form10-q.htm

10-Q 1 form10-q.htm NORTH CENTRAL BANCSHARES, INC. 10-Q 06-30-2011 form10-q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2011

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

For the transition period from __________________ to __________________.

Commission File Number: 0-27672

NORTH CENTRAL BANCSHARES, INC.

(Exact name of registrant as specified in its charter)

Iowa 42-1449849

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

825 Central Avenue, Fort Dodge, Iowa 50501

(Address of principal executive offices) (Zip Code)

515-576-7531

(Registrant’s telephone number, including area code)

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

Yes þ

No ¨

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

Yes þ

No ¨

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

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

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

Yes ¨

No þ

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

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

NORTH CENTRAL BANCSHARES, INC.

INDEX

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

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

	Consolidated Statements of Operations for the Three Months and Six Months Ended June 30, 2011 and 2010	2

	Consolidated Statements of Stockholders’ Equity for the Six Months Ended June 30, 2011 and 2010	3

	Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2011 and 2010	4

	Notes to Consolidated Financial Statements	6

	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	20

	Item 3. Quantitative and Qualitative Disclosure About Market Risk	30

	Item 4. Controls and Procedures	30
Part II. Other Information
	Item 1. Legal Proceedings	31

	Item 6. Exhibits	32

	Signatures	33

INDEX

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

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

	June 30,			December 31,
	2011			2010
ASSETS

Cash and due from banks:
Interest-bearing	$	8,882,679		$	13,563,234
Noninterest-bearing		6,469,119			7,040,574
Total cash and due from banks		15,351,798			20,603,808
Investments in certificates of deposit		8,359,000			12,689,000
Securities available-for-sale		71,537,150			48,435,771
Federal Home Loan Bank stock, at cost		2,199,100			3,017,200

Loans receivable		320,921,205			340,607,428
Allowance for loan losses		(5,872,458	)		(6,146,861	)
Loans receivable, net		315,048,747			334,460,567

Loans held for sale		1,245,214			332,178
Accrued interest receivable		1,672,761			1,754,292
Foreclosed real estate		1,892,247			4,586,399
Premises and equipment, net		11,457,323			11,498,583
Rental real estate		2,089,405			2,144,400
Title plant		671,704			671,704
Deferred taxes		1,492,210			2,151,594
Bank-owned life insurance		5,905,466			5,787,864
Prepaid FDIC assessment		1,114,376			1,353,121
Prepaid expenses and other assets		2,592,697			2,777,185

Total assets	$	442,629,198			452,263,666


LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES
Deposits	$	357,567,252		$	349,832,904
Borrowed funds		30,250,000			49,250,000
Advances from borrowers for taxes and insurance		1,897,537			1,828,430
Accrued expenses and other liabilities		2,101,143			2,177,042

Total liabilities		391,815,932			403,088,376


STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, authorized 3,000,000
shares; 10,200 shares were issued and outstanding		10,147,152			10,137,381
Common stock, $.01 par value, authorized 15,500,000
shares; at June 30, 2011 and at December 31,
2010 1,355,073 and 1,351,448 shares were
issued and outstanding, respectively		13,519			13,502
Additional paid-in capital		18,095,558			18,066,437
Retained earnings, substantially restricted		21,993,503			21,047,295
Accumulated other comprehensive income (loss)		563,534			(89,325	)

Total stockholders' equity		50,813,266			49,175,290

Total liabilities and stockholders' equity	$	442,629,198		$	452,263,666


See Notes to Consolidated Financial Statements.

INDEX

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

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

Interest income:
Loans receivable	$	4,599,448	$	5,294,291		$	9,358,833	$	10,847,401
Securities and cash deposits		520,441		299,544			936,663		534,220
		5,119,889		5,593,835			10,295,496		11,381,621

Interest expense:
Deposits		1,217,718		1,357,456			2,433,216		2,684,966
Borrowed funds		305,464		606,998			696,079		1,301,593
		1,523,182		1,964,454			3,129,295		3,986,559

Net interest income		3,596,707		3,629,381			7,166,201		7,395,062

Provision for loan losses		485,000		1,610,000			785,000		2,410,000
Net interest income after provision for loan losses		3,111,707		2,019,381			6,381,201		4,985,062

Noninterest income:
Fees and service charges		1,230,721		1,216,101			2,380,665		2,292,863
Abstract fees		152,286		164,063			283,505		306,684
Mortgage banking income		108,008		128,768			224,067		240,955
Loan prepayment fees		12,255		17,125			13,455		27,204
Other income		336,286		348,250			571,954		671,198

Total noninterest income		1,839,556		1,874,307			3,473,646		3,538,904

Investment securities gains, net:
Total other-than-temporary impairment losses		-		-			-		-
Portion of loss recognized in other comprehensive
income (loss) before taxes		-		-			-		-
Net impairment losses recognized in earnings		-		-			-		-
Realized securities gains, net		30,041		-			30,041		7,652
Total securities gains, net		30,041		-			30,041		7,652

Noninterest expense:
Compensation and employee benefits		1,910,907		1,879,873			3,790,355		3,769,732
Premises and equipment		442,981		484,335			947,786		985,425
Data processing		239,448		229,857			432,900		442,980
FDIC insurance expense		114,261		140,013			258,072		283,830
Foreclosed real estate impairment		317,633		306,500			389,171		316,458
Other expenses		1,314,562		1,162,526			2,458,960		2,157,501

Total noninterest expense		4,339,792		4,203,104			8,277,244		7,955,926

Income (loss) before income taxes		641,512		(309,416	)		1,607,644		575,692

Provision for (benefit from) income taxes		93,700		(180,400	)		369,600		76,100

Net income (loss)	$	547,812	$	(129,016	)	$	1,238,044	$	499,592


Preferred stock dividends and accretion of discount	$	132,417	$	132,169		$	264,771	$	264,278

Net income (loss) available to common stockholders	$	415,395	$	(261,185	)	$	973,273	$	235,314


Basic earnings (loss) per share	$	0.31	$	(0.19	)	$	0.72	$	0.17

Dilluted earnings (loss) per share	$	0.31	$	(0.19	)	$	0.72	$	0.17

Dividends declared per common share	$	0.01	$	0.01		$	0.02	$	0.02

See Notes to Consolidated Financial Statements.

INDEX

NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES

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

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

Balance, January 1, 2010			$	10,118,581	$	13,471	$	18,009,468	$	19,924,798		$	212,500		$	48,278,818
Comprehensive income:
Net income	$	499,592		-		-		-		499,592			-			499,592
Other comprehensive income, net of
reclassification adjustment and tax		102,984		-		-		-		-			102,984			102,984
Total comprehensive income	$	602,576
Dividends on preferred stock				-		-		-		(255,000	)		-			(255,000	)
Dividends on common stock				-		-		-		(26,999	)		-			(26,999	)
Employee stock-based compensation				-		16		28,876		-			-			28,892
Accretion of discount on preferred stock				9,278		-		-		(9,278	)		-			-
Balance, June 30, 2010			$	10,127,859	$	13,487	$	18,038,344	$	20,133,113		$	315,484		$	48,628,287

Balance, January 1, 2011			$	10,137,381	$	13,502	$	18,066,437	$	21,047,295		$	(89,325	)	$	49,175,290
Comprehensive income:
Net income	$	1,238,044		-		-		-		1,238,044			-			1,238,044
Other comprehensive income, net of
reclassification adjustment and tax		652,859		-		-		-		-			652,859			652,859
Total comprehensive income	$	1,890,903
Dividends on preferred stock				-		-		-		(255,000	)		-			(255,000	)
Dividends on common stock				-		-		-		(27,065	)		-			(27,065	)
Employee stock-based compensation				-		17		29,121		-			-			29,138
Accretion of discount on preferred stock				9,771		-		-		(9,771	)		-			-
Balance, June 30, 2011			$	10,147,152	$	13,519	$	18,095,558	$	21,993,503		$	563,534		$	50,813,266


