CFS BANCORP INC - FORM 10-Q

Attached files

file	filename
EX-31.2 - CFS BANCORP, INC. EXHIBIT 31.2 03-31-11 - CFS BANCORP INC	exhibit31-2_033111.htm
EX-31.1 - CFS BANCORP, INC. EXHIBIT 31.1 03-31-11 - CFS BANCORP INC	exhibit31-1_033111.htm
EX-32.0 - CFS BANCORP, INC. EXHIBIT 32.0 03-31-11 - CFS BANCORP INC	exhibit32-0_033111.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 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: 0-24611

CFS Bancorp, Inc.

(Exact name of registrant as specified in its charter)

	Indiana		35-2042093
	(State or other jurisdiction		(I.R.S. Employer
	of incorporation or organization)		Identification No.)

	707 Ridge Road, Munster, Indiana		46321
	(Address of principal executive offices)		(Zip code)

	(219) 836-2960
	(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 R 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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

YES £ 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 R

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES £ NO R

The Registrant had 10,869,236 shares of Common Stock issued and outstanding as of April 28, 2011.

CFS BANCORP, INC.

TABLE OF CONTENTS

		Page
	PART I - FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)
	Condensed Consolidated Statements of Condition	3
	Condensed Consolidated Statements of Income	4
	Condensed Consolidated Statements of Changes in Shareholders’ Equity	5
	Condensed Consolidated Statements of Cash Flows	6
	Notes to Condensed Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	51

Item 4.	Controls and Procedures	53


	PART II - OTHER INFORMATION

Item 1.	Legal Proceedings	53

Item 1A.	Risk Factors	53

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	54

Item 3.	Defaults Upon Senior Securities	54

Item 4.	(Removed and Reserved)	54

Item 5.	Other Information	54

Item 6.	Exhibits	54

Signature Page		55

Certifications of Principal Executive Officer and Principal Financial Officer		56
	Exhibit 31.1
	Exhibit 31.2
	Exhibit 32.0

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CFS BANCORP, INC.

Condensed Consolidated Statements of Condition

	March 31, 2011			December 31, 2010
	(Unaudited)
ASSETS	(Dollars in thousands)

Cash and amounts due from depository institutions	$	19,211		$	24,624
Interest-bearing deposits		38,757			37,130
Cash and cash equivalents		57,968			61,754
Investment securities available-for-sale, at fair value		239,012			197,101
Investment securities held-to-maturity, at cost		16,764			17,201
Federal Home Loan Bank stock, at cost		10,282			20,282
Loans receivable		724,223			732,584
Allowance for loan losses		(17,095	)		(17,179	)
Net loans		707,128			715,405
Bank-owned life insurance		35,669			35,463
Accrued interest receivable		3,265			3,162
Other real estate owned		23,567			22,324
Office properties and equipment		18,514			20,464
Net deferred tax assets		17,146			17,923
Other assets		14,726			10,597
Total assets	$	1,144,041		$	1,121,676

LIABILITIES AND SHAREHOLDERS’ EQUITY

Deposits	$	980,517		$	945,884
Borrowed funds		40,658			53,550
Advance payments by borrowers for taxes and insurance		4,785			4,618
Other liabilities		4,317			4,696
Total liabilities		1,030,277			1,008,748

Commitments and contingencies

Shareholders’ equity:
Preferred stock, $.01 par value; 15,000,000 shares authorized		—			—
Common stock, $.01 par value; 85,000,000 shares authorized;
23,423,306 shares issued; 10,869,236 and 10,850,040 shares outstanding		234			234
Additional paid-in capital		186,929			187,164
Retained earnings		83,957			83,592
Treasury stock, at cost; 12,554,070 and 12,573,266 shares		(154,877	)		(155,112	)
Accumulated other comprehensive loss, net of tax		(2,479	)		(2,950	)
Total shareholders’ equity		113,764			112,928
Total liabilities and shareholders’ equity	$	1,144,041		$	1,121,676

See accompanying notes to the unaudited condensed consolidated financial statements.

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CFS BANCORP, INC.

Condensed Consolidated Statements of Income

	Three Months Ended March 31,
	2011			2010
	(Unaudited)
	(Dollars in thousands, except share and per share data)
Interest income:
Loans receivable	$	8,811		$	9,678
Investment securities		2,045			2,213
Other interest-earning assets		157			124
Total interest income		11,013			12,015
Interest expense:
Deposits		1,894			2,053
Borrowed funds		262			519
Total interest expense		2,156			2,572
Net interest income		8,857			9,443
Provision for loan losses		903			1,710
Net interest income after provision for loan losses		7,954			7,733
Non-interest income:
Service charges and other fees		1,076			1,220
Card-based fees		475			437
Commission income		45			54
Net gain (loss) on sale of:
Investment securities		519			456
Loans receivable		32			―
Other assets		(5	)		1
Income from bank-owned life insurance		206			223
Other income		103			150
Total non-interest income		2,451			2,541
Non-interest expense:
Compensation and employee benefits		5,239			4,668
Net occupancy expense		765			755
FDIC insurance premiums and OTS assessments		653			600
Professional fees		388			593
Furniture and equipment expense		463			533
Data processing		442			430
Marketing		187			114
Other real estate owned related expense, net		592			631
Loan collection expense		120			169
Severance and early retirement expense		―			4
Other general and administrative expenses		1,118			970
Total non-interest expense		9,967			9,467
Income before income taxes		438			807
Income tax (benefit) expense		(34	)		109
Net income	$	472		$	698

Per share data:
Basic earnings per share	$	.04		$	.07
Diluted earnings per share		.04			.07
Cash dividends declared per share		.01			.01
Weighted-average common and common share equivalents outstanding:
Basic		10,650,743			10,581,770
Diluted		10,706,677			10,673,776

See accompanying notes to the unaudited condensed consolidated financial statements.

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CFS BANCORP, INC.

Condensed Consolidated Statements of Changes in Shareholders’ Equity

												Accumulated
			Additional									Other
	Common		Paid-In			Retained			Treasury			Comprehensive
	Stock		Capital			Earnings			Stock			Loss			Total
		(Unaudited)
		(Dollars in thousands, except per share data)
Balance at January 1, 2010	$	234	$	188,930		$	80,564		$	(157,041	)	$	(2,314	)	$	110,373
Net income		—		—			698			—			—			698
Other comprehensive income:
Change in unrealized appreciation
on investment securities available-for-sale,
net of reclassification and tax		—		—			—			—			229			229
Total comprehensive income		—		—			—			—			—			927
Net purchases of Rabbi Trust shares		—		—			—			(1	)		—			(1	)
Forfeiture of restricted stock awards		—		205			—			(205	)		—			—
Unearned compensation restricted stock award		—		(395	)		—			395			—			—
Dividends declared on common stock ($.01 per share)		—		—			(106	)		—			—			(106	)
Balance at March 31, 2010	$	234	$	188,740		$	81,156		$	(156,852	)	$	(2,085	)	$	111,193

Balance at January 1, 2011	$	234	$	187,164		$	83,592		$	(155,112	)	$	(2,950	)	$	112,928
Net income		—		—			472			—			—			472
Other comprehensive income:
Change in unrealized appreciation
on investment securities available-for-sale,
net of reclassification and tax		—		—			—			—			471			471
Total comprehensive income		—		—			—			—			—			943
Forfeiture of restricted stock awards		—		437			2			(437	)		—			2
Unearned compensation restricted stock awards		—		(672	)		—			672			—			—
Dividends declared on common stock ($.01 per share)		—		—			(109	)		—			—			(109	)
Balance at March 31, 2011	$	234	$	186,929		$	83,957		$	(154,877	)	$	(2,479	)	$	113,764

See accompanying notes to the unaudited condensed consolidated financial statements.

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CFS BANCORP, INC.

Condensed Consolidated Statements of Cash Flows

	Three Months Ended March 31,
	2011			2010
	(Unaudited)
	(Dollars in thousands)
OPERATING ACTIVITIES:
Net income	$	472		$	698
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		903			1,710
Depreciation and amortization		380			404
Net discount accretion on investment securities available-for-sale		(83	)		(198	)
Net premium amortization on investment securities held-to-maturity		40			—
Net (gain) loss on sale of:
Loans held-for-sale		(32	)		—
Investment securities		(519	)		(456	)
Other assets		5			(1	)
Write down on transfer of future branch sites to other real estate owned		396			—
Write down of construction-in-progress		106			—
Deferred income tax expense		515			110
Proceeds from sale of loans held-for-sale		1,231			—
Origination of loans held-for-sale		(899	)		—
Increase in cash surrender value of bank-owned life insurance		(206	)		(223	)
(Increase) decrease in other assets		(4,456	)		1,275
Increase (decrease) in other liabilities		(125	)		288
Net cash provided by (used in) operating activities		(2,272	)		3,607
INVESTING ACTIVITIES:
Proceeds from sale of:
Investment securities, available-for-sale		6,405			9,603
Other real estate owned		402			57
Proceeds from maturities and paydowns of:
Investment securities, available-for-sale		21,086			19,043
Investment securities, held-to-maturity		397			—
Purchases of:
Investment securities, available-for-sale		(68,070	)		(22,871	)
Properties and equipment		(43	)		(150	)
Redemption of Federal Home Loan Bank stock		10,000			—
Net loan repayments (fundings)		6,537			(4,059	)
Net cash flows provided by (used in) investing activities		(23,286	)		1,623
FINANCING ACTIVITIES:
Net increase (decrease) in:
Deposit accounts		34,606			37,348
Advance payments by borrowers for taxes and insurance		167			493
Short-term borrowed funds		2,158			(9,321	)
Proceeds from Federal Home Loan Bank advances		—			18,000
Repayments of Federal Home Loan Bank advances		(15,050	)		(37,047	)
Dividends paid on common stock		(109	)		(109	)
Net purchase of Rabbi Trust shares		—			(1	)
Net cash flows provided by financing activities		21,772			9,363
Increase (decrease) in cash and cash equivalents		(3,786	)		14,593
Cash and cash equivalents at beginning of period		61,754			24,428
Cash and cash equivalents at end of period	$	57,968		$	39,021
Supplemental disclosures:
Loans and land transferred to other real estate owned	$	1,672		$	1,845
Cash paid for interest on deposits		1,890			2,044
Cash paid for interest on borrowed funds		289			543
Cash paid for income taxes		—			275

See accompanying notes to the unaudited condensed consolidated financial statements.

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CFS BANCORP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.	Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information or footnotes necessary for a complete presentation of financial condition, results of operations, or cash flows in accordance with U.S. generally accepted accounting principles. In our opinion, all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation have been included. The results of operations for the three months ended March 31, 2011 are not necessarily indicative of the results expected for the year ending December 31, 2011. The March 31, 2011 condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes for the year ended December 31, 2010 included in the Company’s Annual Report on Form 10-K.

The preparation of the condensed consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates, judgments, or assumptions that could have a material effect on the carrying value of certain assets and liabilities. These estimates, judgments, and assumptions affect the amounts reported in the condensed consolidated financial statements and the disclosures provided. The determination of the allowance for loan losses, valuations and impairments of investment securities, and the accounting for income tax expense are highly dependent on management’s estimates, judgments, and assumptions where changes in any of these could have a significant impact on the financial statements.

The condensed consolidated financial statements include the accounts of CFS Bancorp, Inc. (the Company), its wholly-owned subsidiary, Citizens Financial Bank (the Bank), and its wholly-owned subsidiary, CFS Holdings, LTD. All material intercompany balances and transactions have been eliminated in consolidation.

Certain items in the condensed consolidated financial statements of prior periods have been reclassified to conform to the current period’s presentation.

2.	Earnings Per Share

Basic earnings per common share (EPS) is computed by dividing net income by the weighted-average number of common shares outstanding during the year. Restricted stock shares which have not vested, and shares held in Rabbi Trust accounts are not considered to be outstanding for purposes of calculating basic EPS. Diluted EPS is computed by dividing net income by the average number of common shares outstanding during the year and includes the dilutive effect of stock options, unearned restricted stock awards, and treasury shares held in Rabbi Trust accounts pursuant to deferred compensation plans. The dilutive common stock equivalents are computed based on the treasury stock method using the average market price for the year.

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The following table sets forth the computation of basic and diluted earnings per share:

		Three Months Ended March 31,
		2011		2010
		(Dollars in thousands, except per share data)

Net income	$	472	$	698

Weighted-average common shares:
Outstanding		10,650,743		10,581,770
Equivalents (1)		55,934		92,006
Total		10,706,677		10,673,776

Earnings per share:
Basic	$	.04	$	.07
Diluted		.04		.07

Number of anti-dilutive stock options excluded from the diluted earnings per share calculation		647,995		740,995
Weighted-average exercise price of anti-dilutive option shares	$	13.46	$	13.24

____________________

(1)

Assumes exercise of dilutive stock options, a portion of the unearned restricted stock awards, and treasury shares held in Rabbi Trust accounts.

3. Investment Securities

The amortized cost of investment securities and their fair values are as follows for the periods indicated:

					Gross		Gross
	Par		Amortized		Unrealized		Unrealized			Fair
	Value		Cost		Gains		Losses			Value
	(Dollars in thousands)
At March 31, 2011:
Available-for-sale investment securities:
U.S. Treasury securities	$	21,000	$	20,946	$	24	$	(202	)	$	20,768
Government sponsored entity (GSE) securities		68,800		69,724		370		(219	)		69,875
Corporate bonds		4,000		3,645		—		(43	)		3,602
Collateralized mortgage obligations		54,340		51,021		2,062		(97	)		52,986
Commercial mortgage-backed securities		70,218		71,341		1,418		(252	)		72,507
Pooled trust preferred securities		29,285		26,386		—		(7,124	)		19,262
GSE preferred stock		200		—		12		—			12
Total available-for-sale securities	$	247,843	$	243,063	$	3,886	$	(7,937	)	$	239,012

Held-to-maturity investment securities:
Asset backed securities	$	9,447	$	9,824	$	112	$	—		$	9,936
Municipals		6,940		6,940		113		—			7,053
Total held-to-maturity investment securities	$	16,387	$	16,764	$	225	$	—		$	16,989

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					Gross		Gross
	Par		Amortized		Unrealized		Unrealized			Fair
	Value		Cost		Gains		Losses			Value
	(Dollars in thousands)
At December 31, 2010:
Available-for-sale investment securities:
U.S. Treasury securities	$	15,000	$	14,975	$	3	$	(159	)	$	14,819
Government sponsored entity (GSE) securities		30,800		30,717		421		(118	)		31,020
Corporate bonds		4,000		3,629		—		(43	)		3,586
Collateralized mortgage obligations		62,512		59,037		2,071		(353	)		60,755
Commercial mortgage-backed securities		66,282		67,052		1,804		(158	)		68,698
Pooled trust preferred securities		29,409		26,473		—		(8,348	)		18,125
GSE preferred stock		5,837		—		98		—			98
Total available-for-sale securities	$	213,840	$	201,883	$	4,397	$	(9,179	)	$	197,101

Held-to-maturity investment securities:
Asset backed securities	$	9,844	$	10,261	$	126	$	(7	)	$	10,380
Municipals		6,940		6,940		106		—			7,046
Total held-to-maturity investment securities	$	16,784	$	17,201	$	232	$	(7	)	$	17,426

The Company's investments in collateralized mortgage obligations consisted of $6.0 million and $13.5 million of GSE issued investment securities and $47.0 million and $47.3 million of non-agency (private issued) residential investment securities at March 31, 2011 and December 31, 2010, respectively.

