Choice Bancorp 10Q 2012 Q2 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 June 30, 2012

	OR

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

For the transition period from _________________ to _________________

Commission file number0-54299

CHOICE BANCORP, INC.

(Exact name of registrant as specified in its charter)


Wisconsin	27-2416885
(State or other jurisdiction of incorporation	(I.R.S. Employer Identification No.)
or organization)

2450 Witzel Avenue, Oshkosh, WI	54904
(Address of principal executive offices)	(Zip Code)

(920) 230-1300
Registrant’s telephone number, including area code

Not Applicable
Former name, former address and former fiscal year, if changed since last report

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.

Yesx Noo

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).

Yesx Noo

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	o	Accelerated filer	o	Non-accelerated filer	o	Smaller reporting company	x
				(Do not check if a smaller reporting company)

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

Yeso Nox

Number of outstanding shares of common stock as of August 10, 2012: 2,160,620 shares.

EXPLANATORY NOTE

This document is intended to speak as of June 30, 2012, except as otherwise noted.

FORM 10-Q TABLE OF CONTENTS


	Page #
Part I – Financial Information
Item 1 Financial Statements (Unaudited)
Consolidated Statement of Financial Condition of Choice Bancorp, Inc. as of June 30, 2012 and as of December 31, 2011	3
Consolidated Statement of Income of Choice Bancorp, Inc. for the Three Months Ended June 30, 2012 and for the Three Months Ended June 30, 2011	4
Consolidated Statements of Comprehensive Income of Choice Bancorp, Inc. for the Three Months Ended June 30, 2012 and for the Three Months Ended June 30, 2011	5
Consolidated Statement of Stockholders’ Equity of Choice Bancorp, Inc. for the Three Months Ended June 30, 2012 and for the Three Months Ended June 30, 2011	6
Consolidated Statement of Cash Flows of Choice Bancorp, Inc. for the Three Months Ended June 30, 2012 and for the Three Months Ended June 30, 2011	7
Notes to Interim Consolidated Financial Statements (Unaudited)	8
Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations	25
Item 3 Quantitative and Qualitative Disclosures About Market Risk	44
Item 4 Controls and Procedures	45
Part II – Other Information	46
Item 1 Legal Proceedings	46
Item 1A Risk Factors	46
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds	46
Item 3 Defaults Upon Senior Securities	46
Item 5 Other Information	46
Item 6 Exhibits	47
Signatures	48

Item 1. Financial Statements

Choice Bancorp, Inc.

Consolidated Statements of Financial Condition


	June 30, 2012	December 31, 2011

	(Unaudited)
Assets

Cash and due from banks	$ 1,166,776	$ 1,540,825
Federal funds sold	7,385,000	409,000

Cash and cash equivalents	8,551,776	1,949,825

Securities available for sale	11,177,750	9,218,665
Loans held for sale	1,813,046	3,463,500
Loans, net	156,017,756	155,577,564
Premises and equipment, net	1,442,393	1,490,989
Other real estate owned	1,020,000	1,020,000
Deferred tax asset	1,705,000	1,200,000
Other assets	1,128,400	1,222,706

TOTAL ASSETS	$ 182,856,121	$ 175,143,249



Liabilities and Stockholders' Equity

Liabilities:
Non-interest bearing deposits	$ 9,556,537	$ 8,539,589
Interest bearing deposits	154,688,660	149,704,864

Total deposits	164,245,197	158,244,453
Other borrowings	290,000	290,000
Other liabilitites	817,572	955,524

Total Liabilities	165,352,769	159,489,977

Stockholders' equity:
Common Stock - $1 par value:
Authorized - 3,177,000 shares
Issued and outstanding - 2,160,620 shares	2,160,620	2,160,620
Additional paid-in capital	20,641,412	20,579,617
Accumulated deficit	(5,495,918)	(7,291,228)
Accumulated other comprehensive income	197,238	204,263

Total stockholders' equity	17,503,352	15,653,272

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$ 182,856,121	$ 175,143,249

See Accompanying Notes to Financial Statements

Choice Bancorp, Inc.

Consolidated Statements of Income

(Unaudited)


	For the Three Months Ended		For the Six Months Ended

	June 30, 2012	June 30, 2011	June 30, 2012	June 30, 2011

Interest and dividend income:
Loans, including fees	$ 2,293,449	$ 2,212,428	$ 4,661,146	$ 4,264,086
Securities - taxable	50,744	80,118	113,750	169,009
Federal funds sold	2,368	17	3,819	1,744

Total interest and dividend income	2,346,561	2,292,563	4,778,715	4,434,839

Interest expense:
Deposits	492,183	526,772	1,032,611	1,086,573
Borrowed funds	4,326	7,800	8,652	8,794

Total interest expense	496,509	534,572	1,041,263	1,095,367

Net interest income, before provision for loan losses	1,850,052	1,757,991	3,737,452	3,339,472
Provison for loan losses	300,000	300,000	600,000	600,000

Net interest income, after provision for loan losses	1,550,052	1,457,991	3,137,452	2,739,472

Non-interest income:
Service fees	66,856	43,174	145,662	87,985
Secondary market fees	62,681	30,126	188,701	65,551
Rental income	4,731	5,498	10,505	5,498
Gain on sale of other assets	0	0	433,802	0

Total non-interest income	134,268	78,798	778,670	159,034

Non-interest expense:
Salaries and employee benefits	589,836	538,745	1,221,241	1,074,289
Occupancy and equipment	80,111	88,470	170,498	182,798
Data processing	42,927	30,291	87,442	62,626
Professional services	123,527	122,924	190,684	203,778
Marketing	11,124	10,773	24,749	18,768
Other investment write-down	0	0	0	100,000
Other	234,403	197,257	426,198	375,685

Total non-interest expenses	1,081,928	988,460	2,120,812	2,017,944

Income before income taxes	602,392	548,329	1,795,310	880,562
Provision for income taxes	0	0	0	0

Net Income	$ 602,392	$ 548,329	$ 1,795,310	$ 880,562

Earnings per share - basic and diluted	$ 0.28	$ 0.25	$ 0.83	$ 0.41

See Accompanying Notes to Financial Statements

Choice Bancorp, Inc.

Consolidated Statements of Comprehensive Income

(Unaudited)


	For the Three Months Ended		For the Six Months Ended

	June 30, 2012	June 30, 2011	June 30, 2012	June 30, 2011

Net income	602,392	548,329	1,795,310	880,562

Other comprehensive income, net of tax
Increase in unrealized gains (loss)
on securities during period	(3,092)	33,239	(7,025)	30,323


Comprehensive income	599,300	581,568	1,788,285	910,885

See Accompanying Notes to Financial Statements

Choice Bancorp, Inc.

Consolidated Statements of Stockholders' Equity

(Unaudited)



							Accumulated
			Additional Paid-				Other		Total
	Common Stock		In-Capital-		Accumulated		Comprehensive		Stockholders'
	Shares	Amount	Common Stock		Deficit		Income		Equity


Balance at January 1, 2011	2,160,620	$ 2,160,620		$ 20,441,866		$ (10,534,452)		$ 187,411	$ 12,255,445

Comprehensive income:

Net income						880,562			880,562

Unrealized gain on
securities available for sale,
net of tax								30,323	30,323

Total comprehensive
income									910,885

Options and warrants
compensation expense				4,620					4,620


Balance at June 30, 2011	2,160,620	$ 2,160,620		$ 20,446,486		$ (9,653,890)		$ 217,734	$ 13,170,950



Balance at January 1, 2012	2,160,620	$ 2,160,620		$ 20,579,617		$ (7,291,228)		$ 204,263	$ 15,653,272

Comprehensive income:

Net income						1,795,310			1,795,310

Unrealized loss on
securities available for sale,
net of tax								(7,025)	(7,025)

Total comprehensive
income									1,788,285

Options and warrants
compensation expense				61,795					61,795



Balance at June 30, 2012	2,160,620	$ 2,160,620		$ 20,641,412		$ (5,495,918)		$ 197,238	$ 17,503,352

See Accompanying Notes to Financial Statements

Choice Bancorp, Inc.

Consolidated Statements of Cash Flows

(Unaudited)


	For the Six Months Ended
	June 30, 2012	June 30, 2011

Cash flows from operating activities:
Net income	$ 1,795,310	$ 880,562

Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation of premises and equipment	57,213	59,627
Provision for loan losses	600,000	600,000
Gain on sale of other real estate	(433,802)	0
Compensation expense for options	61,795	4,620
Net amortization of securities	25,189	24,181
Changes in operating assets and liabilities:
Loans held for sale	1,650,454	18,131
Other assets	23,108	230,492
Other liabilities	(133,365)	92,918

Net cash provided by operating activities	3,645,902	1,910,531

Cash flows from investing activities:
Purchases of securities available for sale	(11,894,335)	(2,753,875)
Proceeds from maturities and pre-payments
of securities available for sale	9,898,449	5,458,080
Loan originations and principal collections, net	(1,040,192)	(14,065,294)
Purchases of premises and equipment	(8,617)	0

Net cash used in investing activities	(3,044,695)	(11,361,089)

Cash flows from financing activities:
Net increase in deposits	6,000,744	2,954,750
Proceeds from borrowed funds	0	145,000

Net cash provided by financing activities	6,000,744	3,099,750

Net increase (decrease) in cash and cash equivalents	6,601,951	(6,350,808)
Cash and cash equivalents at beginning	1,949,825	9,091,935

Cash and cash equivalents at end	$ 8,551,776	$ 2,741,127

Supplemental cash flow information:

Cash paid during the period for interest:	$ 1,044,278	$ 1,109,721
Cash paid during the period for income taxes:	$ 505,000	$ 0

Noncash investing and financing activities:
Transfer of OREO to loans	$ 0	$ 850,000

See Accompanying Notes to Financial Statements

Choice Bancorp, Inc.

Selected Notes to Interim Consolidated Financial Statements

(Unaudited)

Note 1 – Basis of Presentation

Nature of Operations

The accompanying unaudited consolidated financial statements of Choice Bancorp, Inc. (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and conform to general practices within the banking industry for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. They should be read in conjunction with the audited financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011. In the opinion of management, all adjustments consisting of normal recurring accruals considered necessary for fair presentation have been included. The results of operations for the three-month and six-month periods ended June 30, 2012 are not necessarily indicative of the results which may be expected for the entire year.

The preparation of the financial statements in conformity with the above-mentioned accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities as of, and for the three-month and six-month periods ended June 30, 2012. Actual results could vary from those estimates.

Certain amounts in the prior period financial statements have been reclassified for comparative purposes to conform to the presentation in the current period.

Regulatory Actions

On April 13, 2012, the Bank entered into a Stipulation and Consent to the Issuance of a Consent Order (the "Consent Order") with the Wisconsin Department of Financial Institutions ("WDFI") and the Federal Deposit Insurance Corporation ("FDIC"). The Consent Order requires the Bank, among other things, to take certain corrective actions focused on reducing exposure to adversely classified loans, restricting lending to credits that have been adversely classified, restricting the payment of dividends without regulatory approval, requiring the maintenance of a minimum Tier 1 leverage ratio of 9.0% and a minimum total risk-based capital ratio of 12.0%, the need for Board compliance and monitoring of the provisions of the Consent Order, and the maintenance of and a plan for reducing and managing credit concentrations. Generally enforcement actions such as the Consent Order can be lifted only after subsequent examinations and evaluation by the regulatory agencies determine that the issues covered by the Consent Order have been satisfactorily and sustainably resolved.