See Notes to Consolidated Financial Statements

INDEX

NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)	Six Months Ended
	June 30,
	2011			2010
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	1,238,044		$	499,592
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses		785,000			2,410,000
Depreciation		427,646			472,129
Amortization and accretion		151,284			119,743
Deferred taxes		271,000			(842,000	)
Stock-based compensation		29,138			28,892
(Gain) on sale of foreclosed real estate and loans, net		(198,747	)		(218,262	)
Write-down of other real estate owned		389,171			316,458
(Gain) on sale of investments		(30,041	)		(7,652	)
Increase in value of bank-owned life insurance		(117,602	)		(120,954	)
Proceeds from sales of loans held-for-sale		11,279,268			12,921,766
Originations of loans held-for-sale		(11,968,237	)		(13,570,578	)
Change in assets and liabilities:
Accrued interest receivable		81,531			80,009
Prepaid expenses and other assets		413,521			397,569
Accrued expenses and other liabilities		(98,217	)		(1,018,013	)

Net cash provided by operating activities		2,652,759			1,468,699

CASH FLOWS FROM INVESTING ACTIVITIES
Net change in loans		17,654,739			19,100,759
Purchase of investments in certificates of deposit		(1,988,000	)		(11,994,000	)
Proceeds from maturities on investments in certificates of deposits		6,318,000			-
Purchase of securities available-for-sale		(29,038,448	)		(19,480,946	)
Proceeds from sale of securities available-for-sale		1,177,250			207,732
Proceeds from maturities and calls of securities available-for-sale		5,711,092			3,669,678
Proceeds from redemption of Federal Home Loan Bank stock		818,100			626,000
Purchase of premises, equipment and rental real estate		(325,891	)		(248,549	)
Net proceeds from sale of foreclosed real estate		3,260,513			679,937

Net cash provided by (used in) investing activities		3,587,355			(7,439,389	)

CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits		7,734,348			9,727,456
Net increase in advances from borrowers for taxes
and insurance		69,107			64,201
Payments of other borrowed funds		(19,000,000	)		(12,000,000	)
Common and preferred dividends paid		(295,579	)		(281,969	)

Net cash (used in) financing activities		(11,492,124	)		(2,490,312	)

Net decrease in cash		(5,252,010	)		(8,461,002	)

CASH AND DUE FROM BANKS
Beginning		20,603,808			21,766,170
Ending	$	15,351,798		$	13,305,168

INDEX

NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
(Unaudited)	Six Months Ended
	June 30,
	2011		2010
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash payments for:
Interest	$	3,201,820	$	4,065,375
Income taxes		6,121		1,197,213

SUPPLEMENTAL DISCLOSURE OF NONCASH OPERATING,
INVESTING AND FINANCING ACTIVITIES
Transfers from loans to other real estate owned	$	950,520	$	1,793,962


See Notes to Consolidated Financial Statements.

INDEX

NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. BASIS OF PRESENTATION

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

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

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

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

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

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

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

INDEX

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

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

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

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

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

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

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

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

2. EARNINGS PER COMMON SHARE

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

INDEX


	Three Months Ended June 30,					Six Months Ended June 30,
	2011		2010			2011		2010
Basic earnings per common share:
Net Income (loss)	$	547,812	$	(129,016	)	$	1,238,044	$	499,592
Preferred stock dividends and accretion of discount		132,417		132,169			264,771		264,278
Net income (loss) available to common stockholders	$	415,395	$	(261,185	)	$	973,273	$	235,314
Weighted average common shares outstanding - basic		1,350,223		1,346,906			1,349,092		1,345,933
Basic earnings (loss) per common share	$	0.31	$	(0.19	)	$	0.72	$	0.17

Diluted earnings (loss) per common share:
Net income (loss) available to common stockholders		415,395		(261,185	)		973,273		235,314
Weighted average common shares outstanding - basic		1,350,223		1,346,906			1,349,092		1,345,933
Effect of dilutive securities:
Stock Options(1)(2)		-		-			-		-
Restricted Stock(2)		4,014		-			3,758		3,659
Common stock warrant(2)		6,546		-			6,315		4,228
Total diluted average common shares issued and		1,360,783		1,346,906			1,359,165		1,353,820
outstanding		1,360,783		1,346,906			1,359,165		1,353,820
Diluted earnings (loss) per common share	$	0.31	$	(0.19	)	$	0.72	$	0.17


1For the three months ending June 30, 2011 and six months ending June 30, 2011 and 2010, outstanding options to purchase common stock totaled 50,700 and 65,200, respectively. These options were not
dilutive because the exercise price of the options exceeded the average closing price for the Company's common stock.
2For the three months ending June 30, 2010, options to purchase 62,500 shares of common stock, 3,500 shares of restricted stock and 99,157 shares of common stock warrants were not dilutive due to a
net loss for the quarter.

3. SECURITIES


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

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

Debt securities:
State and local obligations	$	9,060,630	$	114,299	$	(255,325	)	$	8,919,604
Mortgage-backed securities(1)		20,143,818		417,638		(49,399	)		20,512,057
Collateralized mortgage obligations (1)		29,430,129		551,769		(13,833	)		29,968,065
Corporate bonds		3,366,739		35,077		(338	)		3,401,478
U.S. Government agencies		8,637,055		98,891		-			8,735,946
Total	$	70,638,371	$	1,217,674	$	(318,895	)	$	71,537,150


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

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

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

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

INDEX

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



	June 30, 2011
	Less than 12 Months					12 Months or More				Total
			Unrealized					Unrealized				Unrealized
	Fair Value		Losses			Fair Value		Losses		Fair Value		Losses
Debt securities:
State and local obligations	$	5,254,837	$	(255,325	)	$	-	$	-	$	5,254,837	$	(255,325	)
Mortgage-backed securities		3,624,464		(49,399	)		-		-		3,624,464		(49,399	)
Collateralized mortgage obligations		1,810,800		(13,833	)		-		-		1,810,800		(13,833	)
Corporate bonds		764,228		(338	)		-		-		764,228		(338	)
Total	$	11,454,329	$	(318,895	)	$	-	$	-	$	11,454,329	$	(318,895	)


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

The total number of securities in the investment portfolio in an unrealized loss position at June 30, 2011 was 33 compared to 35 at December 31, 2010. The Company conducts quarterly reviews to identify and evaluate each investment that has an unrealized loss. The unrealized losses for the above investment securities are generally due to changes in interest rates and, as such, are considered to be temporary by the Company. The review takes into consideration the intent of the Company to not sell the security or whether it is more-likely-than-not that the Company will be required to sell the security before its anticipated recovery, as well as other qualitative factors.

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


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

Due in one year or less	$	95,000	$	93,637
Due from one to five years		10,894,033		10,996,444
Due from five to ten years		5,247,132		5,271,416
Due after ten years		4,828,259		4,695,531
Mortgage-backed securities and
collateralized mortgage obligations		49,573,947		50,480,122
	$	70,638,371	$	71,537,150

INDEX

Gross security gains from the sale of securities was $30,041 for the three and six months ended June 30, 2011 compared to gross security gains from the sale of securities of none and $7,652 for the three and six months ended June 30, 2010. There were no losses on the sales of securities during the reporting periods.

