financial condition arrangements occurred during the nine months ended September 30, 2011.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

In management’s opinion, there has been no material changes in the quantitative and qualitative information about market risk provided in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010. Please see the Company’s 2010 Annual Report on Form 10-K for a more detailed discussion of the Company’s interest rate sensitivity analysis.

Item 4. Controls and Procedures

Management, including the Company’s President and Chief Executive Officer and the Company’s Chief Financial Officer and Treasurer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this report. Based upon that evaluation, the Company’s President and Chief Executive Officer and the Chief Financial Officer and Treasurer concluded that the disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports the Company files and submits under the Exchange Act is (i) recorded, processed, summarized and reported as and when required and (ii) accumulated and communicated to the Company’s management, including the Company’s President and Chief Executive Officer and Chief Financial Officer and Treasurer, as appropriate to allow timely decisions regarding required disclosure.

INDEX

There have been no changes in the Company’s internal control over financial reporting identified in connection with the evaluation that occurred during the Company’s last fiscal quarter that have materially affected, or that

are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

The Company is not involved in any material pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business. Such routine legal proceedings, in the aggregate, are believed by management to be immaterial to the Company’s financial condition and results of operations.

Item 1A. Risk Factors

The following risk factor updates our disclosure of risk factors included in Item 1A. to Part 1 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.

The downgrade of U.S. government securities by the credit rating agencies could have a material adverse effect on the Company’s operations, earnings, and financial condition.

The recent debate in Congress regarding the national debt ceiling, federal budget deficit concerns, and overall weakness in the economy recently resulted in a downgrade of U.S. government securities by Standard & Poor’s, one of the three major credit rating agencies, in August 2011. While the federal banking agencies including the Federal Reserve and the FDIC have issued guidance indicating that, for risk-based capital purposes, the risk weights for U.S. Treasury securities and other securities issued or guaranteed by the U.S. government, government agencies, and government-sponsored entities will not be affected by the downgrade, the downgrade and the possible future downgrade of the federal government’s credit rating by one or both of the other two major rating agencies, could create uncertainty in the U.S. and global financial markets and cause other events which, directly or indirectly, may adversely affect the Company’s operations, earnings, and financial condition.

INDEX

Item 6. Exhibits

Exhibit No.	Description	Reference No.
3.1	Articles of Incorporation of North Central Bancshares, Inc.	(1)
3.2	Bylaws of North Central Bancshares, Inc., as amended	(2)
3.3	Articles of Amendment to the Articles of Incorporation establishing Series A Preferred Stock	(3)
31.1	Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer	*
31.2	Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer	*
32.1	Section 1350 Certification of Chief Executive Officer	*
32.2	Section 1350 Certification of Chief Financial Officer	*
101	Interactive data files: (i) Consolidated Statements of Financial Condition at September 30, 2011 and December 31, 2010 (unaudited), (ii) Consolidated Statements of Operations for the Three Months and Nine Months Ended September 30, 2011 and 2010 (unaudited), (iii) Consolidated Statements of Comprehensive Income for the Three Months and Nine Months Ended September 30, 2011 and 2010; (iv) Consolidated Statements of Stockholders’ Equity for the Nine Months Ended September 30, 2011 and 2010 (unaudited), (v) Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2011 and 2010, and (vi) Notes to Consolidated Financial Statements.**

*	Filed herewith.

Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

(1)	Incorporated herein by reference to the Quarterly Report on Form 10-Q filed with the SEC on August 12, 2009.

(2)	Incorporated herein by reference to the Annual Report on Form 10-K filed with the SEC on March 29, 2004.

(3)	Incorporated herein by reference to the Current Report on Form 8-K filed with the SEC on January 7, 2009.

INDEX

SIGNATURES

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

NORTH CENTRAL BANCSHARES, INC.

Date: November 9, 2011	BY: /s/ David M. Bradley
	David M. Bradley, Chairman, President & CEO

Date: November 9, 2011	BY: /s/ Jane M. Funk
	Jane M. Funk, Chief Financial Officer and Treasurer

Positive
Negative
Uncertain
Constraining
Legalese
Litigious
Readability	H.S. sophomore Bad

North Central Bancshares (FFFD) Inactive 10-Q2011 Q3 Quarterly report

Content analysis