Investment securities available-for-sale with unrealized losses aggregated by investment category and length of time that individual investment securities have been in a continuous unrealized loss position are presented in the following tables for the dates indicated.

	March 31, 2011
	Less than 12 Months					12 Months or More					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses
	(Dollars in thousands)
U.S. Treasury Securities	$	14,773	$	(202	)	$	—	$	—		$	14,773	$	(202	)
GSE securities		29,478		(219	)		—		—			29,478		(219	)
Corporate bonds		3,602		(43	)		—		—			3,602		(43	)
Collateralized mortgage obligations		8,557		(81	)		39		(16	)		8,596		(97	)
Commercial mortgage-backed securities		21,538		(252	)		—		—			21,538		(252	)
Pooled trust preferred securities		—		—			19,262		(7,124	)		19,262		(7,124	)
	$	77,948	$	(797	)	$	19,301	$	(7,140	)	$	97,249	$	(7,937	)

	December 31, 2010
	Less than 12 Months					12 Months or More					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses
	(Dollars in thousands)
U.S. Treasury securities	$	11,905	$	(159	)	$	—	$	—		$	11,905	$	(159	)
GSE securities		5,870		(118	)		—		—			5,870		(118	)
Corporate bonds		3,586		(43	)		—		—			3,586		(43	)
Collateralized mortgage obligations		8,538		(323	)		1,204		(30	)		9,742		(353	)
Commercial mortgage-backed securities		10,255		(158	)		—		—			10,255		(158	)
Pooled trust preferred securities		—		—			18,125		(8,348	)		18,125		(8,348	)
	$	40,154	$	(801	)	$	19,329	$	(8,378	)	$	59,483	$	(9,179	)

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We evaluate all investment securities on a quarterly basis, and more frequently when economic conditions warrant additional evaluations, for determining if an other-than-temporary impairment (OTTI) exists pursuant to guidelines established in the Financial Accounting Standards Board Accounting Standards Codification (ASC) 320-10, Investments – Debt and Equity Securities. Current accounting guidance generally provides that if a marketable security is in an unrealized loss position, whether due to general market conditions or industry or issuer-specific factors, the holder of the investment securities must assess whether the impairment is other-than-temporary.

In management’s belief, the decline in value of the Company’s investment in collateralized mortgage obligations is primarily attributable to changes in market interest rates and macroeconomic conditions affecting liquidity and not necessarily the expected cash flows of the individual investment securities. The fair value of these investment securities is expected to recover as the investment securities approach their maturity date.

At March 31, 2011, the Company’s pooled trust preferred investment securities consisted of “Super Senior” securities backed by senior securities issued mainly by bank and thrift holding companies. Due to the structure of the securities, as deferrals and defaults on the underlying collateral increase, cash flows are increasingly diverted from mezzanine and subordinate tranches to pay down principal on the “Super Senior” tranches. In management’s belief, the decline in value is primarily attributable to macroeconomic conditions affecting liquidity of these securities and not necessarily the expected cash flows of the individual securities. The fair value of these securities is expected to recover as the securities approach their maturity date.

Unrealized losses on collateralized mortgage obligations and pooled trust preferred investment securities have not been recognized in income because management does not have the intent to sell these securities and has the ability to hold these securities for a period of time sufficient to allow for any anticipated recovery in fair value. We may, from time to time, dispose of an impaired security in response to asset/liability management decisions, future market movements, business plan changes, or if the net proceeds could be reinvested at a rate of return that is expected to recover the loss within a reasonable period of time. The Company concluded that the unrealized losses that existed at March 31, 2011 did not constitute other-than-temporary impairments.

The amortized cost and fair value of investment securities at March 31, 2011, by contractual maturity, are shown in the following tables. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Investment securities not due at a single maturity date are shown separately.

	Available-for-Sale
	Amortized		Fair
	Cost		Value
	(Dollars in thousands)
U.S. Treasury securities:
Due in one year or less	$	3,013	$	3,015
Due after one year through five years		17,933		17,753
GSE securities — Due after one year through five years		69,724		69,875
Corporate bonds — Due after five years		3,645		3,602
Collateralized mortgage obligations:
Due after one year through five years		1,047		1,054
Due after five years		49,973		51,932
Commercial mortgage-backed securities		71,341		72,507
Pooled trust preferred securities		26,386		19,262
GSE preferred stock		—		12
	$	243,062	$	239,012

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	Held-to-Maturity
	Amortized		Fair
	Cost		Value
	(Dollars in thousands)
Asset backed securities — Due after five years	$	9,824	$	9,936
State and municipal securities:
Due in one year or less		2,970		3,003
Due after one year through five years		3,970		4,050
	$	16,764	$	16,989

The following table provides information as to the amount of gross gains and losses realized through the sales of investment securities available-for-sale:

		March 31, 2011		March 31, 2010
		(Dollars in thousands)
Available-for-sale securities:
Gross realized gains	$	519	$	456
Gross realized losses		—		—
Impairment losses		—		—
Net realized gains	$	519	$	456
Income tax expense on realized gains	$	189	$	155

The carrying value of investment securities pledged as collateral to secure public deposits and for other purposes at March 31, 2011 and December 31, 2010 was $52.6 million and $47.9 million, respectively. Other than the U.S. Government, its agencies, and GSEs, there were no other holdings of investment securities of any one issuer in an amount greater than 10% of shareholders’ equity.

4. Loans Receivable

Loans receivable are summarized as follows:

	March 31, 2011			December 31, 2010
	(Dollars in thousands)
Commercial loans:
Commercial and industrial	$	68,381		$	74,940
Commercial real estate – owner occupied		102,053			99,435
Commercial real estate – non-owner occupied		191,443			191,998
Commercial real estate – multifamily		74,552			72,080
Commercial construction and land development		21,130			24,310
Commercial participations		22,419			23,594
Total commercial loans		479,978			486,357
Retail loans:
One-to-four family residential		183,623			185,321
Home equity lines of credit		55,649			56,177
Retail construction		3,328			3,176
Other		2,192			2,122
Total retail loans		244,792			246,796
Total loans receivable		724,770			733,153
Net deferred loan fees		(547	)		(569	)
Total loans receivable, net of deferred fees	$	724,223		$	732,584

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Activity in the allowance for loan losses for March 31, 2011 is as follows:

	Commercial		Commercial Real Estate —						Construction				One-to-four							Total
	and		Owner		Non-Owner				and Land		Commercial		Family				Retail			Loans
	Industrial		Occupied		Occupied		Multifamily		Development		Participations		Residential		HELOC		Construction	Other		Receivable
	(Dollars in thousands)
Allowance for loan losses:
Balance at12/31/10	$ 1,279		$ 1,090		$ 6,906		$ 350		$ 188		$ 4,559		$ 1,356		$ 1,309		$ 7	$ 135		$ 17,179
Provision for loan losses	(13	)	(78	)	(197	)	315		(30	)	863		(11	)	65		2	(13	)	903
Loans charged-off:
Current year charge-offs	—		—		—		(204	)	(4	)	(703	)	(23	)	(52	)	—	(28	)	(1,014	)
Previously established specific allowance	—		—		—		—		—		—		—		—		—	—		—
Total loans charged- off:	—		—		—		(204	)	(4	)	(703	)	(23	)	(52	)	—	(28	)	(1,014	)
Recoveries	2		—		8		—		—		—		1		5		—	11		27
Balance at 3/31/11	$ 1,268		$ 1,012		$ 6,717		$ 461		$ 154		$ 4,719		$ 1,323		$ 1,327		$ 9	$ 105		$ 17,095

Ending balance:
Individually evaluated for impairment	$ —		$ 380		$ 4,387		$ —		$ —		$ 3,573		$ —		$ —		$ —	$ —		$ 8,340
Collectively evaluated for impairment	$ 1,268		$ 632		$ 2,330		$ 461		$ 154		$ 1,146		$ 1,323		$ 1,327		$ 9	$ 105		$ 8,755

Loans receivable:
Balance at 3/31/11	$ 68,381		$ 102,053		$ 191,443		$ 74,552		$ 21,130		$ 22,419		$ 183,623		$ 55,649		$ 3,328	$ 2,192		$ 724,770
Individually evaluated for impairment	$ 3,168		$ 12,313		$ 24,400		$ 263		$ 9,183		$ 8,796		$ —		$ —		$ —	$ —		$ 58,123
Collectively evaluated for impairment	$ 65,213		$ 89,740		$ 167,043		$ 74,289		$ 11,947		$ 13,623		$ 183,623		$ 55,649		$ 3,328	$ 2,192		$ 666,647

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The allowance for loan losses for December 31, 2010 was as follows:

	Commercial	Commercial Real Estate —			Construction		One-to-four				Total
	and	Owner	Non-Owner		and Land	Commercial	Family		Retail		Loans
	Industrial	Occupied	Occupied	Multifamily	Development	Participations	Residential	HELOC	Construction	Other	Receivable
	(Dollars in thousands)
Allowance for loan losses:
Balance at12/31/10	$ 1,279	$ 1,090	$ 6,906	$ 350	$ 188	$ 4,559	$ 1,356	$ 1,309	$ 7	$ 135	$ 17,179

Ending balance:
Individually evaluated for impairment	$ —	$ 433	$ 4,492	$ —	$ —	$ 3,497	$ —	$ —	$ —	$ —	$ 8,422
Collectively evaluated for impairment	$ 1,279	$ 657	$ 2,414	$ 350	$ 188	$ 1,062	$ 1,356	$ 1,309	$ 7	$ 135	$ 8,757

Loans receivable:
Balance at 12/31/10	$ 74,940	$ 99,435	$ 191,998	$ 72,080	$ 24,310	$ 23,594	$ 185,321	$ 56,177	$ 3,176	$ 2,122	$ 733,153
Individually evaluated for impairment	$ 3,692	$ 11,135	$ 21,218	$ 264	$ 9,183	$ 9,499	$ —	$ —	$ —	$ —	$ 54,991
Collectively evaluated for impairment	$ 71,248	$ 88,300	$ 170,780	$ 71,816	$ 15,127	$ 14,095	$ 185,321	$ 56,177	$ 3,176	$ 2,122	$ 678,162

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The Company, as a matter of good risk management practices, utilizes objective loan grading matrices to assign risk ratings to all commercial loans. The risk rating criteria is clearly supported by core credit attributes that emphasize debt service coverage, operating trends, collateral, and guarantor liquidity, and further removes subjective criteria and bias from the analysis. Retail loans are rated pass until they become 90 days or more delinquent, put on non-accrual status, and generally rated substandard. The Company uses the following definitions for risk ratings:

●	Pass. Loans that meet the conservative underwriting guidelines that include core credit attributes noted above as measured by the loan grading matrices at levels that are in excess of the minimum amounts required to adequately service the loans.

●	Pass Watch. Loans which are performing per their contractual terms and are not necessarily demonstrating signs of credit or operational weakness, including but not limited to delinquency. Loans in this category are monitored by management for timely payments. Current financial information may be pending or, based upon the most recent analysis of the loan, possess credit attributes that are sufficient to adequately service the loan, but are less than the parameters required for a pass risk rating. This rating is considered transitional because management does not have current financial information to determine the appropriate risk grade or the quality of the loan appears to be changing. Loans may be graded as pass watch when a single event may have occurred that could be indicative of an emerging issue or indicate trending that would warrant a change in the risk rating.

●	Special Mention. Loans that have a potential weakness that will be closely monitored by management. A credit graded special mention does not expose the Company to elevated risk that would warrant an adverse classification.