At June 30, 2012, the Bank's capital ratios were above the minimum levels required by the Consent Order and the Bank believes it is in substantial compliance with the other requirements set forth in the Consent Order.

Deregistration

On May 21, 2012, following passage of the Jumpstart Our Business Startups Act, which increased the number of shareholders of record threshold for deregistration under Section 12(g) of the Securities Exchange Act of 1934 (the “Exchange Act”) for banks and bank holding companies, the Company filed a Form 15 with the Securities and Exchange Commission (“SEC”) giving notice of the termination of registration of the Company’s common stock under Section 12(g) of the Exchange Act. The termination of the Company’s registration is expected to become effective on or about August 20, 2012. As a result of the effectiveness of the termination of registration, the Company will no longer be required to file annual or periodic reports under Section 13 or 15(d) of the Exchange Act, including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, or comply with proxy rules or file proxy materials under Section 14 of the Exchange Act, and the Company directors and executive officers will no longer be required to comply with the requirements of Section 16 of the Exchange Act, until such time as the Company has 2,000 or more shareholders of record as of the end of any calendar year.

Note 2 – Earnings per Share

Basic earnings per share represents net income divided by the weighted average number of shares outstanding during the period. Diluted earnings per share is calculated by dividing net income by the weighted average number of shares adjusted for the potential dilutive effect of vested stock options and organizer and shareholder warrants. For the three-month and six-month periods ending June 30, 2012, there is no dilutive effect because the average market prices of $6.02 and $6.20, respectively were less than the weighted average strike price of $8.57 per share for options, $10.00 per share for organizer warrants, and $12.50 per share for shareholder warrants. For the three-month and six-month periods ending June 31, 2011, there is no dilutive effect because the average market prices of $7.79 and $6.69, respectively were less than the strike prices of $10.00 per share for options and organizer warrants and $12.50 per share for shareholder warrants. The calculation of basic and diluted income per share is presented below:


	Three Months Ended June 30,

	2012	2011

Net income	$ 602,392	$ 548,329
Average shares outstanding	2,160,620	2,160,620

Basic and dilutive net income per share	$ 0.28	$ 0.25


	Six Months Ended June 30,

	2012	2011

Net income	$ 1,795,310	$ 880,562
Average shares outstanding	2,160,620	2,160,620

Basic and dilutive net income per share	$ 0.83	$ 0.41

Note 3- Comprehensive Income

The Company’s only item comprising “Accumulated other comprehensive income (loss)” is net unrealized gains or losses on investment securities available for sale, net of applicable taxes.

Note 4- Loan Impairment and Loan Losses

Activity in the allowance for loan losses for the six-month period ending June 30, 2012 is shown in the following table:


(Dollars in thousands)	June 30, 2012


	Commercial	Real Estate	Other	Total
Allowance for loan losses:
Balance, beginning of period	$ 1,288	$ 2,832	$ 25	$ 4,145
Charge-offs	0	0	55	55
Recoveries	0	0	0	0
Provision	98	447	55	600
Balance, end of period	$ 1,386	$ 3,279	$ 25	$ 4,690

Ending Balance: Individually evaluated for impairment	$ 450	$ 439	$ 0	$ 889

Ending Balance: Collectively evaluated for impairment	$ 936	$ 2,840	$ 25	$ 3,801



(Dollars in thousands)	June 30, 2012


	Commercial	Real Estate	Other	Total
Loans evaluated for impairment:

Individually	$ 2,199	$ 2,773	$ 0	$ 4,972
Collectively	25,825	129,193	718	155,736

Total	$ 28,024	$ 131,966	$ 718	$ 160,708

Activity in the allowance for loan losses for the year ended December 31, 2011 is shown in the following table:


(Dollars in thousands)	December 31, 2011


	Commercial	Real Estate	Other	Total
Allowance for loan losses:
Balance, beginning of period	$ 1,130	$ 1,904	$ 12	$ 3,046
Charge-offs	46	55	0	101
Recoveries	0	0	0	0
Provision	204	983	13	1,200
Balance, end of period	$ 1,288	$ 2,832	$ 25	$ 4,145

Ending Balance: Individually evaluated for impairment	$ 230	$ 55	$ 0	$ 285

Ending Balance: Collectively evaluated for impairment	$ 1,058	$ 2,777	$ 25	$ 3,860



(Dollars in thousands)	December 31, 2011


	Commercial	Real Estate	Other	Total
Loans evaluated for impairment:

Individually	$ 4,492	$ 2,480	$ 0	$ 6,972
Collectively	23,822	128,283	646	152,751

Total	$ 28,314	$ 130,763	$ 646	$ 159,723

The following is a summary of information pertaining to impaired loans:


	June 30, 2012

		Commercial
(Dollars in thousands)	Commercial	real estate	Total

Unpaid principal balance	$ 2,199	$ 2,773	$ 4,972

Impaired loans with no allowance	$ 21	$ 999	$ 1,020
Impaired loans with allowance	2,178	1,774	3,952
Total impaired loan balance	$ 2,199	$ 2,773	$ 4,972

Related allowance	$ 450	$ 439	$ 889
Average balance	$ 2,207	$ 2,519	$ 4,726
Interest Income Recognized	$ 69	$ 48	$ 117


	December 31, 2011

		Commercial
(Dollars in thousands)	Commercial	real estate	Total

Unpaid principal balance	$ 4,492	$ 2,480	$ 6,972

Impaired loans with no allowance	$ 2,421	$ 2,374	$ 4,795
Impaired loans with allowance	2,071	106	2,177
Total impaired loan balance	$ 4,492	$ 2,480	$ 6,972

Related allowance	$ 230	$ 55	$ 285
Average balance	$ 1,510	$ 1,322	$ 2,832
Interest Income Recognized	$ 207	$ 123	$ 330

The impaired loans at June 30, 2012 represent nine loans. Three of the loans totaling $2,199,237 are secured by equipment and inventory. The remaining six loans totaling $2,772,999 are secured by real estate. Three of the impaired loans totaling $3,387,221 were performing and accruing interest at June 30, 2012.

The impaired loans at December 31, 2011 represent eleven loans. Four of the loans totaling $4,492,305 were secured by equipment, accounts receivables, and inventory. The remaining seven loans totaling $2,480 were secured by real estate. All of the impaired loans at December 31, 2011 were performing and accruing interest.

A specific reserve on impaired loans of $889,000 was provided for at June 30, 2012, versus a specific reserve of $285,000 on such loans at December 31, 2011.

GAAP accounting for contingencies requires recognition of a loss and disclosure of a loss contingency if two conditions are met. First, information available prior to the issuance of financial statements indicates that an asset has been impaired. Management and the Board of Directors recognized that the above referenced loans at June 30, 2012 were impaired. Second, the amount of loss can be reasonably estimated. For the impaired loans at June 30, 2012, the amount of potential loss was reasonably estimated and management believed that the specific reserve of $889,000 was appropriate. The specific reserve for the impaired loans was based on the fair value of collateral.

The following is a summary of information pertaining to past due and nonaccruing loans:


	June 30, 2012


(Dollars in thousands)		Greater than			Total
	30 - 89 days	90 days and			past due and	Current	Total
	past due	nonaccruing			nonaccruing	loans	loans

Commercial	$ 0		$ 148		$ 148	$ 27,876	$ 28,024

Real estate:
Commercial	314			1,265	1,579	66,677	$ 68,256
Residential	0			172	172	43,590	$ 43,762
Construction	0			0	0	11,639	$ 11,639
Second mortgages	0			0	0	1,890	$ 1,890
Equity lines of credit	0			0	0	6,419	$ 6,419

Consumer	0			0	0	718	718

Total	$ 314			$ 1,585	$ 1,899	$ 158,809	$ 160,708


	December 31, 2011


(Dollars in thousands)		Greater than	Total
	30 - 89 days	90 days and	past due and	Current	Total
	past due	nonaccruing	nonaccruing	loans	loans

Commercial	$ 0	$ 141	$ 141	$ 28,173	$ 28,314

Real estate:
Commercial	0	0	0	71,172	$ 71,172
Residential	0	993	993	39,122	$ 40,115
Construction	0	0	0	11,656	$ 11,656
Second mortgages	0	0	0	1,904	$ 1,904
Equity lines of credit	0	0	0	5,916	$ 5,916

Consumer	0	0	0	646	646

Total	$ 0	$ 1,134	$ 1,134	$ 158,589	$ 159,723

The Company analyzes loans individually by classifying the loans as to credit risk. The Company categorizes business purpose loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. Non-business loans are analyzed and categorized as performing or non-performing.

The Company expanded the number of risk rating categories from eight risk grades to nine risk grades during the first quarter of 2012. The Risk Grade 9 category was added to group impaired business purpose loans into a separate category.

The Company uses the following definitions for risk ratings when classifying business purpose loans:

Risk Grade 1 – Superior

Business purpose loans rated “1” are characterized by borrowers fully responsible for the loan with excellent capacity to pay principal and interest. Loans rated “1” may be secured by readily marketable collateral.

Risk Grade 2 – Minimal

Business purpose loans rated “2” are characterized by borrowers consistently capable of generating industry margins, profits, and cash-flow, regardless of economic or business conditions.

Risk Grade 3 – Low

Business purpose loans rated “3” are characterized by borrowers well established in a market and/or industry, capable of generating above average margins, profits, and cash-flow in most economic or business conditions.

Risk Grade 4 – Modest

Business purpose loans rated “4” are characterized by borrowers established in specific markets or industries in satisfactory condition. Profit margin, profitability, and cash flow trends are positive but not consistently stable.

Risk Grade 5 – Average

Business purpose loans rated “5” are characterized by borrowers operating in relatively stable industries but susceptible to moderate cyclicality, unfavorable changes in the economy, or competitive influences. These loans are characterized by average asset quality, limited liquidity, and tighter debt service coverage.

Risk Grade 6 – Acceptable

Business purpose loans rated “6” are characterized by borrowers that are potentially weak that deserve management’s close attention. Potential weaknesses, if left uncorrected, may result in deterioration of the repayment prospects for the asset or inadequately protect the Company’s credit position at some future date.

Risk Grade 7 – Watch

Business purpose loans rated “7” are characterized by borrowers that warrant greater monitoring due to financial condition or unresolved and identified risk factors.

Risk Grade 8 – Problem

Business purpose loans rated “8” include loans inadequately protected by the current net worth and paying capacity of the borrower or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. Problem loans are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

Risk Grade 9 – Impaired

Business purpose loans rated “9” include loans inadequately protected by the current net worth and paying capacity of the borrower or of the collateral pledged, if any, and have weaknesses that make collection or liquidation in full highly questionable and improbable.

Non-Business Purpose Loans

Non-business purpose loans are analyzed on a pass or fail basis. These loans are presented either as performing or non-performing, separately from risk-graded loans. See below for a description of non-performing loans. All other non-business purpose loans are classified as performing.