4. OTHER COMPREHENSIVE INCOME

Credit-related losses on debt securities with other than temporary impairment (OTTI) are recorded in current earnings, while the noncredit-related portion of the reduction in fair value is recorded in other comprehensive income. The Company’s component of other comprehensive income consists of the unrealized holding gains and losses on available for sale investment securities which are considered temporary in nature.

The components of other comprehensive income, presented net of taxes for the six months ended June 30, 2011 and 2010, are as follows:


	Six Months Ended June 30,
	2011			2010
Other comprehensive income:

Securities for which a portion of an other-than-temporary impairment has been recorded in
earnings:
Unrealized holding gain arising during the period	$	-		$	851
(Gain) recognized in earnings		-			(7,652	)
Net unrealized gain on securities with other-than-temporary impairment before tax expense		-			(6,801	)
Tax expense		-			-
Net unrealized (losses) on securities with other-than-temporary impairment, net of tax in other
comprehensive income (loss)		-			(6,801	)

Other securities:
Unrealized holding gains arising during the period		1,071,284			175,095
Realized net (gains) recognized into net income		(30,041	)		-
Net unrealized gains on other securities before tax (expense)		1,041,243			175,095
Tax (expense)		(388,384	)		(65,310	)
Net unrealized gains on other securities, net of tax in other comprehensive income		652,859			109,785
Total other comprehensive income	$	652,859		$	102,984

INDEX

5. LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES

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

	June 30, 2011			December 31, 2010
First mortgage loans:
Secured by:
One-to four-family residences	$	136,088,957		$	141,061,321
Multifamily properties		54,843,887			57,461,170
Commercial properties		62,765,758			69,253,792
Construction and land development loans		3,091,562			4,193,756
Total first mortgage loans		256,790,164			271,970,039

Consumer loans:
Automobile		13,420,343			13,548,710
Second mortgage		48,405,196			51,349,053
Other		4,091,681			4,282,717
Total consumer loans		65,917,220			69,180,480

Total loans		322,707,384			341,150,519

Undisbursed portion of construction loans		(1,421,434	)		(295,609	)
Unearned premiums, net		(33,918	)		83,528
Net deferred loan origination fees		(330,827	)		(331,010	)
	$	320,921,205		$	340,607,428

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


	For the Three Months Ended June 30, 2011
	Commercial Real Estate			Construction and Land Development			Multi-Family Real Estate			1-4 Family Residential Real Estate			Consumer			Total
Allowance for Loan Losses:
Beginning balance	$	2,490,162		$	289,260		$	870,437		$	1,015,455		$	1,575,760		$	6,241,074
Charge-offs		(271,687	)		-			(278,387	)		(26,250	)		(283,907	)		(860,231	)
Recoveries		-			-			-			-			6,615			6,615
Provisions		313,259			(11,898	)		(19,545	)		28,674			174,510			485,000
Ending balance	$	2,531,734		$	277,362			572,505		$	1,017,879		$	1,472,978		$	5,872,458

	For the Six Months Ended June 30, 2011
	Commercial Real Estate			Construction and Land Development			Multi-Family Real Estate			1-4 Family Residential Real Estate			Consumer			Total
Allowance for Loan Losses:
Beginning balance	$	2,555,094		$	354,911		$	803,850		$	1,009,630		$	1,423,376		$	6,146,861
Charge-offs		(372,810	)		(70,000	)		(278,387	)		(41,205	)		(309,256	)		(1,071,658	)
Recoveries		-			-			-			127			12,128			12,255
Provisions		349,450			(7,549	)		47,042			49,327			346,730			785,000
Ending balance	$	2,531,734		$	277,362		$	572,505		$	1,017,879		$	1,472,978		$	5,872,458

INDEX

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

	Three Months			Six Months
	Ended June 30,			Ended June 30,
	2010			2010

Balance at beginning of period	$	7,760,897		$	7,170,595
Charge-offs		(379,781	)		(593,975	)
Recoveries		1,600			6,096
Provision charged to operations		1,610,000			2,410,000
Balance at end of period	$	8,992,716		$	8,992,716

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


	June 30, 2011
	Commercial Real Estate		Construction and Land Development		Multi-Family Real Estate		1-4 Family Residential Real Estate		Consumer		Total
Allowance for Loan Losses:
Individually evaluated for impairment	$	1,080,843	$	151,600	$	-	$	135,250	$	208,132	$	1,575,825
Collectively evaluated for impairment		1,450,891		125,762		572,505		882,629		1,264,846		4,296,633
Total ending allowance balance	$	2,531,734		277,362		572,505		1,017,879	$	1,472,978	$	5,872,458

Loans:
Individually evaluated for impairment	$	8,580,917	$	2,767,333	$	-	$	5,300,853	$	860,026	$	17,509,129
Collectively evaluated for impairment		54,184,841		324,229		54,843,887		130,788,104		65,057,194		305,198,255
Total ending allowance balance	$	62,765,758	$	3,091,562	$	54,843,887	$	136,088,957	$	65,917,220	$	322,707,384

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

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

INDEX

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


	June 30, 2011						December 31, 2010
	Carrying Amount		Unpaid Principal Balance		Associated Allowance		Carrying Amount		Unpaid Principal Balance		Associated Allowance
With no specific allowance recorded:
Commercial Real Estate	$	510,248	$	510,248	$	-	$	1,584,352	$	1,852,852	$	-
Construction and Land Development		892,017		2,962,017		-		892,017		2,962,017		-
Multi-Family Real Estate		-		-		-		-		-		-
1-4 Family Residential Real Estate		4,348,861		4,572,492		-		4,560,823		4,872,752		-
Consumer		484,631		484,631		-		433,793		442,786		-
With an allowance recorded:
Commercial Real Estate		8,070,669		8,070,669		1,080,843		10,610,496		10,610,496		1,121,500
Construction and Land Development		1,875,316		1,875,316		151,600		2,409,328		2,409,328		237,000
Multi-Family Real Estate		-		-		-		1,558,628		1,558,628		201,500
1-4 Family Residential Real Estate		951,992		951,992		135,250		606,546		606,546		85,111
Consumer		375,395		375,395		208,132		173,271		173,271		115,683
Total:
Commercial Real Estate		8,580,917		8,580,917		1,080,843		12,194,848		12,463,348		1,121,500
Construction and Land Development		2,767,333		4,837,333		151,600		3,301,345		5,371,345		237,000
Multi-Family Real Estate		-		-		-		1,558,628		1,558,628		201,500
1-4 Family Residential Real Estate		5,300,853		5,524,484		135,250		5,167,369		5,479,298		85,111
Consumer		860,026		860,026		208,132		607,064		616,057		115,683
	$	17,509,129	$	19,802,760	$	1,575,825	$	22,829,254	$	25,488,676	$	1,760,794

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

	Average Balance		Interest Income
Commercial Real Estate	$	10,331,802	$	237,602
Construction and Loan Development		2,857,988		-
Multi-Family Real Estate		779,314		-
1-4 Family Residential Real Estate		5,190,938		139,239
Consumer		941,855		23,267
	$	20,101,897	$	400,108

Credit Quality Indicators

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

The primary credit quality indicator used by management in the commercial real estate, construction and land development, and multi-family real estate loan portfolios is the internal classification of the loans. Loans in these portfolios that are over $500,000 are reviewed annually at which time they are assigned a classification. Loans may also be reviewed prior to the annual review cycle based on current information that becomes available regarding the borrower’s ability to service the loan. Loans may be classified as watch, special mention, substandard, or doubtful. An asset is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Substandard assets include those characterized by the distinct possibility that the bank will sustain some loss if the deficiencies are not corrected.