●	Substandard. Loans that are inadequately protected by the current net worth and paying capacity of the borrower, guarantor, or the collateral pledged. Loans classified as substandard have a well-defined weakness or weaknesses, characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

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

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The Company’s loans receivable portfolio is summarized by risk category as follows at March 31, 2011:

					Special
	Pass		Pass Watch		Mention		Substandard		Doubtful		Total
	(Dollars in thousands)
Commercial loans:
Commercial and industrial	$	60,944	$	5,915	$	937	$	578	$	7	$	68,381
Commercial real estate – owner occupied		66,639		20,636		1,030		13,748		—		102,053
Commercial real estate – non-owner occupied		142,744		23,047		2,106		23,546		—		191,443
Commercial real estate – multifamily		70,660		2,381		—		1,511		—		74,552
Commercial construction and land development		6,517		4,894		—		9,719		—		21,130
Commercial participations		13,623		—		—		8,796		—		22,419
Total commercial loans		361,127		56,873		4,073		57,898		7		479,978

Retail loans:
One-to-four family residential		179,829		—		—		3,794		—		183,623
Home equity lines of credit		55,038		—		—		611		—		55,649
Retail construction		3,159		—		—		169		—		3,328
Other		2,188		—		—		4		—		2,192
Total retail loans		240,214		—		—		4,578		—		244,792
Total loans	$	601,341		56,873	$	4,073	$	62,476	$	7	$	724,770

					Special
	Pass		Pass Watch		Mention		Substandard		Doubtful		Total
	(Dollars in thousands)
Current	$	593,220	$	55,254	$	3,790	$	11,386	$	7	$	663,657
Delinquent:
30-59 days		5,226		1,319		—		2,594		—		9,139
60-89 days		2,558		300		283		—		—		3,141
90 days or more		337		—		—		48,496		—		48,833
Total loans	$	601,341	$	56,873	$	4,073	$	62,476	$	7	$	724,770

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The Company’s loans receivable portfolio is summarized by risk category as follows at December 31, 2010:

					Special
	Pass		Pass Watch		Mention		Substandard		Doubtful		Total
	(Dollars in thousands)
Commercial loans:
Commercial and industrial	$	62,969	$	3,908	$	7,813	$	228	$	22	$	74,940
Commercial real estate – owner occupied		65,768		20,239		4,310		9,118		—		99,435
Commercial real estate – non-owner occupied		142,636		25,191		2,448		21,723		—		191,998
Commercial real estate – multifamily		61,822		8,238		708		1,312		—		72,080
Commercial construction and land development		10,138		4,989		—		9,183		—		24,310
Commercial participations		14,095		—		—		9,499		—		23,594
Total commercial loans		357,428		62,565		15,279		51,063		22		486,357

Retail loans:
One-to-four family residential		181,991		—		107		3,223		—		185,321
Home equity lines of credit		55,688		—		—		489		—		56,177
Retail construction		2,973		—		—		203		—		3,176
Other		2,118		—		—		4		—		2,122
Total retail loans		242,770		—		107		3,919		—		246,796
Total loans	$	600,198	$	62,565	$	15,386	$	54,982	$	22	$	733,153

					Special
	Pass		Pass Watch		Mention		Substandard		Doubtful		Total
	(Dollars in thousands)
Current	$	589,067	$	61,449	$	11,857	$	13,770	$	22	$	676,165
Delinquent:
30-59 days		5,347		457		415		540		—		6,759
60-89 days		5,322		536		768		321		—		6,947
90 days or more		462		123		2,346		40,351		—		43,282
Total loans	$	600,198	$	62,565	$	15,386	$	54,982	$	22	$	733,153

Interest income is generally not accrued on loans which are delinquent 90 days or more, or for loans which management believes, after giving consideration to a number of factors, including economic and business conditions and collection efforts, collection of interest is doubtful. Past due status is based on the contractual terms of the loan. In all cases, loans are placed on non-accrual or charged off at an earlier date if collection of principal or interest is considered doubtful.

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The Company’s loan portfolio delinquency status is summarized in the following table at March 31, 2011:

													Loans
	30-59		60-89		Greater		Total				Total		> 90 Days
	Days Past		Days Past		Than 90		Past				Loans		And
	Due		Due		Days		Due		Current		Receivable		Accruing
	(Dollars in thousands)
Commercial loans:
Commercial and industrial	$	184	$	833	$	544	$	1,561	$	66,820	$	68,381	$	—
Commercial real estate – owner occupied		148		1,705		13,114		14,967		87,086		102,053		—
Commercial real estate – non-owner occupied		2,130		444		12,028		14,602		176,841		191,443		1,183
Commercial real estate – multifamily		1,594		—		471		2,065		72,487		74,552		241
Commercial construction and land development		—		—		9,719		9,719		11,411		21,130		—
Commercial participations		—		—		8,796		8,796		13,623		22,419		—
Total commercial loans		4,056		2,982		44,672		51,710		428,268		479,978		1,424

Retail loans:
One-to-four family residential		4,308		29		3,503		7,840		175,783		183,623		—
Home equity lines of credit		495		130		485		1,110		54,539		55,649		—
Retail construction		275		—		169		444		2,884		3,328		—
Other		5		—		4		9		2,183		2,192		—
Total retail loans		5,083		159		4,161		9,403		235,389		244,792		—
Total loans receivable	$	9,139	$	3,141	$	48,833	$	61,113	$	663,657	$	724,770	$	1,424

The Company’s loan portfolio delinquency status is summarized in the following table at December 31, 2010:

													Loans
	30-59		60-89		Greater		Total				Total		> 90 Days
	Days Past		Days Past		Than 90		Past				Loans		And
	Due		Due		Days		Due		Current		Receivable		Accruing
	(Dollars in thousands)
Commercial loans:
Commercial and industrial	$	448	$	664	$	180	$	1,292	$	73,648	$	74,940	$	—
Commercial real estate – owner occupied		678		3,691		11,464		15,833		83,602		99,435		2,346
Commercial real estate – non-owner occupied		361		216		9,081		9,658		182,340		191,998		123
Commercial real estate – multifamily		656		—		436		1,092		70,988		72,080		—
Commercial construction and land development		—		536		9,023		9,559		14,751		24,310		—
Commercial participations		—		—		9,660		9,660		13,934		23,594		—
Total commercial loans		2,143		5,107		39,844		47,094		439,263		486,357		2,469

Retail loans:
One-to-four family residential		4,229		1,832		2,589		8,650		176,671		185,321		—
Home equity lines of credit		386		8		642		1,036		55,141		56,177		—
Retail construction		—		—		203		203		2,973		3,176		—
Other		1		—		4		5		2,117		2,122		—
Total retail loans		4,616		1,840		3,438		9,894		236,902		246,796		—
Total loans receivable	$	6,759	$	6,947	$	43,282	$	56,988	$	676,165	$	733,153	$	2,469

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Impaired loans were as follows at March 31, 2011:

			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
	(Dollars in thousands)
Loans without a specific valuation allowance:
Commercial and industrial	$	3,168	$	3,168	$	—	$	3,697	$	—
Commercial real estate – owner occupied		9,559		9,619		—		9,641		—
Commercial real estate – non-owner occupied		7,198		7,424		—		7,393		41
Commercial real estate – multifamily		263		263		—		264		3
Commercial construction and land development		9,183		11,498		—		11,498		—
Commercial participations		3,494		8,012		—		7,881		—
Retail		7,372		7,415		—		7,670		50

Loans with a specific valuation allowance:
Commercial real estate – owner occupied	$	2,754	$	3,168	$	380	$	2,778	$	—
Commercial real estate – non-owner occupied		17,202		17,710		4,387		17,243		—
Commercial participations		5,302		5,443		3,573		5,443		—

Total impaired loans:
Commercial	$	58,123	$	66,305	$	8,340	$	65,838	$	44
Retail		7,372		7,415		—		7,670		50

Impaired loans were as follows at December 31, 2010:

			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
	(Dollars in thousands)
Loans without a specific valuation allowance:
Commercial and industrial	$	3,692	$	3,976	$	—	$	4,738	$	128
Commercial real estate – owner occupied		5,041		5,082		—		5,059		—
Commercial real estate – non-owner occupied		6,664		6,834		—		6,695		144
Commercial real estate – multifamily		264		264		—		268		4
Commercial construction and land development		9,183		11,498		—		9,313		—
Commercial participations		4,197		8,012		—		4,397		—
One-to-four family residential		2,847		2,891		—		2,758		122

Loans with a specific valuation allowance:
Commercial real estate – owner occupied	$	2,798	$	3,168	$	433	$	2,900	$	—
Commercial real estate – non-owner occupied		17,850		18,311		4,492		18,066		—
Commercial participations		5,302		5,443		3,497		5,302		—

Total impaired loans:
Commercial	$	54,991	$	62,588	$	8,422	$	56,738	$	276
Retail		2,847		2,891		—		2,758		122

At March 31, 2011 and December 31, 2010, the Company had $7.2 million and $9.0 million, respectively, of loan modifications meeting the definition of a troubled debt restructuring (TDR) that were performing in accordance with their agreements and accruing interest that are included above in our impaired

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loans without a specific valuation reserve. These modifications include one commercial and industrial relationship totaling $2.8 million, one non-owner occupied commercial real estate relationship totaling $2.1 million, one multifamily relationship totaling $263,000, and 17 one-to-four family residential loans totaling $2.0 million. The loan modifications included short-term extensions of maturity, interest only payments, or payment modifications to better match the timing of cash flows due under the modified terms with the cash flows from the borrowers’ operations.

Non-accrual loans are summarized as follows:

	March 31,		December 31,
	2011		2010
	(Dollars in thousands)
Commercial loans:
Commercial and industrial	$	578	$	228
Commercial real estate – owner occupied		13,748		9,119
Commercial real estate – non-owner occupied		21,320		21,512
Commercial real estate – multifamily		855		1,071
Commercial construction and land development		9,719		9,183
Commercial participations		8,796		9,499
Total commercial loans		55,016		50,612

Retail loans:
One-to-four family residential		3,862		2,955
Home equity lines of credit		610		718
Retail construction		169		203
Other		4		4
Total retail loans		4,645		3,880
Total non-accrual loans	$	59,661	$	54,492

Loans are placed on non-accrual status when, in the judgment of management, the probability of collection of interest is deemed to be insufficient to warrant further accrual. All interest accrued, but not received for loans placed on non-accrual, is reversed against interest income. Interest subsequently received on such loans is accounted for by using the cost-recovery basis for commercial loans and the cash-basis for retail loans until qualifying for return to accrual status.

5. Fair Value Measurements

The Company measures fair value according to ASC 820-10: Fair Value Measurements and Disclosures. ASC 820-10 establishes a fair value hierarchy that prioritizes the inputs used in valuation techniques, but not the valuation techniques themselves. The fair value hierarchy is designed to indicate the relative reliability of the fair value measure. The highest priority is given to quoted prices in active markets and the lowest to unobservable data such as the Company’s internal information. ASC 820-10 defines fair value as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” There are three levels of inputs into the fair value hierarchy (Level 1 being the highest priority and Level 3 being the lowest priority):

Level 1 – Unadjusted quoted prices for identical instruments in active markets;

Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable; and

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Level 3 – Instruments whose significant value drivers or assumptions are unobservable and that are significant to the fair value of the assets or liabilities.

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

The following tables set forth the Company’s financial assets by level within the fair value hierarchy that were measured at fair value on a recurring basis at the dates indicated.

			Fair Value Measurements at March 31, 2011
	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(Dollars in thousands)
Investment securities available-for-sale:
U.S. Treasury securities	$	20,768	$	—	$	20,768	$	—
GSE securities		69,875		—		69,875		—
Corporate bonds		3,602		—		3,602		—
Collateralized mortgage obligations		52,986		—		52,986		—
Commercial mortgage-backed securities		72,507		—		72,507		—
Pooled trust preferred securities		19,262		—		—		19,262
GSE preferred stock		12		12		—		—

			Fair Value Measurements at December 31, 2010
	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(Dollars in thousands)
Investment securities available-for-sale:
U.S. Treasury securities	$	14,819	$	—	$	14,819	$	—
GSE securities		31,020		—		31,020		—
Corporate bonds		3,586		—		3,586		—
Collateralized mortgage obligations		60,755		—		60,755		—
Commercial mortgage-backed securities		68,698		—		68,698		—
Pooled trust preferred securities		18,125		—		—		18,125
GSE preferred stock		98		98		—		—

Investment securities available-for-sale are measured at fair value on a recurring basis. Level 2 investment securities are valued by a third party pricing service commonly used in the banking industry utilizing observable inputs. The pricing provider utilizes evaluated pricing models that vary based on asset class. These models incorporate available market information including quoted prices of investment securities with similar characteristics and, because many fixed-income investment securities do not trade on a daily basis, apply available information through processes such as benchmark yield curves, benchmarking of like investment securities, sector groupings, and matrix pricing. In addition, model processes, such as an option adjusted spread model, are used to develop prepayment estimates and interest rate scenarios for investment securities with prepayment features.

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Level 3 models are utilized when quoted prices are not available for certain investment securities or in markets where trading activity has slowed or ceased. When quoted prices are not available and are not provided by third party pricing services, management judgment is necessary to determine fair value. As such, fair value is determined by using discounted cash flow analysis models, incorporating default rate assumptions, estimations of prepayment characteristics, and implied volatilities.

The Company determined that Level 3 pricing models should be utilized for valuing its pooled trust preferred investment securities. The markets for these securities and for similar securities at March 31, 2011 were illiquid. There have been a limited number of observable transactions in the secondary market, however, a new issue market does not exist. Management has determined a valuation approach that maximizes the use of relevant observable inputs and minimizes the use of unobservable inputs will be more representative of fair value than the market approach valuation technique.

For its Level 3 pricing model, the Company uses externally produced fair values provided by a third party and compares them to other external pricing sources. Other external sources provided similar prices, both higher and lower, than those used by the Company. The external model uses observed prices from limited transactions on similar securities to estimate liquidation values.

The following is a reconciliation of the beginning and ending balances for the periods indicated of recurring fair value measurements recognized in the accompanying consolidated statements of condition using Level 3 inputs:

	Investment Securities Available-For-Sale
	Three Months Ended March 31,
	2011			2010
	(Dollars in thousands)
Beginning balance	$	18,125		$	20,012
Total realized and unrealized gains and losses:
Included in accumulated other comprehensive income (loss)		1,224			3
Principal repayments		(87	)		(114	)
Ending balance	$	19,262		$	19,901

The following table sets forth the Company’s financial and non-financial assets by level within the fair value hierarchy that were measured at fair value on a non-recurring basis at the dates indicated.

			Fair Value Measurements at March 31, 2011
	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(Dollars in thousands)
Impaired loans	$	2,262	$	—	$	—	$	2,262
Other real estate owned		991		—		—		991

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			Fair Value Measurements at December 31, 2010
	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(Dollars in thousands)
Impaired loans	$	15,258	$	—	$	—	$	15,258
Other real estate owned		4,837		—		—		4,837

Loans for which it is probable that the Bank will not collect all principal and interest due according to contractual terms are measured for impairment. Allowable methods for determining the amount of impairment include estimating fair value using the fair value of the collateral for collateral-dependent loans. If the impaired loan is identified as collateral-dependent, then the fair value method of measuring the amount of impairment is utilized. This method utilizes current independent appraisals or analysis to determine the market value of the collateral and then applying a discount factor to the value. Impaired loans that are collateral-dependent are classified within Level 3 of the fair value hierarchy when impairment is determined using the fair value method.