Non-Performing Loans

Loans are reported as non-performing when principal or interest has been in default for a period of ninety days or more or if the collection of interest is in question. Both business purpose and non-business purpose loans are included in this category as appropriate.

The breakdown of loans by risk grades as of June 30, 2012 and December 31, 2011 is presented in the following tables:


(Dollars in thousands)
	June 30, 2012


Risk Grade	Commercial	Real Estate	Consumer	Total

Grade - 1	$ 0	$ 0	$ 0	$ 0
Grade - 2	0	1,250	0	1,250
Grade - 3	122	1,044	0	1,166
Grade - 4	3,857	5,574	0	9,431
Grade - 5	16,178	77,562	0	93,740
Grade - 6	1,364	10,480	0	11,844
Grade - 7	337	4,769	0	5,106
Grade - 8	3,973	4,829	0	8,802
Grade - 9	2,193	1,371	0	3,564
	$ 28,024	$ 106,879	$ 0	$ 134,903

Not Graded

Performing	$ 0	$ 25,021	$ 718	$ 25,739
Non-performing	0	66	0	66


	$ 28,024	$ 131,966	$ 718	$ 160,708


(Dollars in thousands)
	December 31, 2011


Risk Grade	Commercial	Real Estate	Consumer	Total

Grade - 1	$ 0	$ 0	$ 0	$ 0
Grade - 2	0	1,274	0	1,274
Grade - 3	99	1,062	0	1,161
Grade - 4	5,657	2,584	0	8,241
Grade - 5	14,953	79,213	0	94,166
Grade - 6	1,563	14,893	0	16,456
Grade - 7	0	0	0	0
Grade - 8	6,042	8,347	0	14,389
	$ 28,314	$ 107,373	$ 0	$ 135,687

Not Graded

Performing	$ 0	$ 22,397	$ 646	$ 23,043
Non-performing	0	993	0	993


	$ 28,314	$ 130,763	$ 646	$ 159,723

The following is a summary of information pertaining to loans that have been modified during the six month period ended June 30, 2012:


	Troubled Debt Restructuring
	For the Six Month Period Ended June 30, 2012

	Number	Pre-Modification	Post-Modification	June 30, 2012	Related
	of Loans	Balance	Balance	Balance	Allowance

Real Estate	1	$ 375,872	$ 375,872	$ 375,872	$ 0

	1	$ 375,872	$ 375,872	$ 375,872	$ 0

The loan modification included reduction of the contractual interest rate on one commercial real estate loan. The risk rating on the modified loan remained unchanged after modification. The troubled debt restructured loan was not in default of its modified terms during the first six months of 2012.

Note 5- Commitments and Contingencies

In the normal course of its business the Company is a party to financial instruments with off-balance sheet risk to meet the financing needs of its customers. These financial instruments include commitments to extend credit and unfunded commitments. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the Company’s balance sheets. The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit and unfunded commitments is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. At June 30, 2012, the Company had commitments to extend credit and unfunded commitments of approximately $3.5 million and $15.6 million, respectively. At December 31, 2011, the Company had commitments to extend credit and unfunded commitments of approximately $0.1 million and $18.6 million, respectively.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.

Note 6 – Share-based Compensation

The Choice Bank 2006 Stock Incentive Plan was approved by shareholders on July 11, 2006 and assumed by the Company on the Reorganization Date. The Board of Directors reserved 360,000 shares of Company stock for use as option awards to officers and directors under the Plan. As of June 30, 2012, 218,000 option awards have been granted to Company directors and employees including 100,833 options that have fully vested and 117,167 in non-vested options. The options vest ratably over an average vesting period of 2.4 years, and have a 7.6 year average life from the date of issuance.

During the first six months of 2012, 10,500 options were issued and 1,500 options were forfeited. None of the options issued in 2012 were vested as of June 30, 2012. As of June 30, 2012, 142,000 options remain available for future grants.

The fair value of stock options granted is estimated on the date of grant using a Black-Scholes option pricing model. The fair values of stock grants are amortized as compensation expense on a straight-line basis over the vesting period of the grants. Compensation expense recognized for the three-month and six-month periods ended June 30, 2012 totaled $31,235 and $61,795 respectively, and is included in personnel expense in the statement of income for the period.

Assumptions are used in estimating the fair value of stock options granted. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. The expected volatility is based on the historical volatility of the Bank’s or the Company’s stock as applicable. The weighted average assumptions utilized for options granted during the six-month period ended June 30, 2012 are as follows:


		Weighted Ave

Fair Value		$ 3.36
Stock price		$ 6.62
Option strike price		$ 8.21
Maturity		7.0
Risk-free interest rate		1.44%
Volatility		55.68%

The Company has two types of warrants outstanding to purchase shares of its common stock at June 30, 2012 and December 31, 2011. Initial shareholders in the Bank received warrants to purchase one share of common stock for every five shares of common stock purchased in the Bank’s initial common stock offering (“shareholder warrants”). A total of 431,990 shareholder warrants were issued. Originally, the shareholder warrants were exercisable at a price of $12.50 per share at any time until July 24, 2009. On October 28, 2008, the Board of Directors extended the expiration date to July 24, 2012. As part of the transaction to reorganize the Bank as a wholly-owned subsidiary of the Company (the “Reorganization”), shareholder warrants to purchase Bank stock were converted into warrants to purchase Company stock at the same price. As of June 30, 2012, 620 shareholder warrants had been exercised and 431,370 shareholder warrants remained outstanding.

The Bank’s organizers advanced funds and guaranteed loans for organizational and other pre-opening expenses. As consideration for the financial risk assumed, the organizers received warrants to purchase one share of common stock for every $10.00 placed at risk, up to a maximum of 11,250 warrants per organizer (“organizer warrants”). A total of 213,750 organizer warrants have been issued. The organizer warrants are exercisable at a price of $10.00 per share at any time until July 24, 2016. The organizer warrants were accounted for in accordance with the fair value method and recognized as stock compensation included in start-up expenses at July 24, 2006. As part of the Reorganization, organizer warrants to purchase Bank stock were converted into warrants to purchase Company stock at the same price. None of the organizer warrants had been exercised as of June 30, 2012.

Note 7 - Income Taxes

Deferred income tax assets and liabilities have been determined using the liability method. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities as measured by the current enacted tax rates which will be in effect when those differences are expected to reverse. Provision/(credit) for deferred taxes is the result of changes in the deferred tax assets and liabilities. A deferred tax valuation allowance is established if it is more likely than not that all or a portion of the deferred tax assets will not be recognized.

The Company may also recognize a liability for unrecognized tax benefits from uncertain tax positions. Unrecognized tax benefits represent the difference between a tax position taken or expected to be taken in a tax return and the benefit recognized and measured in the financial statements. Interest and penalties related to unrecognized tax benefits are classified as income taxes.

The Company’s net deferred tax asset, resulting largely from its net operating loss carryforwards, was $2,465,015 as of June 30, 2012. All available evidence, both positive and negative, was considered to determine whether, based on the weight of that evidence, impairment should be recognized. Based on management’s consideration of the available evidence including historical losses which must be treated as substantial negative evidence and an uncertain economy and the potential effect on the Company’s asset quality, a valuation allowance for the entire amount of the deferred tax asset was established in 2010. A $1,200,000 partial reversal of the valuation allowance was recognized at December 31, 2011 based on an evaluation of the ability of the Company to recognize its net deferred assets. The valuation allowance remained at $760,015 at June 30, 2012.

Note 8 – New Authoritative Accounting Guidance

ASU No. 2011-02, “Receivables (Topic 310) - A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring.” ASU 2011-02 clarifies which loan modifications constitute troubled debt restructurings and is intended to assist creditors in determining whether a modification of the terms of a receivable meets the criteria to be considered a troubled debt restructuring, both for purposes of recording an impairment loss and for disclosure of troubled debt restructurings. In evaluating whether a restructuring constitutes a troubled debt restructuring, a creditor must separately conclude, under the guidance clarified by ASU 2011-02, that both of the following exist: (a) the restructuring constitutes a concession; and (b) the debtor is experiencing financial difficulties. ASU 2011-02 became effective for the Company on July 1, 2011, and applies retrospectively to restructurings occurring on or after January 1, 2011. The adoption of this guidance did not have any impact on the Company’s consolidated statement of income, its consolidated balance sheet, or its consolidated statement of cash flows.

ASU No. 2011-03, “Transfers and Servicing (Topic 860) - Reconsideration of Effective Control for Repurchase Agreements.” ASU 2011-03 is intended to improve financial reporting of repurchase agreements and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. ASU 2011-03 removes from the assessment of effective control (i) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee, and (ii) the collateral maintenance guidance related to that criterion. ASU 2011-03 became effective for the Company on January 1, 2012 and did not have a significant impact on the Company’s financial statements.

ASU 2011-04, “Fair Value Measurement (Topic 820) - Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in U.S. GAAP and IFRSs.” ASU 2011-04

amends Topic 820, “Fair Value Measurements and Disclosures,” to converge the fair value measurement guidance in U.S. generally accepted accounting principles and International Financial Reporting Standards. ASU 2011-04 clarifies the application of existing fair value measurement requirements, changes certain principles in Topic 820 and requires additional fair value disclosures. ASU 2011-04 is effective for annual periods beginning after December 15, 2011, see Note 9 for the impact to the Company’s financial statements.

ASU 2011-05, “Comprehensive Income (Topic 220) - Presentation of Comprehensive Income.” ASU 2011-05 amends Topic 220, “Comprehensive Income,” to allow an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income in either a single continuous statement of comprehensive income or in two separate but consecutive statements. Additionally, ASU 2011-05 requires entities to present, on the face of the financial statements, reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement or statements where the components of net income and the components of other comprehensive income are presented. The option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity was eliminated. ASU 2011-05 is effective for annual and quarterly periods beginning after December 15, 2011, and did not have a significant impact on the Company’s financial statements.

ASU 2011-08, “Intangibles - Goodwill and Other (Topic 350) - Testing Goodwill for Impairment.” ASU 2011-08 amends Topic 350, “Intangibles – Goodwill and Other,” to give entities the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. However, if an entity concludes otherwise, then it is required to perform the first step of the two-step impairment test by calculating the fair value of the reporting unit and comparing the fair value with the carrying amount of the reporting unit. ASU 2011-08 is effective for annual and interim impairment tests beginning after December 15, 2011, and did not have any impact on the Company’s financial statements.

Note 9 – Fair Value Measurement

Accounting standardsdescribe the three levels of inputs that may be used to measure fair value (the fair value hierarchy). The level of an asset or liability within the fair value hierarchy is based on the lowest level of input significant to the fair value of that asset or liability.

Following is a brief description of each level of the fair value hierarchy:

Level 1pricing for an asset or liability is derived from the most actively traded markets, and considered to be very reliable. Quoted prices on actively traded equities, for example, fall into this category.

Level 2pricing of an asset or liability is derived from observable data including market spreads, current and projected rates, prepayment data, and credit quality. Interactive Data Corporation (“IDC”) pricing, for example, falls into this category as it derives prices using actively quoted rates, prepayment models, other underlying collateral and credit data, etc. Typically, most bonds fall into this category. IDC provides the pricing on the Company’s investment portfolio on a monthly basis.