INDEX

Assets classified as doubtful have all of the weaknesses inherent in those classified substandard, with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. Assets that do not expose the Bank to risk sufficient to warrant classification in one of the aforementioned categories, but which possess potential weaknesses that deserve management’s close attention are designated as special mention. If left uncorrected, these potential weaknesses could increase the level of risk to the Bank in the future. Commercial loans to borrowers whose most recent financial information shows deterioration in the earliest stages and warrant greater than routine attention and monitoring by management are designated as watch.

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

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


Commercial Loans
Credit risk profile by internally assigned grade

	June 30, 2011								December 31, 2010
	Commercial Real Estate		Construction and Land Development		Multi-Family Real Estate		Total		Commercial Real Estate		Construction and Land Development		Multi-Family Real Estate		Total
Grade:
Pass	$	47,121,335	$	324,229	$	51,050,837	$	98,496,401	$	53,092,384	$	892,411	$	53,291,156	$	107,275,951
Watch		6,590,308		-		3,793,050		10,383,358		3,966,560		-		2,611,386		6,577,946
Special Mention		473,198		-		-		473,198		-		-		-		-
Substandard		7,500,074		2,615,733		-		10,115,807		11,073,348		3,064,345		1,357,128		15,494,821
Doubtful		1,080,843		151,600		-		1,232,443		1,121,500		237,000		201,500		1,560,000
	$	62,765,758	$	3,091,562	$	54,843,887	$	120,701,207	$	69,253,792	$	4,193,756	$	57,461,170	$	130,908,718


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

	June 30, 2011								December 31, 2010
	1-4 Family Residential Real Estate		Second Mortgage		Other Consumer Loans		Total		1-4 Family Residential Real Estate		Second Mortgage		Other Consumer Loans		Total
Current	$	131,463,843	$	47,558,068	$	17,172,949	$	196,194,860	$	137,430,650	$	50,136,653	$	17,590,417	$	205,157,720
Past due 30-89 days		2,438,477		313,040		281,675		3,033,192		1,473,094		786,900		203,341		2,463,335
Past due 90 days and greater		2,186,637		534,088		57,400		2,778,125		2,157,577		425,500		37,669		2,620,746
	$	136,088,957	$	48,405,196	$	17,512,024	$	202,006,177	$	141,061,321	$	51,349,053	$	17,831,427	$	210,241,801

INDEX

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

	30-89 Days		90 Days Past Due
	Past Due		and Greater		Total Past Due		Current		Total
June 30, 2011
Commercial Loans:
Commercial Real Estate	$	1,855,149	$	179,773	$	2,034,922	$	60,730,836	$	62,765,758
Construction and Land Development		-		1,620,394		1,620,394		1,471,168		3,091,562
Multi-Family Real Estate		-		-		-		54,843,887		54,843,887
1-4 Family Residential Real Estate		2,438,477		2,186,637		4,625,114		131,463,843		136,088,957
Consumer:
Second mortgage		313,040		534,088		847,128		47,558,068		48,405,196
Other consumer loans		281,675		57,400		339,075		17,172,949		17,512,024
	$	4,888,341	$	4,578,292	$	9,466,633	$	313,240,751	$	322,707,384

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

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


	June 30, 2011		December 31, 2010
Commercial Loans:
Commercial Real Estate	$	332,822	$	5,408,650
Construction and Land Development		2,767,333		1,679,839
Multi-Family Real Estate		-		1,558,628
1-4 Family Residential Real Estate		2,437,212		2,459,406
Consumer:
Second mortgage		534,089		425,500
Other consumer loans		57,400		37,669
	$	6,128,856	$	11,569,692

The Company had loans renegotiated in troubled debt restructurings of $15.1 million as of June 30, 2011, of which $3.1 million were included in nonaccrual loans and $12.0 million were on accrual status. The Company had loans renegotiated in troubled debt restructurings of $17.4 million as of December 31, 2010, of which $5.2 million were included in nonaccrual loans and $12.2 million were on accrual status.

6. FAIR VALUE

Fair Value Measurements

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

INDEX

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

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

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

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

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


	Fair Value Measurements at June 30, 2011

	Quoted Prices
	in Active Markets		Significant Other		Significant
	for Identical Assets		Observable Inputs		Unobservable Inputs
Description	(Level 1)		(Level 2)		(Level 3)		Total
Debt securities:
State and local obligations	$	-	$	8,919,604	$	-	$	8,919,604
Mortgage-backed securities		-		20,512,057		-		20,512,057
Collateralized mortgage obligations		-		29,968,065		-		29,968,065
Corporate bonds		3,401,478		-		-		3,401,478
U.S. Government agencies		-		8,735,946		-		8,735,946
Total securities available-for-sale	$	3,401,478	$	68,135,672	$	-	$	71,537,150


	Fair Value Measurements at December 31, 2010

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

When available, quoted market prices are used to determine the fair value on investment securities and such items are classified within Level 1 of the fair value hierarchy. Examples include equity securities, U.S. Treasury securities and certain corporate bonds. For other securities, the Company determines fair value based on various sources and may apply matrix pricing with observable prices for similar bonds where a price for the identical bond is not observable. Securities measured at fair value by such methods are classified as Level 2. The fair values of Level 2 securities are determined by matrix pricing models that consider observable market data, such as interest rate volatilities, LIBOR yield curve, credit spreads and prices from market makers, and live trading systems. Certain securities are not valued based on observable inputs and are, therefore, classified as Level 3. The fair value of these securities is based on management’s best estimates. The Company’s policy is to recognize transfer between levels at the end of each reporting period, if applicable. There were no transfers between levels during the six months ended June 30, 2011.

INDEX

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


	Fair Value Measurements at June 30, 2011

	Quoted Prices
	in Active Markets		Significant Other		Significant
	for Identical Assets		Observable Inputs		Unobservable Inputs
Description	(Level 1)		(Level 2)		(Level 3)		Total
Impaired loans	$	-	$	-	$	9,697,547	$	9,697,547
Foreclosed real estate		-		-		1,892,247		1,892,247
Total	$	-	$	-	$	11,589,794	$	11,589,794


	Fair Value Measurements at December 31, 2010

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

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

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

Fair Value Disclosures

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

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

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

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

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

INDEX

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

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

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

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

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


	June 30, 2011				December 31, 2010
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
			(nearest 000)				(nearest 000)
Financial assets:
Cash and due from banks	$	15,351,798	$	15,352,000	$	20,603,808	$	20,604,000
Investments in certificates of deposit		8,359,000		8,359,000		12,689,000		12,689,000
Securities available-for-sale		71,537,150		71,537,000		48,435,771		48,436,000
FHLB stock		2,199,100		2,199,000		3,017,200		3,017,000
Loans, net		315,048,747		323,582,000		334,460,567		341,055,000
Loans held for sale		1,245,214		1,245,000		332,178		332,000
Accrued interest receivable		1,672,761		1,673,000		1,754,292		1,754,000
Financial liabilities:
Deposits		357,567,252		360,746,000		349,832,904		353,328,000
Borrowed funds		30,250,000		31,397,000		49,250,000		51,118,000
Accrued interest payable		89,509		90,000		162,034		162,000

7. OPERATING SEGMENTS

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

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

INDEX


	Three Months Ended June 30, 2011									Six Months Ended June 30, 2011
	Traditional									Traditional
	Banking			All Others			Total			Banking		All Others			Total