Fair value measurements for impaired loans are performed pursuant to ASC 310-10, Receivables, and are measured on a non-recurring basis. Certain impaired loans were partially charged-off or re-evaluated during the first quarter of 2011. These impaired loans were carried at fair value as estimated using current and prior appraisals, discounting factors, the borrowers’ financial results, estimated cash flows generated from the property, and other factors. The change in the fair value of impaired loans that were valued based upon Level 3 inputs was approximately $779,000 and $616,000 for the three months ended March 31, 2011 and 2010, respectively. These losses are not recorded directly as an adjustment to current earnings or other comprehensive income (loss), but rather as a component in determining the overall adequacy of the allowance for loan losses. These adjustments to the estimated fair value of impaired loans may result in increases or decreases to the provision for loan losses recorded in future earnings.

The fair value of the Company’s other real estate owned is determined by using Level 3 inputs which include current and prior appraisals and estimated costs to sell. The change in fair value of other real estate owned was $496,000 and $417,000 for the three months ended March 31, 2011 and 2010, respectively, which was recorded as an adjustment to current earnings through other real estate owned related expenses.

The Company has the option to measure financial instruments and certain other assets and liabilities at fair value on an instrument-by-instrument basis (the Fair Value Option) according to ASC 825-10, Financial Instruments. The Company is not currently engaged in any hedging activities and, as a result, did not elect to measure any financial instruments at fair value under ASC 825-10.

Disclosure of fair value information about financial instruments, whether or not recognized in the consolidated statement of condition, for which it is practicable to estimate their value, is summarized below. The aggregate fair value amounts presented do not represent the underlying value of the Company.

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The carrying amounts and fair values of financial instruments consist of the following:

	March 31, 2011				December 31, 2010
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
	(Dollars in thousands)
Financial Assets:
Cash and cash equivalents	$	57,968	$	57,968	$	61,754	$	61,754
Investment securities, available-for-sale		239,012		239,012		197,101		197,101
Investment securities, held-to-maturity		16,764		16,989		17,201		17,426
Federal Home Loan Bank stock		10,282		10,282		20,282		20,282
Loans receivable, net of allowance for loan losses		707,128		708,766		715,405		718,556
Interest receivable		3,265		3,265		3,162		3,162
Total financial assets	$	1,034,419	$	1,036,282	$	1,014,905	$	1,018,281
Financial Liabilities:
Deposits	$	980,517	$	983,076	$	945,884	$	948,804
Borrowed funds		40,658		42,530		53,550		55,572
Interest payable		83		83		106		106
Total financial liabilities	$	1,021,258	$	1,025,689	$	999,540	$	1,004,482

The carrying amount is the estimated fair value for cash and cash equivalents and accrued interest receivable and payable. Investment securities fair values are based on quotes received from a third-party pricing source and discounted cash flow analysis models. The fair value of Federal Home Loan Bank stock is based on its redemption value. The fair values for loans receivable are estimated using discounted cash flow analyses. Cash flows are adjusted for estimated prepayments where appropriate and are discounted using interest rates currently being offered for loans with similar terms and collateral to borrowers of similar credit quality.

The fair value of checking, savings, and money market accounts is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated by discounting the future cash flows using the rates currently offered for deposits of similar remaining maturities. The fair value of borrowed funds is estimated based on rates currently available to the Company for debt with similar terms and remaining maturities. The fair value of the Company’s off-balance sheet instruments, including lending commitments, letters of credit, and credit enhancements, approximates their book value and is not included in the above table.

6.	Share-Based Compensation

The Company accounts for its stock options in accordance with ASC 718-10, Compensation – Stock Based Compensation. ASC 718-10 addresses all forms of share-based payment awards, including shares under employee stock purchase plans, stock options, restricted stock, and stock appreciation rights. ASC 718-10 requires all share-based payments to be recognized as expense, based upon their fair values, in the financial statements over the service period of the awards.

For additional details on the Company’s share-based compensation plans and related disclosures, see “Note 9. Share-Based Compensation” in the consolidated financial statements as presented in the Company’s 2010 Annual Report on Form 10-K.

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Omnibus Equity Incentive Plan

The Company’s 2008 Omnibus Equity Incentive Plan (Equity Incentive Plan) authorized the issuance of 270,000 shares of its common stock. In addition, there were 64,500 shares that had not yet been issued or were forfeited, cancelled, or unexercised at the end of the option term under the 2003 Stock Option Plan that are available for any type of stock-based awards in the future under the Equity Incentive Plan. At March 31, 2011, 165,420 shares were available for future grants under the Equity Incentive Plan.

Restricted Stock

During the first quarter of 2011, the Compensation Committee of the Board of Directors granted performance- and service-based awards under the Equity Incentive Plan. The awards included 42,540 of performance-based and 12,375 of service-based shares of restricted stock granted to key employees of the Company. The Company reissued treasury shares to satisfy the restricted stock awards.

The weighted-average fair market vale of the restricted stock awards granted in the first quarter of 2011 was $5.62 per share and totaled $309,000. These restricted stock awards vest 33%, 33%, and 34% on May 1, 2013, 2014, and 2015, respectively. The expense for these awards is being recorded over their requisite service period from their grant date. The Company estimates that the impact of forfeitures based on its historical experience with previously granted restricted stock and will consider the impact of the forfeitures when determining the amount of expense to record for the restricted stock granted.

During the first quarter of 2011, 35,745 shares of performance-based restricted stock granted during 2010 were deemed unearned by the Compensation Committee of the Board of Directors and, accordingly, were forfeited. There was no expense recorded on these restricted stock shares at the time of forfeiture.

The following table presents the activity for restricted stock for the three months ended March 31, 2011.

					Weighted-Average
		Number of			Grant-Date
		Shares			Fair Value
Unvested at December 31, 2010			188,027		$	4.98
2011 Awards:
Granted	54,915					5.62
Forfeited	—					—
Net 2011 grant awards			54,915			5.62
Vested			—			—
Forfeited			(35,745	)		3.53
Unvested as of March 31, 2011			207,197		$	5.40

The compensation expense related to restricted stock for the three months ended March 31, 2011 and 2010 totaled $66,000 and $61,000, respectively. At March 31, 2011, the remaining unamortized cost of the restricted stock awards was reflected as a reduction in additional paid-in capital and totaled $1.1 million. This cost is expected to be recognized over a weighted-average period of 2.8 years which is subject to the actual number of shares earned and vested.

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Stock Options

The Company has stock option plans under which shares of Company common stock were reserved for the grant of both incentive and non-qualified stock options to directors, officers, and employees. These plans were frozen in conjunction with the approval of the Equity Incentive Plan in 2003 and no new awards will be made under these plans. The stock option vesting periods and exercise and expiration dates were determined by the Compensation Committee at the time of the grant. The exercise price of the stock options is equal to the fair market value of the common stock on the grant date.

The following table presents the activity under the Company’s stock option plans for the three months ended March 31, 2011.

	2011
				Weighted-
				Average
	Number of			Exercise
	Options			Price
Options outstanding and exercisable at December 31, 2010		650,995		$	13.44
Granted		—			—
Exercised		—			—
Forfeited		—			—
Expired unexercised		(3,000	)		13.16
Options outstanding and exercisable at March 31, 2011		647,995		$	13.45

For stock options outstanding at March 31, 2011, the range of exercise prices was $10.44 to $14.76 and the weighted-average remaining contractual term was 2.2 years. At March 31, 2011, all of the Company’s outstanding stock options were out-of-the-money and had no intrinsic value. There were no stock options exercised during the three months ended March 31, 2011 and 2010. The Company reissues treasury shares to satisfy option exercises.

7.	Other Comprehensive Income

The related income tax effect and reclassification adjustments to the components of other comprehensive income for the periods indicated are as follows:

	Three Months Ended March 31,
	2011			2010
	(Dollars in thousands)
Unrealized holding gains arising during the period:
Unrealized net gains	$	1,250		$	802
Related tax expense		(449	)		(272	)
Net unrealized gains		801			530
Less: reclassification adjustment for net gains realized during the period:
Realized net gains		519			456
Related tax expense		(189	)		(155	)
Net realized gains		330			301
Total other comprehensive income	$	471		$	229

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8.	Recent Accounting Pronouncements

In April 2011, the FASB issued ASU No. 2011-02, Receivables (Topic 310): A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring. ASU 2011-02 clarifies the guidance in ASC 310-40 Receivables: Troubled Debt Restructurings by Creditors. Creditors are required to identify a restructuring as a troubled debt restructuring if the restructuring constitutes a concession and the debtor is experiencing financial difficulties. ASU 2011-02 clarifies guidance on whether a creditor has granted a concession and clarifies the guidance on a creditor’s evaluation of whether a debtor is experiencing financial difficulties. In addition, ASU 2011-02 also precludes the creditor from using the effective interest rate test in the debtor’s guidance on restructuring of payables when evaluating whether a restructuring constitutes a troubled debt restructuring. The effective date of ASU 2011-2 for public entities is effective 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. If, as a result of adoption, an entity identifies newly impaired receivables, an entity should apply the amendments for purposes of measuring impairment prospectively for the first interim or annual period beginning on or after June 15, 2011. The Company intends to adopt the methodologies prescribed by this ASU by the date required and is currently evaluating the impact of adopting this ASU.

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

Operations

Cautionary Statement Regarding Forward Looking Statements

Certain statements contained in this Form 10-Q, in our other filings with the U.S. Securities and Exchange Commission (SEC), and in our press releases or other shareholder communications are forward-looking statements, as that term is defined in U.S. federal securities laws. Generally, these statements relate to our business plans or strategies, projections involving anticipated revenues, earnings, profitability, or other aspects of operating results, or other future developments in our affairs or the industry in which we conduct business. Forward-looking statements may be identified by reference to a future period or periods or by the use of forward-looking terminology such as “anticipate,” “believe,” “expect,” “intend,” “plan,” “estimate,” “would be,” “will,” “intend to,” “project,” or similar expressions or the negative thereof, as well as statements that include future events, tense or dates, or are not historical or current facts.

We wish to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. We also advise readers that various factors, including regional and national economic conditions, changes in levels of market interest rates, credit and other risks which are inherent in our lending and investment activities, legislative changes, changes in the cost of funds, demand for loan products and financial services, changes in accounting principles, ability to realize deferred tax assets, competitive and regulatory factors, and successful execution of our strategy and our Strategic Growth and Diversification Plan could affect our financial performance and could cause actual results for future periods to differ materially from those anticipated or projected. For further discussion of risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements see “Part I. Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2010. Such forward-looking statements are not guarantees of future performance. We do not undertake, and specifically disclaim any obligation, to update any forward-looking statements to reflect occurrences or unanticipated events or circumstances after the date of such statements unless required to do so under the federal securities laws.

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Critical Accounting Policies

Our condensed consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (GAAP), which require us to establish various accounting policies. Certain of these accounting policies require us to make estimates, judgments, or assumptions that could have a material effect on the carrying value of certain assets and liabilities. The estimates, judgments, and assumptions we use are based on historical experience, projected results, internal cash flow modeling techniques, and other factors which we believe are reasonable under the circumstances.

Significant accounting policies are presented in “Note 1. Summary of Significant Accounting Policies” in the notes to our consolidated financial statements included in “Item 8. Financial Statements and Supplementary Data” of our Annual Report on Form 10-K. These policies, along with the disclosures presented in other financial statement notes and in this management’s discussion and analysis, provide information on the methodology used for the valuation of significant assets and liabilities in our financial statements. We view critical accounting policies to be those that are highly dependent on subjective or complex judgments, estimates, and assumptions, and where changes in those estimates and assumptions could have a significant impact on the financial statements. We currently view the determination of the allowance for loan losses, valuations and impairments of investment securities, and the accounting for income taxes to be critical accounting policies.

Allowance for loan losses. We maintain our allowance for loan losses at a level we believe is appropriate to absorb credit losses inherent in our loan portfolio. The allowance for loan losses represents our estimate of probable incurred losses in our loan portfolio at each statement of condition date and is based on our review of available and relevant information.

The first component of our allowance for loan losses contains allocations for probable incurred losses that we have identified relating to impaired loans pursuant to ASC 310-10, Receivables. We individually evaluate for impairment all loans over $750,000 and classified substandard. Loans are considered impaired when, based on current information and events, it is probable that the borrower will not be able to fulfill its obligation according to the contractual terms of the loan agreement. The impairment loss, if any, is generally measured based on the present value of expected cash flows discounted at the loan’s effective interest rate. As a practical expedient, impairment may be measured based on the loan’s observable market price, or the fair value of the collateral, if the loan is collateral-dependent. A loan is considered collateral-dependent when the repayment of the loan will be provided solely by the underlying collateral and there are no other available and reliable sources of repayment. If we determine a loan is collateral-dependent, we will charge-off any identified collateral short fall against the allowance for loan losses.

If foreclosure is probable, we are required to measure the impairment based on the fair value of the collateral. The fair value of the collateral is generally obtained from appraisals or estimated using an appraisal-like methodology. When current appraisals are not available, management estimates the fair value of the collateral giving consideration to several factors including the price at which individual unit(s) could be sold in the current market, the period of time over which the unit(s) could be sold, the estimated cost to complete the unit(s), the risks associated with completing and selling the unit(s), the required return on the investment a potential acquirer may have, and the current market interest rates. The analysis of each loan involves a high degree of judgment in estimating the amount of the loss associated with the loan, including the estimation of the amount and timing of future cash flows and collateral values.

The second component of our allowance for loan losses contains allocations for probable incurred losses within various pools of loans with similar characteristics pursuant to ASC 450-10, Contingencies. This

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component is based in part on certain loss factors applied to various stratified loan pools excluding loans evaluated individually for impairment. In determining the appropriate loss factors for these loan pools, we consider historical charge-offs and recoveries; levels of and trends in delinquencies, impaired loans, and other classified loans; concentrations of credit within the commercial loan portfolios; volume and type of lending; and current and anticipated economic conditions.

Loan losses are charged off against the allowance when the loan balance or a portion of the loan balance is no longer covered by the paying capacity of the borrower based on an evaluation of available cash resources and collateral value, while recoveries of amounts previously charged off are credited to the allowance. We assess the adequacy of the allowance for loan losses on a quarterly basis and adjust the allowance for loan losses by recording a provision for loan losses in an amount sufficient to maintain the allowance at a level we deem appropriate. Our evaluation of the adequacy of the allowance for loan losses is inherently subjective as it requires estimates that are susceptible to significant revision as additional information becomes available or as future events occur. To the extent that actual outcomes differ from our estimates, an additional provision for loan losses could be required which could adversely affect earnings or our financial position in future periods. The Office of Thrift Supervision (OTS) could require us to make additional provisions for loan losses.