Level 3pricing is derived without the use of observable data. In such cases, mark-to-market model strategies are typically employed. Often, these types of instruments have no active market, possess unique characteristics, and are thinly traded.

Some assets and liabilities, such as securities available for sale, are measured at fair value on a recurring basis under accounting principles generally accepted in the United States. Other assets and liabilities, such as impaired loans, are measured at fair value on a non-recurring basis. Following is a description of the valuation methodology used for each asset and liability measured at fair value on a recurring or non-recurring basis, as well as the classification of the asset or liability within the fair value hierarchy.

Securities available for saleare classified as level 2 measurements within the fair value hierarchy. Level 2 securities include U.S. government and agency securities, obligations of states and political subdivisions, corporate debt securities, and mortgage-related securities. The fair value measurement of a level 2 security is obtained from an independent pricing service and is based on recent sales of similar securities and other observable market data.

Loans held for salein the secondary market are carried at the lower of aggregate cost or estimated fair market value. The fair value measurement of a loan held for sale is based on current secondary market prices for similar loans, which is a considered a level 2 measurement.

Loansare not measured at fair value on a recurring basis. However, loans considered to be impaired are measured at fair value on a non-recurring basis. The fair value measurement of an impaired loan that is collateral dependent is based on the fair value of the underlying collateral. All other impaired loan fair value measurements are based on the present value of expected future cash flows discounted at the applicable effective interest rate. Fair value measurements of underlying collateral that utilize observable market data, such as independent appraisals reflecting recent comparable sales, are considered level 2 measurements. Other fair value measurements that incorporate estimated assumptions market participants would use to measure fair value, such as discounted cash flow measurements, are considered level 3 measurements.

Other real estate owned -Real estate and other property acquired through or in lieu of loan foreclosure are not measured at fair value on a recurring basis. However, foreclosed assets are initially measured at fair value (less estimated costs to sell) when they are acquired and may also be measured at fair value (less estimated costs to sell) if they become subsequently impaired.

The fair value measurement for each asset may be obtained from an independent firm or prepared internally. Fair value measurements obtained from independent firms are generally based on sales of comparable assets and other observable market data and are considered Level 2 measurements. Fair value measurements prepared internally are based on observable market data but include significant unobservable data and are therefore considered Level 3 measurements.

Information regarding the fair value of assets measured on a recurring basis at fair value as of June 30, 2012 and December 31, 2011 follows:


	Assets measured on a recurring basis at:
	June 30, 2012

		Fair Value Measurements Using

Description	Fair Value	Level 1	Level 2	Level 3

Securities available for sale	$ 11,177,750	$ 0	$ 11,177,750	$ 0
Loans held for sale	1,813,046	1,813,046	0	0

	$ 12,990,796	$ 1,813,046	$ 11,177,750	$ 0


	Assets measured on a recurring basis at:
	December 31, 2011

		Fair Value Measurements Using

Description	Fair Value	Level 1	Level 2	Level 3

Securities available for sale	$ 9,218,665	$ 0	$ 9,218,665	$ 0
Loans held for sale	3,463,500	3,463,500	0	0

	$ 12,682,165	$ 3,463,500	$ 9,218,665	$ 0

Information regarding the fair value of assets measured on a non-recurring basis at fair value as of June 30, 2012 and December 31, 2011 follows:


	Assets measured on a non-recurring basis at:
	June 30, 2012

		Fair Value Measurements Using

Description	Fair Value	Level 1	Level 2	Level 3

Impaired Loans	$ 4,083,236	$ 0	$ 4,083,236	$ 0
Other real estate owned	1,020,000	0	1,020,000	0

	$ 5,103,236	$ 0	$ 5,103,236	$ 0


	Assets measured on a non-recurring basis at:
	December 31, 2011

		Fair Value Measurements Using

Description	Fair Value	Level 1	Level 2	Level 3

Impaired Loans	$ 1,892,440	$ 0	$ 1,892,440	$ 0
Other real estate owned	1,020,000	0	1,020,000	0

	$ 2,912,440	$ 0	$ 2,912,440	$ 0

Impaired loans with a carrying amount of $4,972,236 at June 30, 2012 were determined to have a fair value of $4,083,236 based on the fair value of the collateral securing the loans. As a result, the Company allocated specific reserves in the amount of $889,000 for impaired loans at June 30, 2012. Impaired loans with a carrying amount of $2,177,440 at December 31, 2011 were determined to have a fair value of $1,892,440 based on the fair value of the collateral securing the loans. As a result, the Company allocated specific reserves in the amount of $285,000 for impaired loans as of December 31, 2011.

Other real estate owned is recorded at fair value at the date of acquisition. Subsequent valuations are periodically performed by management, and the assets are carried at the lower of carrying amount or fair value less cost to sell. The fair value of other real estate owned was $1,020,000 as of June 30, 2012 and December 31, 2011. No expenses related to devaluation of other real estate have been incurred for the six-month period ended June 30, 2012.

Accounting standards also require disclosure of fair value information about financial instruments, whether or not recognized in the statement of financial condition, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimate of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets, and, in many cases, could not be realized in immediate settlement of the instruments.

The applicable standards exclude certain financial instruments from their disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company. The Company estimates fair value of all financial instruments

regardless of whether such instruments are measured at fair value. The following methods and assumptions were used by the Company to estimate fair value of instruments not previously discussed.

Cash and cash equivalents –Fair value approximates the carrying value

Loans –Fair value of variable rate loans that re-price frequently is equal to carrying value. Fair value of other loans is estimated by discounting future cash flows using current rates at which similar loans would be made to borrowers with similar credit ratings. Fair value of impaired and other non-performing loans is estimated using discounted expected future cash flows or the fair value of underlying collateral, if applicable.

Accrued interest receivable and payable –Fair value approximates the carrying value.

Deposits –Fair value of deposits with no stated maturity, such as demand deposits, savings, and money market accounts, by definition, is the amount payable on demand on the reporting date. Fair value of fixed rate time deposits is estimated using discounted cash flows applying interest rates currently being offered on similar time deposits.

Other Borrowings – Due to the short-term nature of other borrowings held by the Company, fair value approximates the carrying value.

The carrying value and estimated fair values of financial instruments as of June 30, 2012, and December 31, 2011 follows:


	June 30, 2012					December 31, 2011

(In thousands)	Carrying	Estimated Fair Value				Carrying	Estimated
	Value	Total	Level 1	Level 2	Level 3	Value	Fair Value
Financial Assets

Cash and cash equivalents	$ 8,552	$ 8,552	$ 8,552	$ 0	$ 0	$ 1,950	$ 1,950
Securities available for sale	11,178	11,178	0	11,178	0	9,219	9,219
Loans held for sale	1,813	1,813	1,813	0	0	3,463	3,463
Loans, net	156,018	159,392	0	2,337	157,055	155,578	159,450
Accrued interest receivable	549	549	549	0	0	593	594

Total financial assets	$ 178,110	$ 181,484	$ 10,914	$ 13,515	$ 157,055	$ 170,803	$ 174,676

Financial Liabilities

Deposits	$ 164,245	$ 165,789	$ 59,041	$ 0	$ 106,748	$ 158,245	$ 158,770
Other borrowings	290	290	290	0	0	290	290
Accrued interest payable	165	165	165	0	0	168	168

Total financial liabilities	$ 164,700	$ 166,244	$ 59,496	$ 0	$ 106,748	$ 158,703	$ 159,228

Limitations –The fair value of a financial instrument is the current amount that would be exchanged between willing parties, other than in a forced liquidation. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. Consequently, the aggregate fair value amounts presented may not necessarily represent fair value of the Company.

Fair value estimates are made at a specific point in time based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters that could affect the estimates. Fair value estimates are based on existing on- and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Deposits with no maturities are defined as having a fair value equivalent to the amount payable on demand. This prohibits adjusting fair value derived from retaining those deposits for an expected future period of time. This component, commonly referred to as a deposit base intangible, is neither considered in the above amounts nor is it recorded as an intangible asset on the balance sheet. Significant assets and liabilities that are not considered financial assets and liabilities include premises and equipment. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.

Management has reviewed the Company’s operations for potential disclosure of information or financial statement impacts related to events occurring after June 30, 2012, but prior to the release of these financial statements. Based on the results of this review, Management has determined that no subsequent event disclosures are required as of the release date.

ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward Looking Statements

This Report contains certain statements that are forward-looking within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. Actual outcomes and results may differ materially from those expressed in, or implied by, the forward-looking statements. These statements are often, but not always, made through the use of words or phrases such as “may,” “should,” “could,” “predict,” “potential,” “believe,” “will likely result,” “expect,” “anticipate,” “seek,” “estimate,” “intend,” “plan,” “projection,” “would” and “outlook,” and other similar expressions or future or conditional verbs. Readers of this Report should not rely solely on the forward-looking statements and should consider all uncertainties and risks throughout this Report. All forward-looking statements contained in this Report or which may be contained in future statements made for or on behalf of the Company are based upon information available at the time the statement is made and the Company assumes no obligation to update any forward-looking statement.

These forward-looking statements implicitly and explicitly reflect the assumptions underlying the statements and other information with respect to the Company’s beliefs, plans, objectives, goals, expectations, anticipations, estimates, financial condition, results of operations, future performance and business, including management’s expectations and estimates with respect to revenues, expenses, return on equity, return on assets, efficiency ratio, asset quality and other financial data and capital and performance ratios.

Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, these statements involve risks and uncertainties that are subject to change based on various important factors, some of which are beyond the Company’s control. Forward-looking statements are subject to significant risks and uncertainties and the Company’s actual results may differ materially from the results discussed in such forward-looking statements. Factors that might cause actual results to differ from the results discussed in forward-looking statements include, but are not limited to, the factors set forth under “Risk Factors,” Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2011 as filed with the SEC on March 31, 2012 as well as Part II, Item 1A herein and any other risks identified in this Report. New factors emerge from time to time, and it is not possible for the Company to predict which factor, if any, will materialize. In addition, the Company cannot assess the potential impact of each factor on the Company’s business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

The Reorganization

In May 2010, the Board of Directors of the Bank adopted, subject to shareholder approval, a plan to effect the Reorganization. At a special meeting held on August 3, 2010, the shareholders of the Bank adopted a resolution approving the Reorganization, subject to the satisfaction of certain conditions, including the receipt of all applicable regulatory approvals. Such approvals were received in late February 2011.

On and effective as of the close of business on March 10, 2011, the Reorganization was consummated and each issued and outstanding share of Bank common stock was converted solely into the right to receive one (1) share of Company common stock and the outstanding warrants for Bank common stock were converted into warrants to acquire Company common stock.

The Company was organized to serve as the holding company for the Bank and, prior to consummation of the Reorganization on March 10, 2011, had no assets or liabilities and had not conducted any business other than that of an organizational nature.

EXCEPT WHERE OTHERWISE EXPRESSLY INDICATED, THE INFORMATION IN THIS REPORT FOR ANY DATE OR PERIOD PRIOR TO MARCH 10, 2011 PERTAINS SOLELY TO THE BANK AND NOT TO THE COMPANY.