Interest income	$	5,119,889		$	-		$	5,119,889		$	10,295,496	$	-		$	10,295,496
Interest expense		1,496,255			26,927			1,523,182			3,075,153		54,142			3,129,295
Net interest income (loss)		3,623,634			(26,927	)		3,596,707			7,220,343		(54,142	)		7,166,201
Provision for loan losses		485,000			-			485,000			785,000		-			785,000
Net interest income (loss) after
provision for loan losses		3,138,634			(26,927	)		3,111,707			6,435,343		(54,142	)		6,381,201
Noninterest income		1,381,638			457,918			1,839,556			2,620,528		853,118			3,473,646
Securities gains, net		30,041			-			30,041			30,041		-			30,041
Noninterest expense		3,922,732			417,060			4,339,792			7,450,764		826,480			8,277,244
Income (loss) before income taxes		627,581			13,931			641,512			1,635,148		(27,504	)		1,607,644
Provision for income taxes		77,800			15,900			93,700			357,900		11,700			369,600
Net income (loss)	$	549,781		$	(1,969	)	$	547,812		$	1,277,248	$	(39,204	)	$	1,238,044
Inter-segment revenue (expense)	$	130,910		$	(130,910	)	$	-		$	275,060	$	(275,060	)	$	-
Total assets	$	439,077,280		$	3,551,918		$	442,629,198		$	439,077,280	$	3,551,918		$	442,629,198
Total deposits	$	357,567,252		$	-		$	357,567,252		$	357,567,252	$	-		$	357,567,252

	Three Months Ended June 30, 2010									Six Months Ended June 30, 2010
	Traditional									Traditional
	Banking			All Others			Total			Banking		All Others			Total

Interest income	$	5,593,835		$	-		$	5,593,835		$	11,381,621	$	-		$	11,381,621
Interest expense		1,936,416			28,038			1,964,454			3,930,453		56,106			3,986,559
Net interest income (loss)		3,657,419			(28,038	)		3,629,381			7,451,168		(56,106	)		7,395,062
Provision for loan losses		1,610,000			-			1,610,000			2,410,000		-			2,410,000
Net interest income (loss) after
provision for loan losses		2,047,419			(28,038	)		2,019,381			5,041,168		(56,106	)		4,985,062
Noninterest income		1,434,207			440,100			1,874,307			2,675,150		863,754			3,538,904
Securities gains, net		-			-			-			7,652		-			7,652
Noninterest expense		3,778,573			424,531			4,203,104			7,102,370		853,556			7,955,926
Income (loss) before taxes		(296,947	)		(12,469	)		(309,416	)		621,600		(45,908	)		575,692
Provision for income taxes		(183,400	)		3,000			(180,400	)		80,300		(4,200	)		76,100
Net income	$	(113,547	)	$	(15,469	)	$	(129,016	)	$	541,300	$	(41,708	)	$	499,592
Inter-segment revenue (expense)	$	177,922		$	(177,922	)	$	-		$	353,196	$	(353,196	)	$	-
Total assets	$	448,496,463		$	3,633,269		$	452,129,732		$	448,496,463	$	3,633,269		$	452,129,732
Total deposits	$	344,540,516		$	-		$	344,540,516		$	344,540,516	$	-		$	344,540,516

8. CURRENT ACCOUNTING DEVELOPMENTS

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

In July 2010, the FASB issued ASU 2010-20, Disclosures about Credit Quality of Financing Receivables and the Allowance for Credit Losses, which amends ASC 310, Receivables, by requiring more robust and disaggregated disclosures about the credit quality of an entity’s financing receivables and its allowance for credit losses. The objective of enhancing these disclosures is to improve a financial statement user’s understanding of (1) the nature of an entity’s credit risk associated with its financing receivables and (2) the entity’s assessment of that risk in estimating its allowance for credit losses as well as changes in the allowance and the reasons for those changes.

INDEX

The new and amended disclosures that relate to information as of the end of a reporting period will be effective for the first interim or annual reporting periods ending on or after December 15, 2010, which for the Company was the annual reporting period ending December 31, 2010. However, the disclosures that include information for activity that occurs during a reporting period will be effective for the first interim or annual periods beginning after December 15, 2010, which for the Company is the quarterly period beginning January 1, 2011. Those disclosures include the activity in the allowance for credit losses for each period. In January 2011, the FASB temporarily delayed the effective date of the disclosures required for troubled debt restructured loans (TDR) for public companies. Since the provisions of ASU 2010-20 are disclosure related, the Company’s adoption of this guidance has not and is not expected to have an impact on its financial condition or results of operations.

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

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

9. SUBSEQUENT EVENT

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

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

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

INDEX

Overview

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

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

	•		The Bank completed its conversion to a state-chartered commercial bank from a federally-chartered stock savings bank. The Company completed a reorganization to a bank holding company from a savings and loan holding company.
	•		Loans amounted to $322.7 million as of June 30, 2011 compared to $341.2 million as of December 31, 2010, representing a decrease of 5.4%. The decline in the loan portfolio is primarily the result of a decrease in loan volume due to low demand for new loans as payments and prepayments exceeded originations in most loan categories.
	•		Nonperforming assets decreased $8.2 million from $16.2 million at December 31, 2010 to $8.0 million at June 30, 2011. The Bank recorded a provision for loan losses of $485,000 and $785,000 for the three and six months ended June 30, 2011 compared to $1.6 million and $2.4 million for the same periods in 2010. The Company continues to monitor its loan portfolio with the objective of minimizing defaults or write-downs. Despite these actions, the possibility of additional losses in loans and losses in the value of real estate owned can not be eliminated.
	•		Deposits increased $7.7 million for the first six months of the year. Growth occurred primarily in interest bearing demand deposits, savings, and money markets accounts.
	•		Capital remains strong with average stockholders equity as a percentage of average total assets increasing to 11.0% at June 30, 2011 from 10.8% at December 31, 2010. The Bank continues to be considered “well capitalized” under regulatory capital requirements with a total risk based capital ratio of 17.5% at June 30, 2011.
	•		The Company has increased liquidity as it continues investing funds in securities available-for-sale.

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

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

Of particular significance is that earlier this month, after the close of the quarter ended June 30, 2011, the Dodd-Frank Act marked its one year anniversary, at which time certain important provisions pertaining to the operations of depository institutions became effective. For example, effective July 21, 2011, the Dodd-Frank Act repealed the federal prohibition on the payment of interest on demand deposits, thereby permitting depository institutions to pay interest on commercial transaction and other accounts. The ultimate impact of this change in law on the operations of the Company and Bank has not yet been determined.

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

INDEX

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

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

CRITICAL ACCOUNTING POLICIES

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

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

The allowance for loan losses is established through a provision for loan losses charged to expense. Loans are charged off against the allowance for loan losses when management believes that collectibility of the principal is unlikely. The Company has policies and procedures for evaluating the overall credit quality of its loan portfolio, including timely identification of potential problem credits. On a quarterly basis, management reviews the appropriate level for the allowance for loan losses, incorporating a variety of risk considerations, both quantitative and qualitative. Quantitative factors include the Company’s historical loss experience, delinquency and charge-off trends, collateral values, known information about individual loans and other factors. Qualitative factors include the general economic environment in the Company’s market area and the trends of those economic conditions. To the extent that actual results differ from forecasts and management’s judgment, the allowance for loan losses may be greater or less than future charge-offs.