Investment Securities. Under ASC 320-10, Investments – Debt and Equity Securities, investment securities must be classified as held-to-maturity, available-for-sale, or trading. We determine the appropriate classification at the time of purchase. The classification of investment securities is significant since it directly impacts the accounting for unrealized gains and losses on investment securities. Debt investment securities are classified as held-to-maturity and carried at amortized cost when we have the positive intent and we have the ability to hold the investment securities to maturity. Investment securities not classified as held-to-maturity are classified as available-for-sale and are carried at fair value, with the unrealized holding gains and losses, net of tax, reported in other comprehensive income and do not affect earnings until realized.

The fair values of our investment securities are generally determined by reference to quoted prices from reliable independent sources utilizing observable inputs. Certain of the fair values of investment securities are determined using models whose significant value drivers or assumptions are unobservable and are significant to the fair value of the investment securities. These models are utilized when quoted prices are not available for certain investment securities or in markets where trading activity has slowed or ceased. When quoted prices are not available and are not provided by third-party pricing services, our judgment is necessary to determine fair value. As such, fair value is determined by using discounted cash flow analysis models, incorporating default rates, estimation of prepayment characteristics, and implied volatilities.

We evaluate all investment securities on a quarterly basis, and more frequently when economic conditions warrant additional evaluations, for determining if an other-than-temporary impairment (OTTI) exists pursuant to guidelines established in ASC 320-10, Investments – Debt and Equity Securities. In evaluating the possible impairment of investment securities, consideration is given to many factors including the length of time and the extent to which the fair value has been less than cost, whether the market decline was affected by macroeconomic conditions, the financial conditions and near-term prospects of the issuer, and our ability and intent to retain our investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. In analyzing an issuer’s financial condition, we may consider whether the investment securities are issued by the federal government or its agencies or government sponsored agencies, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer’s financial condition. The assessment of whether an other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.

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If we determine that an investment experienced an OTTI, we must then determine the amount of the OTTI to be recognized in earnings. If we do not intend to sell the security and it is more likely than not that we will not be required to sell the security before recovery of its amortized cost basis less any current period loss, the OTTI will be separated into the amount representing the credit loss and the amount related to all other factors. The amount of the OTTI related to the credit loss is determined based on the present value of cash flows expected to be collected and is recognized in earnings. The amount of the OTTI related to other factors will be recognized in other comprehensive income, net of applicable taxes. The previous amortized cost basis less the OTTI recognized in earnings will become the new amortized cost basis of the investment. If we intend to sell the security or it is more likely than not we will be required to sell the security before recovery of its amortized cost basis less any current period credit loss, the OTTI will be recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date. Any recoveries related to the value of these investment securities are recorded as an unrealized gain (as other comprehensive income (loss) in shareholders’ equity) and not recognized in income until the security is ultimately sold. From time to time we may dispose of an impaired security in response to asset/liability management decisions, future market movements, business plan changes, or if the net proceeds can be reinvested at a rate of return that is expected to recover the loss within a reasonable period of time.

Income Tax Accounting. We file a consolidated federal income tax return. The provision for income taxes is based upon income in our consolidated financial statements, rather than amounts reported on our income tax return. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on our deferred tax assets and liabilities is recognized as income or expense in the period that includes the enactment date.

Under GAAP, a valuation allowance is required to be recognized if it is more likely than not that a deferred tax asset will not be realized. The determination of the realizability of the deferred tax assets is highly subjective and dependent upon judgment concerning our evaluation of both positive and negative evidence, our forecasts of future income, applicable tax planning strategies, and assessments of current and future economic and business conditions. Positive evidence includes the existence of taxes paid in available carryback years as well as the probability that taxable income will be generated in future periods, while negative evidence includes any cumulative losses in the current year and prior two years and general business and economic trends. At March 31, 2011, we conducted an extensive analysis to determine if a valuation allowance was required and concluded that a valuation allowance was not necessary, largely based on our projections of future taxable income and available tax planning strategies. Additional positive evidence considered in our analysis was our long-term history of generating taxable income, including six consecutive quarters of operating taxable income, exclusive of the loss recognized for tax purposes on the sale of GSE preferred securities, at March 31, 2011; the industry in which we operate is cyclical in nature, as a result, recent losses are not expected to have a significant long-term impact on our profitability; the fact that recent losses were partly attributable to syndicated/participation lending which we stopped investing in during 2007; our history of fully realizing net operating losses, most recently a federal net operating loss from a $45.0 million taxable loss in 2004; and the relatively long remaining tax loss carryforward periods (nineteen years for federal income tax purposes, ten years for the state of Indiana, and eight years for the state of Illinois). We concluded that the aforementioned positive evidence outweighs the negative evidence of cumulative losses over the past three years. Any reduction in estimated future taxable income may require us to record a valuation allowance against our deferred tax assets. Any required valuation allowance would result in additional income tax expense in the period and could have a significant impact on our future earnings.

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Positions taken in our tax returns may be subject to challenge by the taxing authorities upon examination. The benefit of an uncertain tax position is initially recognized in the financial statements only when it is more likely than not the position will be sustained upon examination by the tax authorities. Such tax positions are both initially and subsequently measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon settlement with the tax authority, assuming full knowledge of the position and all relevant facts. Differences between our position and the position of tax authorities could result in a reduction of a tax benefit or an increase to a tax liability, which could adversely affect our future income tax expense.

We believe our tax policies and practices are critical accounting policies because the determination of our tax provision and current and deferred tax assets and liabilities have a material impact on our net income and the carrying value of our assets. We believe our tax assets and liabilities are adequate and are properly recorded in the condensed consolidated financial statements at March 31, 2011.

Results of Operations for the Three Months Ended March 31, 2011 and 2010

Performance Overview

The following table provides selected financial information and performance information for the three months ended March 31, 2011 and March 31, 2010.

	Three Months Ended March 31,
	2011			2010
	(Dollars in thousands)
Net income	$	472		$	698
Diluted earnings per share		.04			.07
Pre-tax, pre-provision earnings from core operations (1)		1,539			2,864
Return on average assets (2)		.17	%		.26	%
Return on average equity (2)		1.69			2.55
Average interest-earning assets	$	1,012,431		$	982,630
Net interest income		8,857			9,443
Net interest margin		3.55	%		3.90	%
Non-interest income	$	2,451		$	2,541
Non-interest expense		9,967			9,467
Efficiency ratio (3)		92.34	%		82.13	%

________________

(1) See “Non-GAAP Financial Information” on page 33.
(2) Annualized.
(3) The efficiency ratio is calculated by dividing non-interest expense by the sum of net interest income and non-interest income, excluding net gain on sales of investment securities and other assets.

	March 31, 2011			December 31, 2010			March 31, 2010
Book value per share	$	10.47		$	10.41		$	10.28
Shareholders’ equity to total assets		9.94	%		10.07	%		10.18	%
Tangible capital ratio (Bank only)		8.94			9.07			8.92
Core capital ratio (Bank only)		8.94			9.07			8.92
Risk based capital ratio (Bank only)		13.22			13.32			12.63

The following discussion and analysis presents the more significant factors affecting our financial condition as of March 31, 2011 and results of operations for the three months ended March 31, 2011. This

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discussion and analysis should be read in conjunction with our condensed consolidated financial statements and notes thereto included in this report.

During the first quarter of 2011, we recorded net income of $472,000, or $.04 per diluted share, which represents our sixth consecutive quarter of positive earnings. Our earnings were positively affected by $519,000 of pre-tax gains from the sales of investment securities which were substantially offset by $502,000 of write-downs to fair market values less costs to sell and construction-in-progress related to three land parcels currently held for future developments. Due to regulatory rules, these undeveloped parcels were required to be transferred to other real estate owned at the fair market value less selling costs because the holding period on these parcels exceeded three years. In addition to the write-downs, the transfers increased non-performing assets by $1.1 million during the quarter.

Our net interest margin increased six basis points to 3.55% for the first quarter of 2011 from 3.49% for the fourth quarter of 2010 and decreased 35 basis points from 3.90% for the first quarter of 2010. Our net interest margin continued to be negatively impacted by our higher levels of liquidity due to strong deposit growth and modest loan demand, which results in a smaller loan portfolio. Our net interest margin was positively affected by an eleven basis point decrease in the cost of interest-bearing liabilities from the fourth quarter of 2010 and a 24 basis point decrease compared to the first quarter of 2010.

Improving credit quality remains our number one priority in 2011. Our loan portfolio mix continues to improve as the higher risk, targeted contraction portfolios of commercial construction and land development, commercial participations, and non-owner occupied commercial real estate loans decreased $4.9 million during the quarter. Although total loans receivable decreased during the quarter, our commercial loan pipeline is improving and we expect loan growth in the second quarter of 2011.

Our non-performing loans increased to $59.7 million at March 31, 2011 from $54.5 million at December 31, 2010. Non-performing loans during the first quarter were negatively affected by three loan relationships totaling $5.1 million in the aggregate, of which $4.7 million were owner occupied commercial real estate and $359,000 were commercial and industrial loans. One construction and land development relationship totaling $536,000 was also transferred to non-accrual status during the first quarter of 2011.

Subsequent to March 31, 2011, we consummated an other real estate owned sale transaction that resulted in a decrease of $2.8 million in other real estate owned and recognized a pre-tax gain on the sale of approximately $2.1 million, which represents a recovery of a previously recorded charge-off. The gain will be recognized in the financial results of the second quarter of 2011. In addition, we have sold one and currently have contracts on three separate other real estate owned properties which will reduce non-performing assets by an additional $450,000 during the second quarter of 2011.

We continue to have success in growing core deposits through many channels including enhancing our brand recognition within our communities, offering attractive deposit products, bringing in new client relationships by meeting all of their banking needs, and holding our experienced sales team accountable for growing deposits and relationships. During the first quarter of 2011, we increased our core deposits by $37.2 million, or 6.9%, from December 31, 2010 and by $70.8 million, or 14.0%, from March 31, 2010. The increase in core deposits has strengthened our balance sheet and enhanced our liquidity by allowing us to pay maturing Federal Home Loan Bank (FHLB) borrowed funds during the quarter.

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Our tangible, core, and risk-based capital ratios exceeded “minimum” and “well capitalized” for regulatory capital requirements. Our tangible common equity at March 31, 2011 was $113.8 million, or 9.94% of tangible assets compared to $112.9 million, or 10.07% of tangible assets, at December 31, 2010.

Progress on Strategic Growth and Diversification Plan

We continue to focus our efforts on reducing the level of non-performing loans, seeking to either restructure specific non-performing credits or foreclose, obtain title, and transfer the loan to other real estate owned where we can take control of and liquidate the underlying collateral. Our ratio of non-performing loans to total loans was 8.24% compared to 7.44% at December 31, 2010 primarily due to three loan relationships totaling $5.1 million in the aggregate transferring to non-accrual status, coupled with a decrease of $8.4 million in total loans outstanding during the first quarter of 2011.

We remain strongly focused on our cost structure even though non-interest expense for the first quarter of 2011 increased to $10.0 million from $9.3 million for the fourth quarter of 2010 and $9.5 million for the first quarter of 2010. The increase was primarily related to an increase in medical expense due to a higher amount of claims overall coupled with write-downs and other expenses totaling $502,000 related to the transfer of three land parcels held for future expansion to other real estate owned pursuant to regulatory rules that require undeveloped property held for future expansion to be transferred to other real estate owned three years from the property’s purchase date if the proposed branches have not been built by then. Medical expense also increased $242,000 during the first quarter of 2011 from the fourth quarter of 2010 due to higher medical claims during the quarter.

We have succeeded in increasing targeted growth segments in our loan portfolio, including commercial and industrial, commercial real estate – owner occupied, and multifamily, to comprise 51.1% of the commercial loan portfolio at March 31, 2011, up from 50.7%, 45.8%, and 39.1% at December 31, 2010, 2009, and 2008, respectively. Our focus on deepening relationships has emphasized core deposit and relationship-oriented time deposit growth which has resulted in a $34.6 million increase, or 3.7%, in deposits since December 31, 2010.

Pre-tax, Pre-Provision Earnings from Core Operations

Our pre-tax, pre-provision earnings from core operations totaled $1.5 million for the first quarter of 2011 compared to $2.2 million for the fourth quarter of 2010 and $2.9 million for the first quarter of 2010. The pre-tax, pre-provision earnings from core operations was impacted during the first quarter of 2011 by lower net interest income and service charges and other fees coupled with an increase in compensation and employee benefits primarily due to the increase in medical expenses.

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Non-GAAP Financial Information

The following table reconciles income before income taxes in accordance with U.S. generally accepted accounting principles (GAAP) to the non-GAAP measurement of pre-tax, pre-provision earnings from core operations.

	Three Months Ended March 31,
	2011			2010
	(Dollars in thousands)
Reconciliation of Income Before Income Taxes to Pre-Tax, Pre-Provision Earnings from Core Operations:
Income before income taxes	$	438		$	807
Provision for loan losses		903			1,710
Pre-tax, pre-provision earnings		1,341			2,517

Adjustments:
Net (gain) loss on sale of:
Investment securities		(519	)		(456	)
Other assets		5			(1	)
Other real estate owned expense, net		592			631
Loan collection expense		120			169
Severance and early retirement expense		―			4
Pre-tax, pre-provision earnings from core operations	$	1,539		$	2,864

Pre-tax, pre-provision earnings from core operations to average assets		.55	%		1.07	%

Our accounting and reporting policies conform to U.S. generally accepted accounting principles (GAAP) and general practice within the banking industry. Management uses certain non-GAAP financial measures to evaluate our financial performance and has provided the non-GAAP financial measures of pre-tax, pre-provision earnings from core operations and pre-tax, pre-provision earnings from core operations to average assets. In these non-GAAP financial measures, the provision for loan losses, other real estate owned related expense, loan collection expense, and certain other items, such as gains and losses on sales of investment securities and other assets, and severance and early retirement expense, are excluded from the determination of core operating results. Management believes that these measures are useful because they provide a more comparable basis for evaluating financial performance from core operations period to period and allows management and others to assess our ability to generate earnings to cover credit costs. Although these non-GAAP financial measures are intended to enhance investors understanding of our business performance, these operating measures should not be considered as an alternative to GAAP.