Regulatory Considerations

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

Critical Accounting Policies

The Company’s accounting and reporting policies are in accordance with accounting principles generally accepted in the United States of America and conform to general practices within the banking industry. The Company’s significant accounting policies are described in the notes to the financial statements. Certain accounting policies require management to make significant estimates and assumptions, which have a material impact on the carrying value of certain assets and liabilities, and the Company considers these to be critical accounting policies. The estimates and assumptions used are based on historical experience and other factors that management believes to be reasonable under the circumstances. Actual results could differ significantly from these estimates and assumptions, which could have a material impact on the carrying value of assets and liabilities at the balance sheet dates and results of operations for the reporting periods. The Company believes the following critical accounting policies require the most significant estimates and assumptions that are particularly susceptible to a significant change in the preparation of its financial statements.

Income Taxes

Deferred income taxes and liabilities are determined using the liability method. Under this method deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities as measured by the current enacted tax rates that will be in effect when these differences are expected to reverse. Provision (credit) for deferred taxes is the result of changes in the deferred tax assets and liabilities. A deferred tax valuation allowance is established if it is more likely than not that all or a portion of the deferred tax assets will not be realized.

Allowance for Loan Losses

Management’s evaluation process used to determine the appropriateness of the allowance for loan losses (“ALL”) is subject to the use of estimates, assumptions, and judgments. The evaluation process combines several factors: management’s ongoing review and grading of the loan portfolio, consideration of historical loan loss and delinquency experience, trends in past due and nonperforming loans, risk characteristics of the various classifications of loans, concentrations of loans to specific borrowers or industries, existing economic conditions, the fair value of underlying collateral, and other qualitative and quantitative factors which could affect probable loan losses. Because current economic conditions can change and future events are inherently difficult to predict, the anticipated amount of estimated loan losses, and therefore the appropriateness of the ALL, could change significantly. As an integral part of their examination process, various regulatory agencies also review the ALL. Such agencies may require that certain loan balances be classified differently or charged off when their credit evaluations differ from those of management, based on their judgments about information available to them at the time of their examination.

Management considers the policies related to the ALL as critical to the financial statement presentation. The ALL represents management’s assessment of the risk associated with extending credit and its evaluation of the quality of the loan portfolio. That assessment includes thorough review of the portfolio, with analysis of past-due and potentially impaired loans on an individual basis, based upon the following factors:


	A.	Specific Reserves for individually analyzed impaired loans.
	B.	General Reserves for groups of similar loans analyzed for impairment.
	C.	General Reserves for groups of similar loans not analyzed for impairment.

The analysis, and the loan loss provision, is reviewed and approved by the Board of Directors on a quarterly basis.

Other factors considered in the analysis of General Reserves include:


	•	Annual loan review performed by the Company’s Risk Management Officer;
	•	Changes in the national and local economy and business conditions, including underwriting standards, collections, charge off and recovery practices;
	•	The asset quality of individual loans;
	•	Changes in the nature and volume of the loan portfolio;
	•	Changes in the experience, ability and depth of the Company’s lending staff and management;
	•	Possible deterioration in collateral segments or other portfolio concentrations;
	•	Changes in the quality of the Company’s loan review system and the degree of oversight by its board of directors;
	•	The effect of external factors such as competition and the legal and regulatory requirement on the level of estimated credit losses in the Company’s current loan portfolio; and
	•	Off-balance sheet credit risks.

The factors cited above have been, and will continue to be, evaluated at least quarterly. Changes in the asset quality of individual loans will be evaluated more frequently as needed. Following guidelines established by the FDIC and the Wisconsin Department of Financial Institutions (“DFI”), the Company has established minimum General Reserves based on the asset quality of the loan. General Reserve factors applied to each type of loan are based upon management’s experience and common industry and regulatory guidelines. After a loan is underwritten and

booked, loans are monitored or reviewed by the account officer, management, and external loan review personnel during the life of the loan. Payment performance is monitored monthly for the entire loan portfolio. Account officers contact customers in the ordinary course of business and may be able to ascertain if weaknesses are developing with the borrower. External loan personnel perform an independent review annually, and federal and state banking regulators perform periodic reviews of the loan portfolio. If weaknesses develop in an individual loan relationship and are detected, the loan will be downgraded and higher reserves will be assigned based upon management’s assessment of the weaknesses in the loan that may affect full collection of the debt. If a loan does not appear to be fully collectible as to principal and interest, the loan will be recorded as a non-accruing loan and further accrual of interest will be discontinued while previously accrued but uncollected interest is reversed against income. If a loan will not be collected in full, the allowance for loan losses is increased to reflect management’s estimate of potential exposure of loss.

The Company believes the level of the ALL is appropriate as recorded in the financial statements. See further discussion in the section below titled “Allowance for Loan Losses”.

Management’s Discussion & Analysis

The following discussion describes the Company’s consolidated results of operations for the three-month and six-month periods ended June 30, 2012, as compared to the Company’s results of operations for the three-month and six-month periods ended June 30, 2011 and also compares the Company’s consolidated financial condition as of June 30, 2012 to the Company’s financial condition at December 31, 2011. Since the consummation of the Reorganization, the Company's sole asset is its investment in the Bank and the Company's operations are conducted solely through the Bank.

Like most community banks, the Company derives most of its income from interest it receives on its loans and investments. The Company’s primary source of funds for making its loans and investments is its deposits, most of which are interest bearing. Consequently, one of the key measures of the Company’s success is net interest income, which is the difference between income on interest-earning assets, such as loans and investments, and expense on interest-bearing liabilities, such as deposits and borrowed funds. Another key measure is the spread between the yield earned on interest-earning assets and the rate paid on interest-bearing liabilities.

The Company maintains the ALL to absorb probable losses on existing loans that may become uncollectible. The Company establishes and maintains the ALL by charging a provision for loan losses against operating earnings. The following section includes a further discussion of this process.

In addition to earning interest on loans and investments, the Company earns income through fees charged to customers for services provided. These fees include the origination of long-term, fixed rate mortgage loans, which are sold with servicing released in the secondary market.

Non-interest expenses include personnel, facilities, marketing, FDIC insurance premiums, audit and legal, and other costs related to the conduct of the Company’s business.

The various components of non-interest income and non-interest expense are described in the following discussion which also identifies significant factors that have affected the Company’s financial position and operating results during the periods included in the accompanying financial statements. This discussion and analysis should be read in conjunction with the financial statements and the related notes and the other statistical information included in this report.

The Bank received its charter and opened for business on July 24, 2006. The table and graph below show the increases and decreases in end-of-quarter assets of the Bank/Company since that time.

[choice10q812002.gif]


July 2006 thru December 2009			March 2010 thru June 2012

Date	Total Assets	% Growth	Date	Total Assets	% Growth

Jul-06	$ 20,824,545		Mar-10	$ 122,940,295		2%
Sep-06	$ 26,737,176	28%	Jun-10	$ 147,394,234		20%
Dec-06	$ 32,600,536	22%	Sep-10	$ 161,221,291		9%
Mar-07	$ 39,447,477	21%	Dec-10	$ 163,697,874		2%
Jun-07	$ 44,966,989	14%	Mar-11	$ 159,438,965		-3%	[1]
Sep-07	$ 58,190,302	29%	Jun-11	$ 167,825,844		5%	[1]
Dec-07	$ 71,851,968	23%	Sep-11	$ 175,169,581		4%	[1]
Mar-08	$ 86,699,212	21%	Dec-11	$ 175,143,249		0%	[1]
Jun-08	$ 92,258,664	6%	Mar-12	$ 180,996,128		3%	[1]
Sep-08	$ 105,211,742	14%	Jun-12	$ 182,856,121		1%	[1]
Dec-08	$ 119,041,620	13%
Mar-09	$ 121,815,492	2%
Jun-09	$ 121,626,414	0%
Sep-09	$ 118,964,450	-2%
Dec-09	$ 120,807,482	2%

[1] Reflects consolidated assets of the Company subsequent to the reorganization.

The graph and table above show that asset growth was significant during the Bank’s initial two and a half years of operation. Asset growth slowed subsequent to December 31, 2008 as management curtailed lending in the recessionary environment. However, the Bank took advantage of a special growth opportunity in April 2010 when it added another seasoned

commercial lending officer with established ties to the Oshkosh community. This addition had an immediate impact, enabling the Bank to increase total loans by about $32.2 million during the last three quarters of 2010. Total asset growth for 2010 and 2011 was $42.9 million or 35.5%, and $11.4 million or 7.0%, respectively. Management has implemented a measured growth strategy for 2012 in accordance with the Company’s capital management guidelines. Total asset growth is $7.7 million or 4.4% for the six-month period ended June 30, 2012.

The Company intends to continue to adhere to a business plan that includes:

Serving as a community bank from two locations in Oshkosh, Wisconsin;

Attracting primarily local deposits;

Maintaining loan growth without sacrificing credit quality; and

Concentrating on banking services and products, rather than ancillary services.

These fundamental tenets will be pursued with appropriate modifications made for changes in budgeted growth, interest rate assumptions, product/service offerings, and staffing. Management has identified capital enhancement as a priority for 2012. The near term focus will be on improving earnings while containing asset growth.

Allowance for Loan Losses and Provision for Loan Losses

The provision for loan losses charged to earnings for each of the six-month periods ended June 30, 2012 and June 30, 2011 was $600,000. As of June 30, 2012, the loan portfolio increased $1.0 million or 0.6% compared to the loan portfolio balance as of December 31, 2011. The provision for loan losses for the six-month period ended June 30, 2012 is supported by Management’s ongoing assessment of risk associated with the current loan portfolio.

A summary of past due and non-accruing loans as of June 30, 2012 is reported in the table below:


			Over 90 days
			and
Past Due Loans	30 - 59 days	60 - 89 days	nonaccruing	Total

Principal balance	$ 313,581	$ 0	$ 1,585,015	$ 1,898,596
Number of loans	3	0	6	9
% of Gross Loans	0.19%	0.00%	0.99%	1.18%

Per Company policy, and regulation, loans past due 90 days or more are placed on non-accrual status and all interest accrued up to that point is reversed out of interest income. In addition, loans less than 90 days past due will be classified as non-accrual if circumstances exist that jeopardize the borrower’s ability to meet contractual payment requirements. No further interest accrues on any such loan as long as the loan remains in non-accrual status. Such loans are considered to be on a cash basis, so any payments received are recognized as principal reductions or as income depending upon the circumstances of the borrower. Even if payments reduce the delinquency to less than 90 days, the loan remains classified as non-accrual until all past due principal and interest is collected.

For the quarter ended June 30, 2012, interest payments of $27,365 were received on loans classified as non-accrual. The amount of additional interest that would have been recorded as interest income had the non-accrual loans been current during the quarter ended June 30, 2012 is approximately $15,110.

Historical performance is not an indicator of future performance. Future results could differ materially. However, management believes, based upon known factors, management’s judgment, regulatory methodologies, and generally accepted accounting principles that the current methodology used to determine the adequacy of the ALL is reasonable.

The ALL is also subject to regulatory examinations and determinations as to its adequacy, which may take into account such factors as the methodology used to calculate the ALL and the size of the ALL in comparison to a group of peer banks identified by the regulators. During their routine examinations of banks, regulatory agencies may require a bank to make additional provisions to its ALL when, in the opinion of the regulators, credit evaluations and ALL methodology differ materially from those of management. While it is the Company’s policy to charge off in the current period loans for which a loss is considered probable, there are additional risks of future losses that cannot be quantified precisely or attributed to particular loans or classes of loans.