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

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

INDEX

FINANCIAL CONDITION

Total assets decreased $9.6 million, or 2.1%, to $442.6 million at June 30, 2011, from $452.3 million at December 31, 2010. The decrease in assets was primarily due to a decrease in net loans receivable, cash and due from banks, investments in certificates of deposits and foreclosed real estate, offset in part by an increase in securities available-for sale. During the six months ended June 30, 2011, cash balances and cash provided by loan payments and prepayments, securities sales, maturities, and paydowns, as well as maturities of investments in certificates of deposit were used in part to purchase $29 million of securities available for sale. These cash flows, along with growth in deposits, were also utilized in reducing the amount of outstanding borrowed funds.

Net loans receivable decreased by $19.5 million, or 5.8%, to $315.0 million at June 30, 2011, from $334.5 million at December 31, 2010, primarily due to payments and prepayments of $46.5 million and loan sales of $11.1 million during the six months ended June 30, 2011. These payments, prepayments, and loan sales were offset in part by the origination of $27.4 million of first mortgage loans primarily secured by one-to-four family residences and commercial real estate, and the origination of $12.7 million of consumer loans during the six months ended June 30, 2011. The Company generally sells fixed-rate residential loans originated with maturities of more than 15 years in the secondary mortgage market in order to reduce interest rate risk.

At June 30, 2011, net loans consisted of (i) $133.5 million of one-to-four family real estate representing a decrease of $6.7 million from December 31, 2010, (ii) $62.9 million of nonresidential commercial real estate loans representing a decrease of $7.0 million from December 31, 2010, (iii) $54.2 million of multi-family real estate loans representing a decrease of $2.5 million from December 31, 2010, and (iv) $64.5 million of consumer loans representing a decrease of $3.3 million from December 31, 2010. The decrease in the loan portfolio was primarily due to general decreases in demand for new loans. The Company has also significantly restricted any out-of-state lending.

At June 30, 2011, the Company’s loan portfolio included $81.2 million of loans secured by out-of-state properties, compared to $91.5 million at December 31, 2010. These loans represented 25.2% of the Company’s total loan portfolio at June 30, 2011 compared to 26.9% at December 31, 2010 and are primarily multifamily and commercial real estate loans. There were $3.2 million in out-of-state loan originations secured by multi-family and commercial real estate for the six months ended June 30, 2011. There were no purchases of commercial loans secured by out-of-state properties during the six months ended June 30, 2011.

INDEX

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


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

First mortgage loans:
One- to four-family residential	$	2,438		$	2,460
Multifamily and commercial properties		3,100			8,647
Consumer loans		591			463
Total nonaccrual loans		6,129			11,570

90 days past due loans (still
accruing interest)		-			-
Other nonperforming loans		-			-
Total nonperforming loans		6,129			11,570

Total foreclosed real estate		1,892			4,586
Other nonperforming assets		-			-
Total nonperforming assets	$	8,021		$	16,156

Total nonaccrual loans to net loans receivable		1.95	%		3.46	%
Total nonaccrual loans to total assets		1.38	%		2.56	%
Total nonperforming assets to total assets		1.81	%		3.57	%

The allowance for loan loss was $5.9 million at June 30, 2011, compared to $6.1 million at December 31, 2010. The allowance for loan losses at June 30, 2011 was 1.8% of loans and 95.8% of nonperforming loans, compared to 1.8% of loans and 53.1% of nonperforming loans at December 31, 2010, and 2.5% of loans and 66.5% of nonperforming loans at June 30, 2010.

The improvement in nonperforming assets is primarily the result of the sale of commercial foreclosed real estate and the sales of commercial properties collateralizing certain nonperforming commercial loans resulting in the settlement of the loan balance. Two commercial foreclosed real estate properties with total balances of $2.2 million were sold. Three nonperforming commercial loans with total balances of $5.1 million were settled with sales of the underlying collateral.

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

Deposits increased $7.7 million, or 2.2%, to $357.6 million at June 30, 2011, from $349.8 million at December 31, 2010, primarily reflecting increases in interest bearing demand deposits, money market, savings accounts and certificates of deposits of $4.0 million, $1.7 million, $2.2 million and $61,000, respectively, offset in part by a decrease in noninterest bearing deposits of $175,000. Interest bearing demand deposits increased primarily due to the Company’s continued promotion of F1Rst Perks which is a deposit account that offers a higher interest rate based on certain transactional activity. Borrowings, which consist of FHLB advances, decreased $19.0 million, or 38.6%, to $30.3 million at June 30, 2011, from $49.3 million at December 31, 2010. This decrease was due to the normal repayment of borrowings due to maturities.

INDEX

Total stockholders’ equity increased $1.6 million, or 3.3%, to $50.8 million at June 30, 2011, from $49.2 million at December 31, 2010, primarily due to earnings for the 2011 period and an increase in accumulated other comprehensive gains, offset in part by dividends paid to stockholders.

RESULTS OF OPERATIONS

The following table shows selected financial results and ratios.

	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
Net income (loss)	$	547,812		$	(129,016	)	$	1,238,044		$	499,592

Average assets		453,792,023			456,296,391			452,730,128			456,286,629
Average stockholders equity		50,276,680			48,979,516			49,875,031			48,810,067

Return on assets		0.48	%		-0.11	%		0.55	%		0.22	%

Return on equity		4.36	%		-1.05	%		4.96	%		2.05	%

Efficiency ratio		79.83	%		76.37	%		77.79	%		72.76	%


Definitions of ratios:

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

Net Income (Loss). Net income increased by $677,000 to $548,000 for the quarter ended June 30, 2011, compared to net loss of ($129,000) for the quarter ended June 30, 2010. The increase in net income was primarily due to a decrease in provision for loan losses, offset in part by a decrease in net interest income and noninterest income and an increase in noninterest expenses.

Net income increased by $738,000 to $1.2 million for the six months ended June 30, 2011, compared to net income of $500,000 for the six months ended June 30, 2010. The increase in net income was primarily due to a decrease in provision for loan losses, offset in part by a decrease in net interest income and noninterest income and an increase in noninterest expenses.

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

INDEX


	Three months ended June 30,
	2011							2010
	Average Balance		Interest		Average Yield/Rate			Average Balance		Interest		Average Yield/Rate
Assets:
Interest-earning assets:
Loans	$	324,244,660	$	4,599,448		5.67	%	$	363,863,582	$	5,294,291		5.82	%
Securities available-for-sale		68,912,996		484,289		2.81	%		35,631,182		254,497		2.86	%
Investments in certificates of deposit		8,133,232		23,333		1.15	%		9,732,374		35,039		1.44	%
Interest-bearing cash		21,240,551		12,819		0.24	%		17,602,179		10,008		0.23	%
Total interest-earning assets		422,531,439		5,119,889		4.83	%		426,829,317		5,593,835		5.21	%
Noninterest-earning assets		31,260,584							29,467,074
Total assets	$	453,792,023						$	456,296,391

Liabilities and Equity:
Interest-bearing liabilities:
Demand and money market savings	$	159,866,137	$	343,227		0.86	%	$	126,047,498	$	230,379		0.73	%
Savings		33,424,689		11,439		0.14	%		30,855,916		15,684		0.20	%
Certificates of Deposit		151,814,184		863,052		2.28	%		171,630,140		1,111,393		2.60	%
Borrowed funds		34,929,431		305,464		3.51	%		56,383,154		606,998		4.32	%
Total interest-bearing liabilities		380,034,441		1,523,182		1.61	%		384,916,708		1,964,454		2.05	%
Noninterest-bearing liabilities		23,480,902							22,400,167
Total liabilities		403,515,343							407,316,875
Equity		50,276,680							48,979,516
Total liabilities and equity	$	453,792,023						$	456,296,391


Net interest income			$	3,596,707						$	3,629,381

Net interest rate spread						3.22	%						3.16	%
Net interest margin						3.39	%						3.36	%