The risks associated with utilizing operating measures (such as the pre-tax, pre-provision earnings from core operations) are that various persons might disagree as to the appropriateness of items included or excluded in these measures and that other companies might calculate these measures differently. Management compensates for these limitations by providing detailed reconciliations between GAAP information and our pre-tax, pre-provision earnings from core operations as noted above; however, these disclosures should not be considered an alternative to GAAP.

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Average Balances/Rates

The following table reflects the average yield on assets and average cost of liabilities for the periods indicated. Average balances are derived from average daily balances.

	Three Months Ended March 31,
	2011							2010
	Average				Average			Average				Average
	Balance		Interest		Yield/Cost			Balance		Interest		Yield/Cost
	(Dollars in thousands)
Interest-earning assets:
Loans receivable (1)	$	727,422	$	8,811		4.91	%	$	760,822	$	9,678		5.16	%
Investment securities (2)		239,070		2,045		3.42			194,812		2,213		4.54
Other interest-earning assets (3)		45,939		157		1.39			26,996		124		1.86
Total interest-earning assets		1,012,431		11,013		4.41			982,630		12,015		4.96
Non-interest earning assets		117,646							100,684
Total assets	$	1,130,077						$	1,083,314
Interest-bearing liabilities:
Deposits:
Checking accounts	$	157,782		112		.29		$	134,715		67		.20
Money market accounts		183,431		249		.55			152,912		246		.65
Savings accounts		124,096		76		.25			115,497		94		.33
Certificates of deposit		404,475		1,457		1.46			368,106		1,646		1.81
Total deposits		869,784		1,894		.88			771,230		2,053		1.08
Borrowed funds:
Other short-term borrowed funds		14,199		18		.51			16,711		21		.51
FHLB advances		25,657		244		3.80			80,147		498		2.49
Total borrowed funds		39,856		262		2.63			96,858		519		2.14
Total interest-bearing liabilities		909,640		2,156		.96			868,088		2,572		1.20
Non-interest bearing deposits		95,596							93,620
Non-interest bearing liabilities		11,451							10,425
Total liabilities		1,016,687							972,133
Shareholders’ equity		113,390							111,181
Total liabilities and shareholders’ equity	$	1,130,077						$	1,083,314
Net interest-earning assets	$	102,791						$	114,542
Net interest income/ interest rate spread			$	8,857		3.45	%			$	9,443		3.76	%
Net interest margin						3.55	%						3.90	%
Ratio of average interest-earning assets to
average interest-bearing liabilities						111.30	%						113.19	%

_______________________

(1)		The average balance of loans receivable includes loans held for sale and non-performing loans, interest on which is recognized on a cash basis.

(2)		Average balances of investment securities are based on amortized cost.

(3)		Includes FHLB stock and interest-earning bank deposits.

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Rate / Volume Analysis

The following table shows the impact of changes in the volume of interest-earning assets and interest-bearing liabilities and changes in interest rates on our interest income and interest expense for the periods indicated. Changes attributable to the combined impact of rate and volume have been allocated proportional to the changes due to rate and changes due to volume.

	Three Months Ended March 31,
	2011 Compared to 2010
	Change due to Rate			Change due to Volume			Total Change
	(Dollars in thousands)
Interest income:
Loans receivable	$	(452	)	$	(415	)	$	(867	)
Investment securities		(612	)		444			(168	)
Other interest-earning assets		(38	)		71			33
Total		(1,102	)		100			(1,002	)

Interest expense:
Deposits:
Checking accounts		33			12			45
Money market accounts		(41	)		44			3
Savings accounts		(25	)		7			(18	)
Certificates of deposit		(341	)		152			(189	)
Total deposits		(374	)		215			(159	)
Borrowed funds:
Other short-term borrowed funds		―			(3	)		(3	)
FHLB advances		186			(440	)		(254	)
Total borrowed funds		186			(443	)		(257	)
Total		(188	)		(228	)		(416	)
Net change in net interest income	$	(914	)	$	328		$	(586	)

Net Interest Income

Net Interest Income. Net interest income totaled $8.9 million for the first quarter of 2011 compared to $9.4 million for the first quarter of 2010. Net interest margin for the first quarter of 2011 decreased to 3.55% from 3.90% for the prior year quarter. The decreases in net interest income and net interest margin were primarily a result of lower yields on loans and investment securities as a result of the lower interest rate environment combined with a balance decrease in the higher yielding loan portfolio and higher levels of lower yielding investment securities and liquidity.

Interest Income. Interest income decreased to $11.0 million for the first quarter of 2011 compared to $12.0 million for the prior year quarter. The weighted-average rate on interest-earnings assets decreased to 4.41% for the first quarter of 2011 from 4.96% for the prior year quarter. The decrease was primarily due to higher average balances of investment securities, lower average balances of loans receivable, and the current lower interest rate environment which reduced the yields on loans receivable and investment securities. The yield on loans receivable decreased due to a reduction in interest income related to new non-accrual loans. The yield on investment securities declined due to reinvesting maturing investment securities in lower yielding investments as market interest rates remained significantly low. In addition, the Bank is currently holding

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higher levels of short-term liquid investments due to the lack of desirable investment alternatives in the current interest rate environment.

Interest Expense. Interest expense decreased to $2.2 million for the first quarter of 2011 compared to $2.6 million for the prior year quarter. The average cost of interest-bearing liabilities decreased 24 basis points to .96% for the first quarter of 2011 from 1.20% for the prior year quarter. Interest expense continues to be positively affected by strong growth in low-cost core deposit balances and a reduction in higher cost certificates of deposit.

Interest expense on interest-earning deposits decreased to $1.9 million for the first quarter of 2011 from $2.1 million for the prior year quarter. The weighted-average cost of deposits decreased 20 basis points to .88% for the first quarter of 2011 from 1.08% for the prior year quarter as a result of disciplined pricing on deposits, the repricing of certificates of deposit at lower interest rates, and increases in the average balance of non-interest bearing deposits, which was partially offset by increases in the average balance of interest bearing deposits.

Interest expense on borrowed funds decreased to $262,000 for the first quarter of 2011 from $519,000 for the prior year quarter primarily as a result of a 58.9% reduction in the average balance of borrowed funds during the first quarter of 2011 compared to the prior year quarter as we continue to strengthen our balance sheet and enhance our liquidity position by replacing this funding source with core deposits. Partially offsetting the decrease in the cost of deposits, the weighted-average cost of borrowed funds increased 49 basis points during the first quarter of 2011 to 2.63% from 2.14% for the prior year quarter as a result of lower cost FHLB advances being repaid at maturity early in the first quarter of 2011.

Provision for Loan Losses

The Company’s provision for loan losses was $903,000 for the first quarter of 2011 compared to $1.7 million for the prior year quarter. For more information, see “Changes in Financial Condition – Allowance for Loan Losses” below in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Non-Interest Income

The following table identifies the changes in non-interest income for the period presented:

	Three Months Ended
	March 31,
	2011			2010		$ Change			% Change
	(Dollars in thousands)
Service charges and other fees	$	1,076		$	1,220	$	(144	)		(11.8	)%
Card-based fees		475			437		38			8.7
Commission income		45			54		(9	)		(16.7	)
Subtotal fee based revenues		1,596			1,711		(115	)		(6.7	)
Income from bank-owned life insurance		206			223		(17	)		(7.6	)
Other income		103			150		(47	)		(31.3	)
Subtotal		1,905			2,084		(179	)		(8.6	)
Net gain on sale of investment securities		519			456		63			(13.8	)
Net gain on sale of loans receivable		32			―		32		NM
Net gain (loss) on sale of other assets		(5	)		1		(6	)	NM
Total non-interest income	$	2,451		$	2,541	$	(90	)		(3.5	) %

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Service charges and other fees were impacted by lower volume of non-sufficient funds transactions which is an industry trend that is expected to continue, if not accelerate, due to regulatory changes in 2010 affecting deposit account overdraft activity. Service charges and other fees were also impacted by lower credit enhancement fee income related to non-owner occupied commercial real estate lending as we strategically reduce our exposure to these types of products. Higher card-based fees, net gains on the sale of securities, and a net gain on the sale of loans receivable was partially offset by lower income from bank-owned life insurance and other income, and net losses on the sales of other assets. For information related to net gains on sale of investment securities, see “Changes in Financial Condition – Investment Securities” below in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Non-Interest Expense

The following table identifies changes in our non-interest expense for the period presented:

	Three Months Ended
	March 31,
	2011		2010		$ Change			% Change
	(Dollars in thousands)
Compensation and mandatory benefits	$	4,469	$	4,080	$	389			9.5	%
Retirement and stock related compensation		213		194		19			9.8
Medical and life benefits		547		375		172			45.9
Other employee benefits		10		19		(9	)		47.4
Subtotal compensation and employee benefits		5,239		4,668		571			12.2
Net occupancy expense		765		755		10			1.3
FDIC insurance premiums and OTS assessments		653		600		53			8.8
Professional fees		388		593		(205	)		(34.8	)
Furniture and equipment expense		463		533		(70	)		(13.1	)
Data processing		442		430		12			2.8
Marketing		187		114		73			64.0
Other real estate owned related expense, net		592		631		(39	)		(6.2	)
Loan collection expense		120		169		(49	)		(29.0	)
Severance and early retirement expense		―		4		(4	)	NM
Other general and administrative expenses		1,118		970		148			15.3
Total non-interest expense	$	9,967	$	9,467	$	500			5.3	%

Compensation and employee benefits increased $571,000 for the first quarter of 2011 from the prior year period. The increase was primarily a result of an increase in compensation and mandatory benefits expense due to an increase in compensation costs as the salary freeze was lifted during the third quarter of 2010 coupled with an increase in estimated incentive accruals. Medical and life benefits increased due to significantly higher medical claims incurred during the first quarter of 2011 when compared to the prior year quarter.

Professional fees decreased $205,000 for the first quarter of 2011 from the prior year quarter primarily due to the absence of the proxy contest during the first quarter of 2011.

Furniture and equipment expense decreased $70,000 for the first quarter of 2011 from the prior year quarter primarily due to lower information systems related equipment costs and lower depreciation costs.

Other real estate owned related expense, net includes $396,000 of write-downs related to three land parcels held for future branch expansion that were written down and transferred at their fair market values less

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costs to sell in accordance with regulatory rules that require any undeveloped land held for future branch expansion be transferred to other real estate owned if not developed within a three year period from the date of acquisition. Two of the three properties required write-downs based on current appraisals received on the properties. In addition, we wrote-down through other general and administrative expense $106,000 of construction-in-progress as one of the land parcels held for a future branch site will not be utilized.

Income Tax (Benefit) Expense

Income tax benefit totaled $34,000 for the first quarter of 2011 compared to income tax expense totaling $109,000 for the prior year quarter. The decrease in the effective income tax rate was primarily due to lower pre-tax income and the impact of bank owned life insurance and tax credits.

Changes in Financial Condition

Our total assets at March 31, 2011 increased $22.4 million, or 2.0%, to $1.14 billion from $1.12 billion at December 31, 2010, primarily in investment securities as a result of strong deposit growth and a reduction in total loan balances.

	March 31, 2011		December 31, 2010		$ Change			% Change
	(Dollars in thousands)
Assets:
Cash and cash equivalents	$	57,968	$	61,754	$	(3,786	)		(6.1	)%
Investment securities available-for-sale, at fair value		239,012		197,101		41,911			21.3
Investment securities held-to-maturity, at cost		16,764		17,201		(437	)		(2.5	)
Federal Home Loan Bank stock, at cost		10,282		20,282		(10,000	)		(49.3	)
Loans receivable, net		707,128		715,405		(8,277	)		(1.2	)
Bank-owned life insurance		35,669		35,463		206			.6
Other real estate owned		23,567		22,324		1,243			5.6
Other assets		53,651		52,146		1,505			2.9
Total assets	$	1,144,041	$	1,121,676	$	22,365			2.0	%

Liabilities and Equity:
Deposits	$	980,517	$	945,884	$	34,633			3.7	%
Borrowed funds		40,658		53,550		(12,892	)		(24.1	)
Other liabilities		9,102		9,314		(212	)		(2.3	)
Total liabilities		1,030,277		1,008,748		21,529			2.1
Shareholders’ equity		113,764		112,928		836			.7
Total liabilities and equity	$	1,144,041	$	1,121,676	$	22,365			2.0	%

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Loans Receivable. The following table provides the balance and the percentage of loans by category at the dates indicated.

	March 31, 2011						December 31, 2010
	Amount			% of Total			Amount			% of Total			% Change
	(Dollars in thousands)
Commercial loans:
Commercial and industrial	$	68,381			9.5	%	$	74,940			10.3	%		(8.8	)%
Commercial real estate – owner occupied		102,053			14.1			99,435			13.6			2.6
Commercial real estate – non-owner occupied		191,443			26.4			191,998			26.2			(.3	)
Commercial real estate – multifamily		74,552			10.3			72,080			9.8			3.4
Commercial construction and land development		21,130			2.9			24,310			3.3			(13.1	)
Commercial participations		22,419			3.1			23,594			3.2			(5.0	)
Total commercial loans		479,978			66.3			486,357			66.4			(1.3	)
Retail loans:
One-to-four family residential		183,623			25.3			185,321			25.3			(.9	)
Home equity lines of credit		55,649			7.7			56,177			7.7			(.9	)
Retail construction		3,328			.5			3,176			.4			4.8
Other		2,192			.3			2,122			.3			3.3
Total retail loans		244,792			33.8			246,796			33.7			(.8	)
Total loans receivable		724,770			100.1			733,153			100.1			(1.1	)
Net deferred loan fees		(547	)		(.1	)		(569	)		(.1	)		(3.9	)
Total loans receivable, net of deferred fees	$	724,223			100.0	%	$	732,584			100.0	%		(1.1	)%

At March 31, 2011, the net loan portfolio included $153.8 million of variable-rate loans indexed to the prime lending rate as listed in the Wall Street Journal and $216.6 million of loans tied to other indices that reprice at various intervals from one month up to five years.