Management is intent upon maintaining the quality of the loan portfolio. The Company’s loan staff is constantly monitoring the performance of its loans, and working with borrowers to assist in finding solutions to potential problems.

Financial Condition

The breakdown of the Company’s balance sheets at the dates indicated by dollar balances and percentage of total assets is shown below.

During the six-months ended June 30, 2012, total assets increased by $7.7 million or approximately 4.4%. Cash and cash equivalents increased $6.6 million, including a $7.0 million increase in federal funds sold offset by a $0.4 decrease in cash balances as compared to balances held at December 31, 2011. Net loans increased $0.4 million, or 0.28% compared to year-end 2011. Loans held for sale declined $1.7 million during the six months ended June 30, 2012, primarily due to the slowdown in mortgage financing activity relative to the fourth quarter 2011.

For the six months ended June 30, 2012, total deposits increased $6.0 million, or 3.8%, as compared to balances held at December 31, 2011.

The composition of the balance sheet has changed to include 10.8% liquid assets, (cash and cash equivalents and securities), compared to 6.4% as of December 31, 2011. Management increased short-term liquidity to bolster the Company’s ability to meet potential funding needs under unforeseen market conditions. The effort to bolster the Company’s liquidity position also included the containment of loan growth during the first six months of 2012. Loans represent 85.3% of total assets as of June 30, 2012, down from 88.8% of total assets as of December 31, 2011.


	June 30, 2012		December 31, 2011

Assets	Dollar Amount	%	Dollar Amount	%

Cash and cash equivalents	$ 8,551,776	4.7%	$ 1,949,825	1.1%
Securities available for sale	11,177,750	6.1%	9,218,665	5.3%
Loans held for sale	1,813,046	1.0%	3,463,500	2.0%
Loans	156,017,756	85.3%	155,577,564	88.8%
Premises and equipment, net	1,442,393	0.8%	1,490,989	0.8%
Other real estate owned	1,020,000	0.6%	1,020,000	0.6%
Deferred tax asset	1,705,000	0.9%	1,200,000	0.7%
Prepaid FDIC premium	0	0.0%	125,867	0.1%
Other assets	1,128,400	0.6%	1,096,839	0.6%

Total assets	$ 182,856,121	100.0%	$ 175,143,249	100.0%

Liabilities and Equity

Deposits	$ 164,245,197	89.8%	$ 158,244,453	90.4%
Other Borrowings	290,000	0.2%	290,000	0.2%
Other liabilities	817,572	0.4%	955,524	0.5%
Stockholders' equity	17,503,352	9.6%	15,653,272	8.9%

Total liabilities and equity	$ 182,856,121	100.0%	$ 175,143,249	100.0%

Loans

As shown in the table below, gross loans increased $1.0 million from December 31, 2011 to June 30, 2012. The primary source for new loans has been the residential real estate and equity lines of credit market segments. The commercial and commercial real estate segments declined due to the planned reduction of credit concentrations. The Company intends to continue to pursue loan opportunities when it is able to do so without sacrificing prudent underwriting standards.

The Company has managed its loan portfolio to achieve diversification, both in types of loans made and location. Fifteen-year and thirty-year fixed-rate mortgage loans are sold in the secondary market, with servicing released to the purchaser. The components of the loan portfolio at June 30, 2012 and December 31, 2011 are summarized as follows:


	June 30, 2012	%	December 31, 2011	%

Commercial	$ 28,023,474	17.4%	$ 28,313,560	17.7%
Real estate:
Commercial	68,256,314	42.5%	71,171,639	44.6%
Residential	43,762,406	27.2%	40,115,377	25.1%
Construction & Development	11,638,761	7.2%	11,655,897	7.3%
Second Mortgages	1,889,619	1.2%	1,904,291	1.2%
Equity lines of credit	6,419,113	4.0%	5,915,822	3.7%
Consumer	717,976	0.5%	646,033	0.4%
Subtotals	160,707,663	100.0%	159,722,619	100.0%

Allowance for loan losses	4,689,907		4,145,055
Loans, net	$ 156,017,756		$ 155,577,564

As of June 30, 2012, approximately 43% of loans were made to finance commercial real estate, approximately 17% of loans were made to finance commercial enterprises, and approximately 27% of loans were made to finance residential property. There were no other loan categories that exceeded 10% of total loans as of June 30, 2012.

Investments

The estimated fair market value of the investment portfolio as of June 30, 2012 was $11,177,750 including a pre-tax unrealized gain of $326,014. As of December 31, 2011, estimated fair market value was $9,218,665 including pre-tax unrealized gain of $337,626. There were no significant pre-tax unrealized losses at June 30, 2012 or December 31, 2011.

The Company’s investment strategies are aimed at maximizing income, preserving principal, managing interest rate risk, and avoiding credit risk. Although the Company has no immediate plans to sell any securities, all investments are classified as “available for sale.” This classification strengthens the Company’s liquidity position by allowing management the flexibility to sell securities in the future should conditions change.

The following table sets forth information regarding the scheduled maturities for the Company’s investment securities as of June 30, 2012 and December 31, 2011, by contractual maturity. The maturities of the mortgage-backed securities are the stated maturity date of each security. The table does not take into consideration the effects of scheduled payments or possible payoffs.


			After 1 Year		After 5 Years
	Within 1 Year		Within 5 Years		Within 10 Years		After 10 Years		Totals

(In thousands)	Amount	Yield	Amount	Yield	Amount	Yield	Amount	Yield	Amount	Yield

At June 30, 2012:

US Agency Securities	$ 999	0.27%	$ 3,773	1.40%	$ 2,008	0.92%	$ 0	0.00%	$ 6,780	1.09%
Municipal Securities	360	5.56%	2,431	4.83%	548	1.25%	0	0.00%	3,339	4.32%
Mortgage Backed Securities	65	3.92%	994	4.85%	0	0.00%	0	0.00%	1,059	4.79%
Total	$ 1,424	1.77%	$ 7,198	3.03%	$ 2,556	0.99%	$ 0	0.00%	$ 11,178	2.41%


			After 1 Year		After 5 Years
	Within 1 Year		Within 5 Years		Within 10 Years		After 10 Years		Totals

(In thousands)	Amount	Yield	Amount	Yield	Amount	Yield	Amount	Yield	Amount	Yield

At December 31, 2011:

US Agency Securities	$ 482	3.91%	$ 0	0.00%	$ 2,003	1.32%	$ 501	1.01%	$ 2,986	1.69%
Municipal Securities	2,323	3.52%	2,803	4.92%	0	0.00%	0	0.00%	5,126	4.29%
Mortgage Backed Securities	0	0.00%	1,107	4.85%	0	0.00%	0	0.00%	1,107	4.85%
Total	$ 2,805	3.58%	$ 3,910	4.90%	$ 2,003	1.32%	$ 501	1.01%	$ 9,219	3.51%

Deposits

During the six-month period ended June 30, 2012, deposits increased $6.0 million or 3.8%, compared to December 31, 2011.

Noninterest-bearing deposits increased $1.0 million, or 11.9%, during the first six months of 2012. Management believes that some of this increase may be temporary as deposit customers evaluate other investment options.

Interest-bearing deposits increased by $5.0 million, or 3.3%, during the six-month period ended June 30, 2012. Certificates of deposit balances increased $10.0 million, or 10.4%, offset by a $5.1 million, or 11.0% decrease in money market accounts during this period. Interest bearing checking and savings balances remained relatively stable for the six months ended June 30, 2012.

The decline in money market balances is attributable to management’s effort to reduce reliance on these deposits. Management targeted term deposit growth to secure stable deposit funds and to reduce short-term interest rate risk.

The $10.0 million increase in certificates of deposit during the first six months of 2012 includes $4.5 million of term deposits having maturities beyond two years. Management targeted long-term funding to help reduce interest rate risk within the balance sheet. Management monitors funding to ensure compliance with the Company’s Asset and Liability Management Policy.

The table below shows the deposit breakdown by dollar balance and percentage of total deposits as of June 30, 2012 and December 31, 2011.


	June 30, 2012		December 31, 2011

Deposits	Dollars	%	Dollars-$	%

Non interest-bearing deposits	$ 9,556,537	5.8%	$ 8,539,589	5.4%
Interest-bearing demand	3,432,451	2.1%	3,737,126	2.4%
Money market accounts	41,318,849	25.2%	46,432,343	29.3%
Savings accounts	3,877,280	2.4%	3,484,348	2.2%
Certificates of deposit less than $100,000	68,885,390	41.9%	60,618,445	38.3%
Certificates of deposit $100,000 and greater	37,174,690	22.6%	35,432,602	22.4%
	$ 164,245,197	100.0%	$ 158,244,453	100.0%

The following table shows a breakdown by dollar amount and maturity of certificates of deposit as of June 30, 2012.


	Certificates	Certificates
	of Deposit	of Deposit
	Less Than	$100,000
	$100,000	and Greater	Total

Due three months or less	$ 5,416,381	$ 4,876,419	$ 10,292,800
Due more than three months to six months	3,464,671	3,665,600	7,130,271
More than six months to one year	13,460,910	10,646,063	24,106,973
Over one year	46,543,428	17,986,608	64,530,036

	$ 68,885,390	$ 37,174,690	$ 106,060,080

Income Taxes

The Company has federal and state operating loss carryforwards that approximate $1.5 million for federal and $1.3 million for state that may be applied against future federal and state taxable income earned. The carryforwards begin to expire on December 31, 2026 for federal purposes and December 31, 2021 for Wisconsin purposes.

Liquidity and Sensitivity

Interest rate risk is fundamental to the business of banking. Changes in interest rates can expose an institution to adverse shifts in the level of net interest income or other rate-sensitive income sources and impair the underlying value of its assets and liabilities.

The Company’s Asset-Liability Committee (“ALCO”) is responsible for managing liquidity and interest rate risk. The Board of Directors has adopted a Liquidity Risk Management Policy which establishes a hierarchy of sources of funds the Company would use in case of a liquidity crisis.

The Company’s primary potential source of funds on a short-term basis is access to overnight lines of credit established with two correspondent banks. As of June 30, 2012, the Company had access to a $12.5 million line of credit (of which $5.1 million is unsecured) at Banker’s Bank, Madison and $3.0 million (unsecured) at BMO Harris Bank, Milwaukee. Nothing was drawn on either line of credit at June 30, 2012, nor did the Company draw funds against either line of credit at any time during 2012.

The Company relies primarily on local deposits to fund lending and investing operations. Besides the line of credit mentioned above, the Company has access to needed funds through brokered deposits, which represent deposits from outside of its market area. The Company had third-party brokered deposits of $22.6 million at June 30, 2012 and December 31, 2011.

The Company also has approximately $1.6 million of deposits in the CDARs Reciprocal Program. Those are local deposits transferred to other institutions to ensure complete FDIC insurance coverage, with an equal amount transferred to the Company from other financial institutions participating in the program. This program allows the Company to retain local deposits in excess of the FDIC insurance amount, while providing full insurance coverage to its customers.