Ratio of average interest-earnings assets to
average interest-bearing liabilities						111.18	%						110.89	%



	Six months ended June 30,
	2011									2010
	Average Balance		Interest		Average Yield/Rate			Average Balance		Interest		Average Yield/Rate
Assets:
Interest-earning assets:
Loans	$	329,401,608	$	9,358,833		5.69	%	$	370,011,876	$	10,847,401		5.88	%
Securities available-for-sale		61,240,772		855,042		2.79	%		31,805,438		476,053		2.99	%
Investments in certificates of deposit		9,719,279		59,019		1.22	%		5,188,542		37,287		1.45	%
Interest-bearing cash		20,233,143		22,602		0.23	%		19,762,248		20,880		0.21	%
Total interest-earning assets		420,594,802		10,295,496		4.91	%		426,768,104		11,381,621		5.35	%
Noninterest-earning assets		32,135,326							29,518,525
Total assets	$	452,730,128						$	456,286,629

Liabilities and Equity:
Interest-bearing liabilities:
Demand and money market savings	$	156,017,878	$	658,903		0.85	%	$	121,597,655	$	409,731		0.68	%
Savings		32,415,505		21,842		0.14	%		30,353,681		30,444		0.20	%
Certificates of Deposit		151,860,274		1,752,471		2.33	%		173,214,042		2,244,791		2.61	%
Borrowed funds		38,756,382		696,079		3.62	%		59,692,504		1,301,593		4.40	%
Total interest-bearing liabilities		379,050,039		3,129,295		1.67	%		384,857,882		3,986,559		2.09	%
Noninterest-bearing liabilities		23,805,058							22,618,680
Total liabilities		402,855,097							407,476,562
Equity		49,875,031							48,810,067
Total liabilities and equity	$	452,730,128						$	456,286,629


Net interest income			$	7,166,201						$	7,395,062

Net interest rate spread						3.24	%						3.26	%
Net interest margin						3.41	%						3.46	%

Ratio of average interest-earnings assets to
average interest-bearing liabilities						110.96	%						110.89	%

INDEX

Fluctuations in net interest income can result from the combination of changes in the balances of asset and liability categories and changes in interest rates. Interest rates earned and paid are also affected by general economic conditions, particularly changes in market interest rates, and by competitive factors, government policies, and the actions of regulatory authorities. Net interest income before provision for loan losses decreased by $33,000, or 0.9%, to $3.6 million for the quarter ended June 30, 2011, from $3.6 million for the quarter ended June 30, 2010. The decrease was primarily due to a decrease in the average balance of interest-earning assets, offset by an increase in net interest rate spread (i.e., the difference in the average yield on assets and average cost of liabilities) and a decrease in the average balance of interest-bearing liabilities. The interest rate spread increased to 3.22% for the quarter ended June 30, 2011, from 3.16% for the quarter ended June 30, 2010. The increase in interest rate spread reflects a decrease in cost of funds, offset in part by a decrease in the yield on interest-earning assets.

Net interest income before provision for loan losses decreased by $229,000, or 3.1%, to $7.2 million for the six months ended June 30, 2011, from $7.4 million for the six months ended June 30, 2010. The decrease was primarily due to a decrease in net interest rate spread and a decrease in the average balance of interest-earning assets, offset by a decrease in the average balance of interest-bearing liabilities. The interest rate spread decreased to 3.24% for the six months ended June 30, 2011, from 3.26% for the six months ended June 30, 2010. The decrease in interest rate spread reflects a decrease in the yield on interest-earning assets, offset in part by a decrease in cost of funds.

Provision for Loan Losses. The Company establishes provisions for loan losses, which are charged to operations, in order to maintain the allowance for loan losses at a level which is deemed to be appropriate based upon an assessment of prior loss experience, a review of classified loans, a realistic determination of value and adequacy of underlying collateral, levels and trends of loan categories, industry standards, past due loans, economic conditions, the volume and type of loans in the Company’s portfolio, and other factors related to the collectibility of the Company’s loan portfolio. The Company’s provision for loan losses was $485,000 and $1.6 million for the quarters ended June 30, 2011 and 2010, respectively, representing a decrease of $1.1 million, or 69.9%. The Company’s provision for loan losses was $785,000 and $2.4 million for the six months ended June 30, 2011 and 2010, respectively, representing a decrease of $1.6 million, or 67.4%. The provision for loan loss for the three and six months ended June 30, 2011 was impacted in part by the overall reduction in the size of the loan portfolio and the reduction in the identification of new impaired loans and further impairments.

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


	Three Months Ended June 30,												Six Months Ended June 30,
	2011			2010			Change			Change %			2011			2010			Change			Change %
Noninterest income:
Fees and service charges	$	1,230,721		$	1,216,101		$	14,620			1.2	%	$	2,380,665		$	2,292,863		$	87,802			3.8	%
Abstract fees		152,286			164,063			(11,777	)		-7.2	%		283,505			306,684			(23,179	)		-7.6	%
Mortgage banking income		108,008			128,768			(20,760	)		-16.1	%		224,067			240,955			(16,888	)		-7.0	%
Loan prepayment fees		12,255			17,125			(4,870	)		-28.4	%		13,455			27,204			(13,749	)		-50.5	%
Other income:
Increase in CSV - BOLI		59,499			61,211			(1,712	)		-2.8	%		117,601			120,954			(3,353	)		-2.8	%
Investment and Insurance sales		204,455			176,523			27,932			15.8	%		368,397			347,418			20,979			6.0	%
Foreclosed real estate net earnings		(60,175	)		(11,597	)		(48,578	)		418.9	%		(195,303	)		(52,657	)		(142,646	)		270.9	%
Rental income		122,806			120,941			1,865			1.5	%		244,625			242,598			2,027			0.8	%
All other		9,701			1,172			8,529			727.7	%		36,634			12,885			23,749			184.3	%
Total other income	$	336,286		$	348,250		$	(11,964	)		-3.4	%	$	571,954		$	671,198		$	(99,244	)		-14.8	%

Total noninterest income	$	1,839,556		$	1,874,307		$	(34,751	)		-1.9	%	$	3,473,646		$	3,538,904		$	(65,258	)		-1.8	%

Total noninterest income decreased by $35,000, or 1.9%, to $1.8 million for the quarter ended June 30, 2011, from $1.9 million for the quarter ended June 30, 2010. Total noninterest income decreased by $65,000, or 1.8%, to $3.47 million for the six months ended June 30, 2011, from $3.54 million for the six months ended June 30, 2010.

INDEX

Abstract fees decreased due to additional competition in our market and reduced mortgage loan demand. Mortgage banking income decreased due to a decrease in demand for loans originated for the secondary market. The decrease in other income was primarily related to an increase in net losses and expenses related to foreclosed real estate. Fees and service charges increased due to an increase in interchange fees associated with demand deposit accounts, service fee income related to an increase in loans serviced by the Company and an increase in overdraft and service fees charged on deposit accounts.