Total loan fundings during 2011 were $6.9 million which were more than offset by loan payoffs and repayments of $12.5 million, gross charge-offs of $1.0 million, and transfers to other real estate owned of $560,000. Our business banking pipeline is improving and we are anticipating loan growth as well as additional line usage on our business banking revolving facilities (lines of credit) in the second quarter of 2011. In addition, through the execution of our Strategic Growth and Development Plan, we continue to diversify our loan portfolio and reduce loans not meeting our current defined risk tolerance. We have increased certain of our targeted segments of the loan portfolio, including commercial real estate – owner occupied and multifamily. These segments along with commercial and industrial comprise 51.1% of the commercial loan portfolio at March 31, 2011.

Commercial construction and land development loans decreased $3.2 million, or 13.1%, compared to December 31, 2010 primarily due to the repayment of two loans totaling $724,000 in the aggregate and three loans totaling $2.4 million converting to commercial real estate – owner occupied loans.

Commercial participations decreased 5.0% compared to December 31, 2010 through net paydowns totaling $472,000 and charge-offs totaling $703,000.

Total commercial participations by loan type and state are presented in the following tables as of the dates indicated.

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	March 31, 2011					December 31, 2010
	Amount		% of Total			Amount		% of Total			% Change
	(Dollars in thousands)
Commercial and industrial	$	216		.9	%	$	226		1.0	%		(4.4	)%
Commercial real estate – owner occupied		105		.5			83		.3			26.5
Commercial real estate – non-owner occupied		18,604		83.0			19,064		80.8			(2.4	)
Commercial construction and land development		3,494		15.6			4,221		17.9			(17.2	)
Total commercial participations	$	22,419		100.0	%	$	23,594		100.0	%		(5.0	)%

	March 31, 2011					December 31, 2010
	Amount		% of Total			Amount		% of Total			% Change
	(Dollars in thousands)
Illinois	$	4,797		21.4	%	$	4,988		21.1	%		(3.8	)%
Indiana		5,767		25.7			5,774		24.5			(.1	)
Ohio		7,228		32.2			7,332		31.1			(1.4	)
Florida		1,140		5.1			1,843		7.8			(38.1	)
Colorado		1,925		8.6			2,075		8.8			(7.2	)
Texas		1,562		7.0			1,582		6.7			(1.3	)
Total commercial participations	$	22,419		100.0	%	$	23,594		100.0	%		(5.0	)%

Investment Securities. We manage our investment securities portfolio to adjust balance sheet interest rate sensitivity to insulate net interest income against the impact of changes in market interest rates, to maximize the return on invested funds within acceptable risk guidelines, and to meet pledging and liquidity requirements.

We adjust the size and composition of our investment securities portfolio according to a number of factors including expected loan and deposit growth, the interest rate environment, and projected liquidity. The amortized cost of investment securities available-for-sale and their fair values were as follows at the dates indicated:

					Gross		Gross
	Par		Amortized		Unrealized		Unrealized			Fair
	Value		Cost		Gains		Losses			Value
	(Dollars in thousands)
At March 31, 2011:
U.S. Treasury securities	$	21,000	$	20,946	$	24	$	(202	)	$	20,768
Government sponsored entity (GSE) securities		68,800		69,724		370		(219	)		69,875
Corporate bonds		4,000		3,645		—		(43	)		3,602
Collateralized mortgage obligations		54,340		51,021		2,062		(97	)		52,986
Commercial mortgage-backed securities		70,218		71,341		1,418		(252	)		72,507
Pooled trust preferred securities		29,285		26,386		—		(7,124	)		19,262
GSE preferred stock		200		—		12		—			12
	$	247,843	$	243,063	$	3,886	$	(7,937	)	$	239,012

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					Gross		Gross
	Par		Amortized		Unrealized		Unrealized			Fair
	Value		Cost		Gains		Losses			Value
	(Dollars in thousands)
At December 31, 2010:
U.S. Treasury securities	$	15,000	$	14,975	$	3	$	(159	)	$	14,819
Government sponsored entity (GSE) securities		30,800		30,717		421		(118	)		31,020
Corporate bonds		4,000		3,629		—		(43	)		3,586
Collateralized mortgage obligations		62,512		59,037		2,071		(353	)		60,755
Commercial mortgage-backed securities		66,282		67,052		1,804		(158	)		68,698
Pooled trust preferred securities		29,409		26,473		—		(8,348	)		18,125
GSE preferred stock		5,837		—		98		—			98
	$	213,840	$	201,883	$	4,397	$	(9,179	)	$	197,101

The fair value of investment securities available-for-sale totaled $239.0 million at March 31, 2011 compared to $197.1 million at December 31, 2010. Our investment securities increased since December 31, 2010 due to investing the proceeds from our strong deposit growth as the demand for loans remain constrained by our local economic conditions.

At March 31, 2011, our collateralized mortgage obligation portfolio totaled $51.0 million at amortized cost with 96% of the portfolio maintaining ratings of AA- or better. The portfolio is mainly backed by conventional residential mortgages with prime loans originated prior to 2005; low historical delinquencies; and weighted-average credit scores in excess of 725. The composition of this portfolio includes $6.0 million backed by Ginnie Mae.

Our commercial mortgage-backed investment securities portfolio consists mainly of senior tranches of issues originated prior to 2006 with extensive subordination and limited balloon risk. All bonds are AAA-rated and none are on watch for downgrade.

Our corporate bond portfolio consists of a single AA-rated, floating-rate note purchased at a large discount and maturing in 2016.

At March 31, 2011, our pooled trust preferred investment securities consisted of “Super Senior” securities backed by senior securities issued mainly by bank and thrift holding companies. Due to the structure of the securities, as deferrals and defaults on the underlying collateral increase, cash flows are increasingly diverted from mezzanine and subordinate tranches to pay down principal on the “Super Senior” tranches. In management’s belief, the decline in value is primarily attributable to macroeconomic conditions affecting the liquidity of these securities and not necessarily the expected cash flows of the individual securities. The fair value of these securities is expected to recover as the economy recovers, as interest rates rise, and as the performance of the underlying collateral improves.

All of our pooled trust preferred investments were AAA-rated when they were purchased at discounts in excess of 10%. In 2009, the market for this type of investment was severely impacted by the credit crisis leading to increased deferrals and defaults. Ratings were also negatively affected in 2009, and all of these securities in our portfolio have at least one rating below investment grade. One tranche with an amortized cost of $7.6 million holds recently updated ratings of both A and CCC-. The market for pooled trust preferred securities is currently illiquid. As such, management may have to hold these securities for an extended period of time, which it has the ability and intent to do. We utilize extensive external and internal analysis on the

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pooled trust preferred holdings. Stress tests are performed on all underlying issuers in the pools to project probabilities of deferral or default. Management’s internal stress testing utilizes immediate defaults for all deferring collateral. Any collateral that management believes may be at risk for deferring, based upon management’s review of the underlying banks’ and thrift holding companies’ most recent financial and regulatory information, is assumed to default immediately. Internal stress testing also assumes no recoveries on defaulted collateral. All external and internal stress testing currently projects no loss of principal or interest on any of our holdings. Due to the current ratings on the pooled trust preferred securities being below investment grade, at March 31, 2011, we downgraded four of our five investments in pooled trust preferred securities with an aggregate market value totaling $13.5 million to substandard in accordance with regulatory requirements.

During the second half of 2010, the level of collateral backing the pools deemed by management to be at risk decreased based upon trends of improving financials, large capital raises, acquisitions, and cures by previously deferring issuers. Based on the increasing pace of and success of capital raises by and confirmed acquisitions of underlying issuers, management expects the pace of cures to accelerate in 2011. Due to the structure of the securities, as deferrals and defaults on the underlying collateral increase, cash flows are increasingly diverted from mezzanine and subordinate tranches to pay down principal on the “Super Senior” tranches. Past defaults on underlying collateral ensure cash flows will continue to be diverted to our “Super Senior” tranches to pay down principal for several years.

Recent law changes enacted in the Dodd-Frank Wall Street Reform and the Consumer Protection Act affect the capital treatment of trust preferred securities. Offering circulars outline the underlying issuer’s ability to prepay their issues if such a capital treatment event occurs. While management believes the opportunity exists for underlying issuers to prepay their trust preferred securities, we believe any such activity will be limited. Of the five issues we own, four are failing certain coverage tests designed to protect the holders of the “Super Senior” tranches. As such, the proceeds of any early redemptions, successful tenders or cures, will be used to further pay down principal on these four issues.

Deposits. The following table sets forth the dollar amount of deposits and the percentage of total deposits in each category offered at the dates indicated:

	March 31, 2011					December 31, 2010
	Amount		% of Total			Amount		% of Total			% Change
	(Dollars in thousands)
Checking accounts:
Non-interest bearing	$	101,126		10.3	%	$	90,315		9.5	%		12.0	%
Interest-bearing		158,473		16.2			149,948		15.9			5.7
Money market accounts		189,034		19.3			177,566		18.8			6.5
Savings accounts		127,902		13.0			121,504		12.8			5.3
Core deposits		576,535		58.8			539,333		57.0			6.9
Certificates of deposit accounts		403,982		41.2			406,551		43.0			(.6	)
Total deposits	$	980,517		100.0	%	$	945,884		100.0	%		3.7	%

The Bank continues to have success growing deposits through many channels including enhancing its brand recognition within its communities, offering attractive deposit products, bringing in new client relationships by meeting all of their banking needs, and holding its experienced sales team accountable for growing deposits and relationships. During the first quarter 2011, the Company increased its core deposits by $37.2 million, which included an increase of $10.8 million in non-interest bearing checking deposits. Increasing core deposits is reflective of our success in deepening our client relationships, one of our core Strategic Plan objectives.

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In addition, we offer a repurchase sweep agreement (Repo Sweep) account which allows public entities and other business depositors to earn interest with respect to checking and savings deposit products offered. The depositor’s excess funds are swept from a deposit account and are used to purchase an interest in investment securities that we own. The swept funds are not recorded as deposits and instead are classified as other short-term borrowed funds which generally provide a lower-cost funding alternative as compared to FHLB advances. At March 31, 2011, we had $15.5 million in Repo Sweeps compared to $13.4 million at December 31, 2010. The Repo Sweeps are included in the table under “Borrowed Funds” and are treated as financings, and the obligations to repurchase investment securities sold are reflected as short-term borrowed funds. The investment securities underlying these Repo Sweeps continue to be reflected as assets.

Borrowed Funds. Borrowed funds consisted of the following at the dates indicated:

	March 31, 2011					December 31, 2010
			Weighted-					Weighted-
			Average					Average
			Contractual					Contractual
	Amount		Rate			Amount		Rate
	(Dollars in thousands)
Advances from FHLB of Indianapolis:
Fixed rate advances due in:
2011	$	—		—	%	$	15,000		3.75	%
2013		15,000		2.22			15,000		2.22
2014 (1)		1,096		6.71			1,096		6.71
2018 (1)		2,513		5.54			2,513		5.54
2019 (1)		6,539		6.30			6,589		6.30
Total FHLB advances		25,148		3.81			40,198		3.79

Short-term variable-rate borrowed funds - repo sweep accounts		15,510		.50			13,352		.50

Total borrowed funds	$	40,658		2.55	%	$	53,550		2.97	%

____________________

(1)

These are amortizing advances and are listed by their contractual final maturity date.

At March 31, 2011, the Bank had a line of credit with a maximum of $15.0 million in secured overnight federal funds at the federal funds market rate at the time of any borrowing. The Bank also has a borrowing relationship with the Federal Reserve Bank (FRB) discount window. These lines were not utilized during the first quarter of 2011.

Shareholders’ Equity. Shareholders’ equity at March 31, 2011 was $113.8 million compared to $112.9 million at December 31, 2010. The increase was primarily due to $472,000 of net income for the first quarter of 2011 and an decrease of $471,000 in the unrealized loss on investment securities available-for-sale offset by cash dividends declared of $109,000.

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Asset Quality and Allowance for Loan Losses

Non-performing Assets. The following table provides information relating to non-performing assets at the dates presented.

	March 31, 2011			December 31, 2010
	(Dollars in thousands)
Non-performing loans:
Commercial loans:
Commercial and industrial	$	578		$	228
Commercial real estate – owner occupied		13,748			9,119
Commercial real estate – non-owner occupied		21,320			21,512
Commercial real estate – multifamily		855			1,071
Commercial construction and land development		9,719			9,183
Commercial participations		8,796			9,499
Total commercial loans		55,016			50,612
Retail loans:
One-to-four family residential		3,862			2,955
Home equity lines of credit		610			718
Retail construction		169			203
Other		4			4
Total retail loans		4,645			3,880
Total non-performing loans		59,661			54,492
Other real estate owned, net		23,567			22,324
Total non-performing assets		83,228			76,816
90 days past due loans still accruing interest		1,424			2,469
Total non-performing assets plus 90 days past due
loans still accruing interest	$	84,652		$	79,285
Non-performing assets to total assets		7.27	%		6.85	%
Non-performing loans to total loans, net of deferred fees		8.24			7.44

Total non-performing loans increased $5.2 million to $59.7 million at March 31, 2011 from $54.5 million at December 31, 2010. Non-performing commercial loans increased $4.4 million primarily due to three commercial real estate owner occupied relationships totaling $4.7 million in the aggregate being transferred into nonaccrual status partially offset by a partial charge-off totaling $703,000 on a commercial participation. Non-performing retail loans increased $765,000 primarily due to nine one-to-four family loans totaling $1.5 million in the aggregate being transferred into nonaccrual status partially offset by five one-to-four family loans totaling $262,000 becoming current and being transferred out of nonaccrual status along with four one-to-four family loans totaling $283,000 being transferred into other real estate owned.

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Included in the non-performing loan totals are non-performing syndications and purchased participations as identified by loan category in the following table.

	March 31, 2011			December 31, 2010			% Change
	(Dollars in thousands)
Commercial real estate – non-owner occupied	$	5,302		$	5,302			―	%
Commercial construction and land development		3,494			4,197			(16.8	)
Total non-performing syndications and purchased participations	$	8,796		$	9,499			(7.4	)
Percentage of total non-performing loans		14.7	%		17.4	%
Percentage of total syndications and purchased participations		39.2			40.3

The following table provides the detail for non-accrual syndications and purchased participations by state as of the dates indicated.

	March 31, 2011		December 31, 2010		% Change
	(Dollars in thousands)
Illinois	$	2,354	$	2,354		―	%
Indiana		5,302		5,302		―
Florida		1,140		1,843		(38.1	)
Total non-performing syndications and purchased participations	$	8,796	$	9,499		(7.4	)

Potential Problem Assets. Potential problem assets, defined as loans classified substandard pursuant to our internal loan grading system that do not meet the definition of a non-performing loan, totaled $3.2 million at March 31, 2011 and $926,000 at December 31, 2010.