All deposits obtained through third-party deposit brokers or through the CDARS program are reported as brokered deposits in the Company’s financial reports. The Company’s Asset-Liability Management Policy allows a maximum ratio of 20% brokered deposits to total deposits. As of June 30, 2012 the percentage of brokered deposits to total deposits was 14.7%.

One measure of short-term interest rate risk is gap analysis, which compares the dollar amount of assets which can be re-priced in a certain time period to liabilities which can be re-priced in the same period. Theoretically, in a period of rising market interest rates, being asset sensitive (whereby more assets re-pricing than liabilities) is advantageous. The converse is true in a

declining rate environment. The theoretical advantage is mitigated by the fact that borrowers refinance loans as rates decline, and certificate of deposit holders move to higher yielding CDs in a rising rate environment. The gap analysis is a tool that assists the ALCO in monitoring maturities and setting loan and deposit rates. As of June 30, 2012, the Company is liability sensitive, meaning that it is better positioned in a declining interest rate environment. Management has focused attention on reducing short-term sensitivity to rising interest rates by implementing strategies to extend deposit maturities and securing match-funding for larger credits. Management will continue to manage assets and liabilities to minimize interest rate risk to the balance sheet.

Capital Resources

Management monitors the Company’s and the Bank’s capital levels and has not identified significant capital expenditure needs that would have an impact on capital requirements at this time. As of June 30, 2012, the Bank’s Tier 1 risk-weighted capital ratio, total risk-weighted capital, and Tier 1 leverage ratio were in excess of regulatory minimums and the Bank was classified as “adequately capitalized”. The Bank does not anticipate changes in the mix and relative costs of capital at this time.

The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

Quantitative measures established by regulations to ensure capital adequacy require the Bank to maintain minimum amounts and ratios as set forth in the table below of total and Tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets. For the Bank, Tier 1 capital is defined as total equity capital minus net unrealized gains on available for sale securities or plus any net unrealized losses on such securities. Risk-weighted assets are the sum of all assets on the balance sheet assigned to a designated risk category.

The categories, with examples of items included, though not a complete list or definition, are:

0%, which includes cash on hand and US Treasury securities

20%, which includes cash in banks and US agency securities

50%, which includes 1 to 4 family residential mortgages

100%, which includes any assets not designated elsewhere

As of June 30, 2012, the most recent notification from the FDIC categorized the Bank as adequately capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table below and not be subject to any written regulatory order, capital directives or prompt corrective action directives issued by its bank regulator.

As part of the Consent Order, the Bank is required to maintain a Tier 1 Leverage Capital ratio of at least 9 percent of total assets and a Total Risk-Based Capital ratio level of at least 12 percent. At June 30, 2012, the Bank was in compliance with these directives, with a Tier 1 Leverage Capital ratio of 9.59% and a Total Risk-Based Capital ratio of 13.95%, however, because the Bank is subject to the Consent Order, it is precluded from being characterized as “well capitalized”. The Bank continues to pursue strategies to enhance its capital position to remain in compliance with the levels established pursuant to the initiative indicated above.

To Be Well Capitalized

For Capital

Under Prompt Corrective

Choice Bank

Actual

Adequacy Purposes

Action Provisions

Amount

Ratio

Amount

Ratio

Amount

Ratio

(In Thousands)

As of June 30, 2012

Total Risk-based Capital (to risk-

weighted assets)

$ 19,161

13.95%

$ 10,988

≥ 8.00%

$ 13,735

≥ 10.00%

Tier 1 Capital (to risk-

weighted assets)

$ 17,407

12.67%

$ 5,494

≥ 4.00%

$ 8,241

≥ 6.00%

Tier 1 Capital (to average

assets)

$ 17,407

9.59%

$ 7,262

≥ 4.00%

$ 9,077

≥ 5.00%

As of December 31, 2011

Total Risk-based Capital (to risk-

weighted assets)

$ 17,421

12.61%

$ 11,055

≥ 8.00%

$ 13,818

≥ 10.00%

Tier 1 Capital (to risk-

weighted assets)

$ 15,662

11.33%

$ 5,527

≥ 4.00%

$ 8,291

≥ 6.00%

Tier 1 Capital (to average

assets)

$ 15,662

8.87%

$ 7,064

≥ 4.00%

$ 8,830

≥ 5.00%

Results of Operations

The following is a summary of operations for the periods indicated:


	Three months ended June 30,		Six months ended June 30,

	2012	2011	2012	2011

Net interest income	$ 1,850,052	$ 1,757,991	$ 3,737,452	$ 3,339,472
Provision for loan loss	300,000	300,000	600,000	600,000
Non-interest income	134,268	78,798	778,670	159,034
Non-interest expense	1,081,928	988,460	2,120,812	2,017,944

	602,392	548,329	1,795,310	880,562
Income taxes	0	0	0	0

Net income	$ 602,392	$ 548,329	$ 1,795,310	$ 880,562


Financial Ratios:

Return on average equity	14.01%	17.00%	21.61%	13.74%
Return on average assets	1.33%	1.35%	2.01%	1.08%
Average equity to average assets	9.49%	7.96%	9.29%	7.85%

Net income for the quarter ended June 30, 2012, was $602,392, an increase of $54,063 from net income of $548,329 for the corresponding period in 2011. This increase is attributable to a $92,061 increase in net interest income and a $55,470 increase in non-interest income offset by a $93,468 increase in non-interest expense. Net income for the six-month period ended June 30, 2012 was $1,795,310, an increase of $914,748 compared to net income of $880,562 for the corresponding period in 2011. The increase in year-to-date net income is attributable to a $433,802 gain on sale of other assets, an increase of $397,980 in net interest income, and an increase in non-interest income of $185,834 offset by a $102,868 increase in non-interest expense.

The Company did not report federal and state income tax expense for the six month periods ended June 30, for 2012 and 2011 due to the offset of the deferred tax valuation allowance.

Net Interest Income

Net interest income is the largest component of the Company’s operating income and represents the difference between interest earned on loans, investments and other interest-earning assets offset by the interest expense attributable to the deposits and borrowings that fund such assets. Interest rate fluctuations, together with changes in the volume and types of earning assets and interest-bearing liabilities, combine to affect total net interest income.

Net interest income for the quarter ended June 30, 2012 was $1,850,052, an increase of $92,061, compared to $1,757,991 for the quarter ended June 30, 2011. Net interest income for the six months ended June 30, 2012 was $3,737,452, an increase of $397,980, compared to the $3,339,472 reported for the comparable period in 2011. Management has managed the earning assets and interest-bearing liabilities to increase net interest performance under a prevailing low rate environment.

The following table provides a summary of the changes in interest earned and interest paid resulting from changes in volume and changes in rates:


	Comparison 3-Months Ended			Comparison 6-Months Ended
	June 30, 2012 versus 2011			June 30, 2012 versus 2011

	Increase (Decrease)			Increase (Decrease)
	Due to Change In			Due to Change In
(In thousands)	Average	Average	Total	Average	Average	Total
	Balance	Rate	Change	Balance	Rate	Change
Interest income:
Investment securities	17	(81)	(64)	(10)	(86)	(96)
Federal Funds sold	4	(1)	3	3	(1)	2
Loans	237	(122)	115	479	(41)	438

Total interest income	258	(204)	54	472	(128)	344

Interest expense:
Interest-bearing demand	(5)	(18)	(23)	(13)	(34)	(47)
Savings deposits	0	0	0	0	(1)	(1)
Certificates of deposit	57	(70)	(13)	109	(116)	(7)
Borrowed funds	(4)	2	(2)	(4)	5	1
					0
Total interest expense	48	(86)	(38)	92	(146)	(54)

Net interest income	210	(118)	92	380	18	398

The increase in net interest income for the three-month period ended June 30, 2012 relative to the comparable period in 2011 is primarily due to the growth in earning assets offset by a decrease in net interest spread. Average earning assets held during the second quarter of 2012 were $18.2 million greater than the average earning assets held during the second quarter of 2011. The growth in earning assets generated $257,666 in additional interest income and provided a $209,865 increase to net interest income when offset by a $47,801 increase in interest expense resulting from the growth in deposit balances. The decrease in net interest spread between the three-month-periods ended June 30, 2012 and 2011 generated an offsetting decline to net interest income of $117,804 million for the second quarter 2012. The net interest spread for the second quarter 2012 was 3.94% compared to net interest spread of 4.16% for the second quarter 2011.

The increase in net interest income for the six-month period ended June 30, 2012 relative to the comparable period in 2011 is attributed to the combination of growth in earning assets and the increase in net interest spread. Average earning assets held during the first six months of 2012 were $17.1 million greater than the average earning assets held during the first six months of 2011. The growth in earning assets generated $471,597 in additional interest income and provided a $379,064 increase to net interest income when offset by a $92,533 increase in interest expense resulting from the growth in deposit balances. The increase in net interest spread between the six-month periods ended June 30, 2012 and 2011 generated additional net interest income of $18,916 for the current six-month period. The net interest spread for the six-month period ended June 30, 2012 was 4.03% compared to the net interest spread of 4.00% for the comparable period in 2011.

The decrease in net interest spread for the three-month period ended June 30, 2012 is attributed to a decline in yield on earning assets offset by a reduction in the cost of funds. The decline in yield on earning assets during the second quarter of 2012 resulted in a $203,668 decrease to net interest income relative to the second quarter 2011. The reduction in cost of funds during the

second quarter of 2012 enabled the Company to generate additional net interest income of $85,864 relative to the second quarter 2011.

The increase in net interest spread for the six-month period ended June 30, 2012 is attributed to a reduction in the cost of funds partially offset by a decline in yield on earning assets. The reduction in cost of funds during the six-month period ended June 30, 2012 enabled the Company to generate additional net interest income of $146,637 relative to the comparable period in 2011. The decline in yield on earning assets during the current six-month period resulted in a $127,721 decrease to net interest income relative to comparable period in 2011.

The Company’s average interest-earning assets of $180.4 million for the second quarter of 2012 yielded an average return of 5.23% compared to average interest-earning assets of $162.2 million and a 5.67% average return for the second quarter of 2011. For the six months ended June 30, 2012, average earning assets and yield were $178.0 and 5.40% respectively, compared to $160.9 million and 5.56% for the comparable period in 2011.

Interest-bearing liabilities averaged $154.8 million for the second quarter of 2012 and posted an average interest rate of 1.29%. The average balance and average interest rate paid on interest-bearing liabilities were $142.1 million and 1.51%, respectively, for the second quarter of 2011. Year-to-date, average interest-bearing liabilities and average interest rate were $153.3 million and 1.37%, respectively, compared to $141.4 million and 1.56% for the comparable period in 2011.

Provision for Loan Losses

The provisions for loan loss for the second quarter and year-to-date were $300,000 and $600,000 respectively for each of the comparable periods in 2012 and 2011. Provision expense is determined based on management’s ongoing assessment of risk associated with the loan portfolio.