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

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


	Three Months Ended June 30,										Six Months Ended June 30,
	2011		2010		Change			Change %			2011		2010		Change			Change %
Noninterest expense:
Compensation and employee benefits	$	1,910,907	$	1,879,873	$	31,034			1.7	%	$	3,790,355	$	3,769,732	$	20,623			0.5	%
Premises and equipment		442,981		484,335		(41,354	)		-8.5	%		947,786		985,425		(37,639	)		-3.8	%
Data processing		239,448		229,857		9,591			4.2	%		432,900		442,980		(10,080	)		-2.3	%
FDIC insurance expense		114,261		140,013		(25,752	)		-18.4	%		258,072		283,830		(25,758	)		-9.1	%
Foreclosed real estate impairment		317,633		306,500		11,133			3.6	%		389,171		316,458		72,713			23.0	%
Other expense:
Advertising and promotions		171,295		91,777		79,518			86.6	%		256,919		158,285		98,634			62.3	%
Professional fees		225,522		155,557		69,965			45.0	%		397,580		297,607		99,973			33.6	%
Printing, postage, and supplies		112,514		125,872		(13,358	)		-10.6	%		230,899		218,670		12,229			5.6	%
Checking account charges		62,749		85,336		(22,587	)		-26.5	%		129,349		168,250		(38,901	)		-23.1	%
Insurance		38,563		42,752		(4,189	)		-9.8	%		76,315		85,502		(9,187	)		-10.7	%
Regulatory Fees		48,394		29,332		19,062			65.0	%		80,591		63,661		16,930			26.6	%
Telephone		38,878		42,409		(3,531	)		-8.3	%		73,785		74,980		(1,195	)		-1.6	%
Apartment operating costs		93,263		84,233		9,030			10.7	%		188,710		174,069		14,641			8.4	%
Employee costs		51,194		71,697		(20,503	)		-28.6	%		107,806		114,319		(6,513	)		-5.7	%
ATM expense		169,406		162,993		6,413			3.9	%		331,533		308,835		22,698			7.3	%
All other		302,784		270,568		32,216			11.9	%		585,473		493,323		92,150			18.7	%
Total other expense	$	1,314,562	$	1,162,526	$	152,036			13.1	%	$	2,458,960	$	2,157,501	$	301,459			14.0	%

Total noninterest expense	$	4,339,792	$	4,203,104	$	136,688			3.3	%	$	8,277,244	$	7,955,926	$	321,318			4.0	%

Total noninterest expense increased by $137,000, or 3.3%, to $4.3 million for the three months ended June 30, 2011, from $4.2 million for the three months ended June 30, 2010. Total noninterest expense increased by $321,000, or 4.0%, to $8.3 million for the six months ended June 30, 2011, from $8.0 million for the six months ended June 30, 2010. Compensation and employee benefits increased due to an increase in pension plan expense. The pension plan was frozen in 2008, eliminating future benefit accruals. The Company has also increased staffing as it expands its commercial loan and deposit operations pursuant to the Company’s strategic plan. The increase in foreclosed real estate impairment was primarily a result of further deterioration of foreclosed real estate values indicated by updated appraisals. The decrease in premises and equipment was related to a decrease in depreciation expense. FDIC insurance expense decreased as a new assessment methodology and calculation became effective for the quarter ended June 30, 2011. The increase in other expenses was primarily due to increases in legal fees related to loan collection and other corporate matters, an increase in regulatory fees due to the conversion to a state charter from a federal thrift charter and advertising costs associated with targeted advertising campaigns.

Income Taxes. Provision for income taxes increased by $274,000, or 152%, to $94,000 for the quarter ended June 30, 2011, compared to a benefit of ($180,000) for the quarter ended June 30, 2010. The increase in income taxes was primarily due to an increase in income before taxes.

Provision for income taxes increased by $294,000, or 386%, to $370,000 for the six months ended June 30, 2011, compared to $76,000 for the six months ended June 30, 2010. The increase in income taxes was primarily due to an increase in income before taxes.

INDEX

LIQUIDITY AND CAPITAL RESOURCES

The objective of liquidity management is to ensure the availability of sufficient cash flows to meet all financial commitments and to capitalize on opportunities for profitable business growth. The Company’s principal source of funds is deposits. Other sources include loan principal repayments, proceeds from the maturity and sale of investment securities, advances from the FHLB, and funds provided by operations. Liquidity management is conducted on both a daily and a long-term basis. Investments in liquid assets are adjusted based on expected loan demand, projected loan maturities and payments, expected deposit flows, and the objectives set by the Company’s asset-liability management policy. The Company had liquid assets (cash and cash equivalents) of $15.4 million as of June 30, 2011, compared with $20.6 million as of December 31, 2010. The Company had additional borrowing capacity available from the FHLB of approximately $84.5 million at June 30, 2011. In addition, the Company had $5.0 million in borrowing capacity available through lines of credit with correspondent banks as of June 30, 2011. The Company had not drawn on any of these lines of credit as of June 30, 2011. Net cash from continuing operating activities contributed $2.7 million and $1.5 million to liquidity for the six months ended June 30, 2011 and 2010, respectively. The combination of high levels of potentially liquid assets, cash flows from operations and additional borrowing capacity provided strong liquidity for the Company at June 30, 2011.

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

On May 15, 2011, the Company paid an aggregate cash dividend of $127,500 on the Fixed Rate Cumulative Perpetual Preferred Stock, Series A issued to the Treasury. On May 26, 2011, the Company declared a cash dividend of $0.01 per common share on its common stock, which was paid on July 1, 2011 to stockholders of record as of June 10, 2011.

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

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

INDEX

											To Be Well-Capitalized
						For Capital					Under Prompt Corrective
	Actual					Adequacy Purposes					Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(000's)					(000's)					(000's)
As of June 30, 2011:
Total Capital (to risk-weighted assets)	$	51,270		17.5	%	$	23,423		8.0	%	$	29,279		10.0	%
Tier I Capital (to risk-weighted assets)		47,583		16.3			11,712		4.0			17,567		6.0
Tier I Capital (to average assets)		47,583		10.4			18,237		4.0			22,797		5.0

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

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

OFF-BALANCE SHEET ARRANGEMENTS

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

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

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

Item 4. Controls and Procedures

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

INDEX

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

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

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

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

INDEX

Item 6. Exhibits

Exhibit No.	Description	Reference No.
3.1	Articles of Incorporation of North Central Bancshares, Inc.	(1)
3.2	Bylaws of North Central Bancshares, Inc., as amended	(2)
3.3	Articles of Amendment to the Articles of Incorporation establishing Series A Preferred Stock	(3)
10.1	Employment Agreement dated April 22, 2011 between C. Thomas Chalstrom and North Central Bancshares, Inc. and First Federal Savings Bank of Iowa.	(4)
10.2	Addendum dated April 22, 2011 to Employment Agreement dated April 22, 2011 between C. Thomas Chalstrom and North Central Bancshares, Inc. and First Federal Savings Bank of Iowa.	(4)
10.3	Employment Agreement dated April 22, 2011 between David M. Bradley and North Central Bancshares, Inc. and First Federal Savings Bank of Iowa.	(4)
31.1	Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer	*
31.2	Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer	*
32.1	Section 1350 Certification of Chief Executive Officer	*
32.2	Section 1350 Certification of Chief Financial Officer	*
101	Interactive data files: (i) Consolidated Statements of Financial Condition at June 30, 2011 and December 31, 2010 (unaudited), (ii) Consolidated Statements of Operations for the Three Months and Six Months Ended June 30, 2011 and 2010 (unaudited), (iii) Consolidated Statements of Stockholders’ Equity for the Six Months Ended June 30, 2011 and 2010 (unaudited), (iv) Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2011 and 2010, and (v) Notes to Consolidated Financial Statements.**

*	Filed herewith.

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

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

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

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

(4)	Incorporated herein by reference to the Current Report on Form 8-K filed with the SEC on April 26, 2011.

INDEX

SIGNATURES

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

	NORTH CENTRAL BANCSHARES, INC.
Date: August 9, 2011	BY: /s/ David M. Bradley
	David M. Bradley, Chairman, President & CEO

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