Non-Interest Income

The following table reflects the various components of non-interest income for the three-month and six-month periods ending June 30, 2012 and 2011, respectively:


	Three months ended

Non-interest income	June 30, 2012	June 30, 2011	% Change

Loan document preparation fees	$ 29,243	$ 15,489	88.8%
Other customer service fees	37,613	27,685	35.9%
Total customer service fees	66,856	43,174	54.9%
Secondary market fees	62,681	30,126	108.1%
Rental income on other real estate	4,731	5,498	-14.0%
Total non-interest income	$ 134,268	$ 78,798	70.4%


	Six months ended

Non-interest income	June 30, 2012	June 30, 2011	% Change

Loan document preparation fees	$ 68,682	$ 29,327	134.2%
Other customer service fees	76,980	58,658	31.2%
Total customer service fees	145,662	87,985	65.6%
Secondary market fees	188,701	65,551	187.9%
Rental income on other real estate	10,505	5,498	91.1%
Gain on sale of other assets	433,802	0	NA
Total non-interest income	$ 778,670	$ 159,034	389.6%

Non-interest income increased $55,470, or 70.4%, for the three months ended June 30, 2012 versus the comparable period in 2011. For the six-month period ended June 30, 2012 non-interest income increased $619,636, or 389.6% relative to the comparable period in 2011.

A rise in secondary market fees and related increase in loan document preparation fees had an impact on non-interest income for both periods. Secondary market fees, which are heavily tied to mortgage financing volume, increased $32,555 for the second quarter and $123,150 for the year-to-date 2012 relative to the same periods for 2011. Loan document preparation fees increased $13,754 for the second quarter and $39,355 for the year-to-date relative to the same periods for 2011.

A gain on sale of other real estate had the most notable impact on non-interest income year-to-date 2012. The $433,802 gain included a $400,000 gain recognized on the sale of a residential property and a $33,802 gain on the sale of a commercial real estate property.

Rental income on other real estate increased $5,007, or 91.1% for the six-month period ended June 30, 2012 compared to the same period for 2011. The Company did not own rental properties during the first quarter of 2011.

The rise in other customer service fees for the second quarter and year-to-date relative to the same periods in 2011 is consistent with the increase in customer relationships experienced between the comparable time periods.

Non-Interest Expense

The following table reflects the various components of non-interest expense for the three-month and six-month periods ended June 30, 2012 and 2011, respectively.


	Three months ended

Non-interest expense	June 30, 2012	June 30, 2011	% Change

Salaries and benefits	$ 589,836	$ 538,745	9.5%
Occupancy and equipment	80,111	88,470	-9.4%
Data processing	42,927	30,291	41.7%
Marketing	11,124	10,773	3.3%
Legal fees	29,998	27,093	10.7%
Professional fees	93,529	95,831	-2.4%
FDIC Premium	85,629	85,979	-0.4%
Director Fees	18,750	18,750	0.0%
Other operating expenses	130,024	92,528	40.5%

	$ 1,081,928	$ 988,460	9.5%


	Six months ended

Non-interest expense	June 30, 2012	June 30, 2011	% Change

Salaries and benefits	$ 1,221,241	$ 1,074,289	13.7%
Occupancy and equipment	170,498	182,798	-6.7%
Data processing	87,442	62,626	39.6%
Marketing	24,749	18,768	31.9%
Legal fees	45,760	46,355	-1.3%
Professional fees	144,924	157,423	-7.9%
FDIC Premium	151,048	170,337	-11.3%
Director Fees	37,500	37,500	0.0%
Loss on devaluation of other assets	0	100,000	N/A
Other operating expenses	237,650	167,848	41.6%

	$ 2,120,812	$ 2,017,944	5.1%

Non-interest expense increased $93,468, or 9.5%, for the three months ended June 30, 2012 versus the comparable period in 2011. For the six-month period ended June 30, 2012 non-interest expense increased $102,868, or 5.1% relative to the comparable period in 2011.

A rise in salaries and benefits had an impact on non-interest expense for both periods. Salaries and benefits increased $51,091 for the second quarter and $146,952 for the six-months ended June 30, 2012 relative to the same periods for 2011. The increase in salaries and benefits expense is attributed to the combination of expense related to stock options awarded in 2012 and staff expansion for 2012 relative to 2011.

An increase in data processing expense had an impact on non-interest expense for both periods. Data processing costs increased $12,636 for the second quarter and $24,816 for the six-months ended June 30, 2012 relative to the same periods for 2011. Data processing expense increased during 2012 due to the continued growth in number of customer accounts and volume of banking transactions.

A rise in other operating expenses had an impact on non-interest expense for both periods. Other operating expense increased $37,496 for the second quarter and $69,802 for the six-month period ended June 30, 2012. The increase in other operating costs is primarily attributed to expense to maintain other real estate owned.

For the six-month period ended June 30, 2012, marketing expense increased $5,981 relative to the same period in 2011. The increase in expense is attributed to additional community support initiatives undertaken during the first quarter 2012.

For the six-month period ended June 30, 2012, professional fees decreased $12,499 relative to the same period in 2011. Professional fees for 2011 included expense associated with the conversion of bank stock to holding company stock that occurred in that year.

For the six-month period ended June 30, 2012, FDIC premium expense decreased $19,289 relative to the same period for 2011. FDIC premium expense for 2011 included an adjustment to reflect a rise in the Company’s assessment rate.

The Company incurred an expense of $100,000 during the first quarter of 2011 related to the devaluation of an investment held in other assets. The loss was recognized based on a determination of permanent loss of value in the underlying investment.

Income Tax Expense

The Company did not report federal and state income tax expense for three-month or six-month periods ended June 30, 2012 or June 30, 2011 due to the offset of the deferred tax valuation allowance.

Off-Balance Sheet Arrangements

The Company has no material off-balance sheet arrangements, other than through the Company’s commitments to extend credit and unfunded commitments. At June 30, 2012, the Company had commitments to extend credit and unfunded commitments of approximately $3.5 million and $15.6 million, respectively.

ITEM 3. Quantitative and Qualitative Disclosures about Market Risk

The disclosure contemplated by Item 3 is not required because the Company qualifies as a smaller reporting company.

ITEM 4. Controls and Procedures

As of the end of the period covered by this quarterly report on Form 10-Q for the quarter ended June 30, 2012, the Company carried out an evaluation, under the supervision and with the participation of its management, including its chief executive officer and chief financial officer, of the effectiveness of the design and operation of its “disclosure controls and procedures,” as such term is defined under Exchange Act Rule 13a-15(e) and 15d-15(e).

Based on this evaluation, the Company’s chief executive officer and chief financial officer concluded that, as of the end of the fiscal quarter covered by this report, such disclosure controls and procedures were reasonably designed to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is: (a) recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and (b) accumulated and communicated to the Company’s management, including the Company’s chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, the Company’s management recognized that any controls and procedures, no matter how well designed and operated, can only provide reasonable assurance in achieving the desired control objectives and in reaching a reasonable level of assurance the Company’s management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As reported in the Company's Annual Report on Form 10-K for the year ended December 31, 2011 (the "2011 Form 10-K"), the Chief Executive Officer and Chief Financial Officer identified a material weakness as of December 31, 2011 in the Company's internal controls over its financial reporting processes. The material weakness related to the failure of the Company's internal controls to provide a proper and timely review and reporting of the Company's asset necessary for the Board of Directors to evaluate and establish an adequate allowance and make adequate provision for inherent and identified losses. In the 2011 Form 10-K the Company reported that it engaged an outside professional consultant to conduct a review of the Company's system of internal controls and procedures and assist management in making any changes appropriate to remedy the material weakness and any other deficiencies and to improve the design of such system to assure the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. There were no changes in the Company’s internal controls over financial reporting during the quarter ended June 30, 2012 that materially affected, or were reasonably likely to materially affect, its internal controls over financial reporting. As of the date of this Report, management believes that the material weakness identified in the 2011 Form 10-K continues to exist, although the Company continues to pursue the steps noted above, including engagement of an outside consulting firm, to assist the Company in remediating the identified weakness and improving the design of its system of internal controls and procedures. Management expects that the material weakness will be substantially remediated prior to the end of 2012, although there can be no assurance that management will be successful in such remedial efforts by that date, or at all.

PART II OTHER INFORMATION

ITEM 1. Legal Proceedings

The Company may from time to time be engaged in routine litigation incidental to its business. There are, however, presently no proceedings pending or contemplated which, in the Company’s opinion, would have a material adverse effect on its business or consolidated financial position.

ITEM 1A. Risk Factors

There have been no material changes in the risk factors reported in Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

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

The Company did not sell any unregistered securities during the first six months of 2012, nor repurchased any of its securities during the period.

The ability of the Company to pay dividends on its common stock is largely dependent upon the ability of the Bank to pay dividends to the Company.

The Bank is subject to certain restrictions regarding the declaration and payment of dividends to shareholders without prior regulatory approval. In general, Wisconsin law permits a bank’s board of directors to declare dividends from the bank’s undivided profits in an amount that the Board considers expedient. The board of directors must provide for the payment of all expenses, losses, required reserves, taxes and interest accrued or due from the bank before it may declare dividends from undivided profits. If the dividends declared and paid in either of the two immediately preceding years exceeded net income for either of those two years respectively, then the bank may not declare or pay any dividend in the current year that would exceed year-to-date net income without first obtaining the written consent of the Wisconsin Department of Financial Institutions.

In addition, under federal law, a bank may not pay any dividend while it is “undercapitalized” or if the payment of the dividend would cause it to become “undercapitalized.” The FDIC may further restrict the payment of dividends by requiring that the bank maintain a higher level of capital than would otherwise be required to be “adequately capitalized” for regulatory purposes. Moreover, if, in the opinion of the FDIC, the bank is engaged in an unsafe or unsound banking practice (which could include the payment of dividends), the FDIC may require, generally after notice and hearing, that it cease such practice. The FDIC has indicated that paying dividends that deplete a depository institution’s capital base to an inadequate level would be an unsafe or unsound banking practice. The FDIC has also issued policy statements providing that insured depository institutions generally should pay dividends only out of current operating earnings.

ITEM 3. Default Upon Senior Securities

Not applicable.

ITEM 4. Mine Safety Disclosures

Not applicable.

ITEM 5. Other Information

There have been no material changes to the procedures by which shareholders may recommend nominees to the Board of Directors.

Subsequent Events have been evaluated through the date the financial statements are filed with the Securities and Exchange Commission.

ITEM 6 Exhibits


	Exhibit Number		Description
	31.1		Rule 302 Certification of Principal Executive Officer
	31.2		Rule 302 Certification of Principal Financial Officer
	32.1		Rule 1350 Certification by Chief Executive Officer and Chief
			Financial Officer
	101		Interactive data files pursuant to Rule 405 of Regulation S-T: (i)
			Consolidated Statements of Financial Condition, (ii)
			Consolidated Statements of Income, (iii) Consolidated
			Statements of Comprehensive Income, (iv) Consolidated
			Statements of Changes in Stockholders’ Equity, (v) Consolidated
			Statements of Cash Flows, and (vi) Notes to Financial
			Statements tagged as blocks of text.

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.


		CHOICE BANCORP, INC.


Date:	August 14, 2012	/s/ J. Scott Sitter
		J. Scott Sitter
		President and Chief Executive Officer (Principal Executive Officer)

Date:	August 14, 2012	/s/ John F. Glynn
		John F. Glynn
		Chief Financial Officer Principal Accounting Officer)

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	H.S. freshman Bad

Choice Bancorp (CBKW) Inactive 10-Q2012 Q2 Quarterly report

Content analysis