Allowance for Loan Losses. The following is a summary of changes in the allowance for loan losses for the periods presented:

	Three Months Ended March 31,
	2011			2010
	(Dollars in thousands)
Balance at beginning of period	$	17,179		$	19,461
Loan charge-offs		(1,014	)		(881	)
Recoveries of loans previously charged-off		27			112
Net loan charge-offs		(987	)		(769	)
Provision for loan losses		903			1,710
Balance at end of period	$	17,095		$	20,402

	March 31, 2011			December 31, 2010			March 31, 2010
	(Dollars in thousands)
Allowance for loan losses	$	17,095		$	17,179		$	20,402
Total loans receivable, net of unearned fees		724,223			732,584			763,767
Allowance for loan losses to total loans		2.36	%		2.34	%		2.67	%
Allowance for loan losses to non-performing loans		28.65			31.53			35.29

The allowance for loan losses was relatively stable at $17.1 million at March 31, 2011 compared to $17.2 million at December 31, 2010. The ratio of the allowance for loan losses to total loans was also stable at 2.36% at March 31, 2011 compared to 2.34% at December 31, 2010. The significant changes in the allowance

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for loan losses during the first quarter of 2011 included partial charge-offs of $703,000 related to one commercial construction and land development participation loan, $204,000 on two multifamily loans, and $107,000 on retail loans. The provision for losses on loans decreased to $903,000 for the first quarter of 2011 from $1.7 million for the prior year quarter. The lower provision was primarily the result of the decrease in the total loan balances outstanding at March 31, 2011 compared to March 31, 2010 and the decrease in higher risk loan categories, particularly commercial construction and land development and commercial participations.

When management determines a non-performing collateral dependent loan has a collateral shortfall, management will immediately charge off the collateral shortfall. As a result, the Company is not required to maintain an allowance for loan losses on these loans as the loan balance has already been written down to its net realizable value (fair value less estimated costs to sell the collateral). As such, the ratio of the allowance for loan losses to total loans and the ratio of the allowance for loan losses to non-performing loans have been affected by cumulative partial charge-offs of $6.9 million recorded through March 31, 2011 on $10.9 million of collateral dependent non-performing loans and specific impairment reserves totaling $8.3 million on other non-collateral dependent non-performing loans at March 31, 2011.

At March 31, 2011, we had 20 loans totaling $7.2 million with loan modifications meeting the definition of a troubled debt restructuring (TDR) that were performing in accordance with their agreements and accruing interest. These modified loans include one commercial and industrial relationship totaling $2.8 million, one non-owner occupied commercial real estate relationship totaling $2.1 million, one multifamily relationship totaling $263,000, and 17 one-to-four family loans totaling $2.0 million. The loan modifications included short-term extensions of maturity, interest only payments, or payment modifications to better match the timing of cash flows due under the modified terms with the cash flows from the borrowers’ operations.

Liquidity and Capital Resources

Liquidity, represented by cash and cash equivalents, is a product of operating, investing, and financing activities. Our primary sources of funds are:

•

deposits and Repo Sweeps;

•

scheduled payments of amortizing loans and mortgage-backed investment securities;

•

prepayments and maturities of outstanding loans and mortgage-backed investment securities;

•

maturities of investment securities and other short-term investments;

•

funds provided from operations;

•

federal funds line of credit; and

•

borrowed funds from the FHLB and Federal Reserve Bank.

The Asset/Liability Management Committee is responsible for measuring and monitoring our liquidity profile. We manage our liquidity to ensure stable, reliable, and cost-effective sources of funds to satisfy demand for credit, deposit withdrawals, and investment opportunities. Our general approach to managing liquidity involves preparing a monthly “funding gap” report which forecasts cash inflows and cash outflows over various time horizons and rate scenarios to identify potential cash imbalances. We supplement our funding gap report with the monitoring of several liquidity ratios to assist in identifying any trends that may have an effect on available liquidity in future periods.

We maintain a contingency funding plan that outlines the process for addressing a liquidity crisis. The plan assigns specific roles and responsibilities for effectively managing liquidity through a problem period.

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Scheduled payments from the amortization of loans, maturing investment securities, and short-term investments are relatively predictable sources of funds, while deposit flows and loan prepayments are greatly influenced by market interest rates, economic conditions, and competitive rate offerings.

At March 31, 2011, we had cash and cash equivalents of $58.0 million, a slight decrease from $61.8 million at December 31, 2010. The decrease was mainly the result of:

•	purchases of investment securities totaling $68.1 million and
•	repayment of FHLB advances totaling $15.1 million.

The above cash outflows were partially offset by:

•	increases in deposit accounts totaling $34.6 million;
•	proceeds from sales, maturities, and paydowns of investment securities aggregating $27.9 million;
•	redemption of FHLB stock of $10.0 million; and
•	net loan repayments totaling $6.5 million.

We use our sources of funds primarily to meet our ongoing commitments, fund loan commitments, fund maturing certificates of deposit and savings withdrawals, and maintain an investment securities portfolio. We anticipate that we will continue to have sufficient funds to meet our current commitments.

Our liquidity needs consist primarily of operating expenses and dividend payments to shareholders. The primary sources of liquidity are cash and cash equivalents and dividends from the Bank. We are prohibited from repurchasing shares and incurring any debt at the parent company without the prior approval of the OTS under our informal regulatory agreement with them.

We are currently prohibited from paying dividends without the prior approval of the OTS pursuant to our informal regulatory agreement with them. Absent such restriction, OTS regulations provide various standards under which the Bank may declare and pay dividends to the Company without prior approval. The dividends from the Bank are limited to the extent of the Bank’s cumulative earnings for the year plus the net earnings (adjusted by prior distributions) of the prior two calendar years. At March 31, 2011, under current OTS regulations, the Bank had $5.2 million of retained earnings from the first quarter of 2011 and calendar years ended 2010 and 2009 available for dividend declarations. At March 31, 2011, the parent company had $2.9 million in cash and cash equivalents. We do not anticipate that these restrictions will have a material adverse impact on our liquidity in the short-term.

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Contractual Obligations. The following table presents our contractual obligations to third parties at March 31, 2011 by maturity:

	Payments Due By Period
			Over One		Over Three		Over
	One Year		through		through		Five
	or less		Three Years		Five Years		Years		Total
	(Dollars in thousands)
Certificates of deposit	$	299,350	$	81,539	$	22,511	$	582	$	403,982
FHLB advances (1)		336		15,746		1,789		7,277		25,148
Short-term borrowed funds (2)		15,510	―		―		―			15,510
Service bureau contract		1,548		3,096		3,096	―			7,740
Operating leases		374		403		255		1,967		2,999
Dividends payable on common stock		109	―		―		―			109
	$	317,227	$	100,784	$	27,651	$	9,826	$	455,488

______________

(1) Does not include interest expense at the weighted-average contractual rate of 3.81% for the periods presented.

(2) Does not include interest expense at the weighted-average contractual rate of .50% for the periods presented.

See the “Borrowed Funds” section for further discussion surrounding FHLB advances. The operating lease obligations reflected above include the future minimum rental payments, by year, required under the lease terms for premises and equipment. Many of these leases contain renewal options, and certain leases provide options to purchase the leased property during or at the expiration of the lease period at specific prices.

Off-Balance Sheet Obligations. We are party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our clients. These financial instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the statement of condition. Our exposure to credit loss in the event of non-performance by the third-party to the financial instrument for commitments to extend credit and letters of credit is represented by the contractual notional amount of those instruments. We use the same credit policies in making commitments and conditional obligations as we do for on-balance sheet instruments.

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The following table details the amounts and expected maturities of significant commitments at March 31, 2011:

			Over One
			through		Over Three		Over
	One Year		Three		through		Five
	or Less		Years		Five Years		Years		Total
	(Dollars in thousands)
Commitments to extend credit:
Commercial and industrial	$	11,038	$	—	$	—	$	247	$	11,285
Commercial real estate – owner occupied		13,070		—		135		—		13,205
Commercial real estate – non-owner occupied		1,355		—		—		—		1,355
Commercial real estate – multifamily		1,467		—		—		—		1,467
Commercial construction and land development		10,875		137		—		—		11,012
Commercial participations		—		48		—		—		48
Retail		3,737		—		—		—		3,737
Commitments to fund unused:
Equity lines of credit		12,408		—		—		40,553		52,961
Commercial business lines		42,541		2,600		21		—		45,162
Construction loans		2,254		—		—		—		2,254
Credit enhancements		3,984		—		—		13,518		17,502
Letters of credit		4,373		12		—		—		4,385
	$	107,102	$	2,797	$	156	$	54,318	$	164,373

The commitments listed above do not necessarily represent future cash requirements, in that these commitments often expire without being drawn upon. Credit enhancements expire at various dates through 2018. Letters of credit expire at various dates through 2012.

We also have commitments to fund community investments through investments in various limited partnerships, which represent future cash outlays for the construction and development of properties for low-income housing, small business real estate, and historic tax credit projects that qualify under the Community Reinvestment Act. These commitments include $625,000 to be funded over three years. The timing and amounts of these commitments are projected based upon the financing arrangements provided in each project’s partnership agreement, and could change due to variances in the construction schedule, project revisions, or the cancellation of the project. These commitments are not included in the commitment table above.

Credit enhancements are related to the issuance by municipalities of taxable and nontaxable revenue bonds. The proceeds from the sale of such bonds are loaned to for-profit and not-for-profit companies for economic development projects. In order for the bonds to receive AAA ratings, which provide for a lower interest rate, the FHLB issues, in favor of the bond trustee, an Irrevocable Direct Pay Letter of Credit (IDPLOC) for our account. Since we, in accordance with the terms and conditions of a Reimbursement Agreement between the FHLB, would be required to reimburse the FHLB for draws against the IDPLOC, these facilities are analyzed, appraised, secured by real estate mortgages, and monitored as if we had funded the project initially.

Regulatory Capital

The Bank is subject to regulatory capital requirements under the rules of the Office of Thrift Supervision, or OTS. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators, which could have a material impact on the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective

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action, the Bank must maintain capital amounts in excess of specified minimum ratios based on quantitative measures of the Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices.

Quantitative measures established by the OTS to ensure capital adequacy require us to maintain minimum amounts and ratios (as set forth in the table below) of three capital requirements: tangible capital (as defined in the regulations) as a percentage of adjusted total assets, core capital (as defined) as a percentage of adjusted total assets, and risk-based capital (as defined) as a percentage of total risk-weighted assets. At March 31, 2011, the Bank exceeded all minimum regulatory capital ratios to be considered “well capitalized”.

The Bank’s actual capital amounts and ratios, as well as minimum amounts and ratios required for capital adequacy and prompt corrective action provisions are presented in the following table:

										To Be Well Capitalized
						For Capital Adequacy				Under Prompt Corrective
	Actual					Purposes				Action Provisions
	Amount		Ratio			Amount		Ratio		Amount		Ratio
	(Dollars in thousands)
As of March 31, 2011:
Tangible capital to adjusted total assets	$	101,563		8.94	%	$	17,039	>=1.5	%	$	22,718	>=2.0	%
Tier 1 (core) capital to adjusted total assets		101,563		8.94			45,437	>=4.0			56,796	>=5.0
Tier 1 (core) capital to risk-weighted assets		101,563		12.18			33,366	>=4.0			50,049	>=6.0
Total capital to risk-weighted assets		110,301		13.22			66,732	>=8.0			83,416	>=10.0

As of December 31, 2010:
Tangible capital to adjusted total assets	$	101,144		9.07	%	$	16,719	>=1.5	%	$	22,292	>=2.0	%
Tier 1 (core) capital to adjusted total assets		101,144		9.07			44,583	>=4.0			55,729	>=5.0
Tier 1 (core) capital to risk-weighted assets		101,144		12.26			33,005	>=4.0			49,508	>=6.0
Total capital to risk-weighted assets		109,869		13.32			66,011	>=8.0			82,514	>=10.0

As of March 31, 2011 and December 31, 2010, the Bank was categorized as “well capitalized” under the regulatory framework for prompt corrective action. To be categorized as “well capitalized”, the Bank must maintain a minimum core capital to adjusted total assets, core capital to risk-weighted assets, and total capital to risk-weighted asset ratios as set forth in the table above.

The following table reflects the adjustments required to reconcile the Bank’s shareholders’ equity to the Bank’s regulatory capital at March 31, 2011:

	Tangible			Core			Risk-Based
	(Dollars in thousands)
Shareholders’ equity of the Bank	$	112,072		$	112,072		$	112,072
Disallowed deferred tax asset		(12,159	)		(12,159	)		(12,159	)
Adjustment for unrealized losses on available-for-sale securities		2,487			2,487			2,487
Other		(837	)		(837	)		(837	)
General allowance for loan losses		―			―			8,738
Regulatory capital of the Bank	$	101,563		$	101,563		$	110,301

The decrease in the Bank’s capital ratios from December 31, 2010 is primarily a result of an increase in the Bank’s adjusted total assets from a strong increase in deposits combined with a shift in the risk categories of the Bank’s assets due to increases in the level of investment securities that were risk-weighted 20% and a decrease in cash and treasury securities that are in the 0% category. Determining the amount of deferred tax

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assets included or excluded in periodic regulatory capital calculations requires significant judgment when assessing a number of factors. In assessing the amount of the disallowed deferred tax asset, we consider a number of relevant factors including the amount of deferred tax assets dependent on future taxable income, the amount of taxes that could be recovered through loss carrybacks, the reversal of temporary book tax differences, projected future taxable income within one year, available tax planning strategies, and OTS limitations. Using all information available to us at each statement of condition date, these factors are reviewed and vary from period to period.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Our primary market risk is considered to be interest rate risk. Interest rate risk on our balance sheet arises from the maturity mismatch of interest-earning assets versus interest-bearing liabilities, as well as the potential for maturities to shorten or lengthen on our interest-earning assets, and to a lesser extent on our interest-bearing liabilities due to the exercise of options. The most common of these are prepayment options on mortgage loans, and commercial mortgage-backed securities, and to a lesser extent jump-rate features in certain of our certificates of deposit. Management’s goal, through policies established by the Asset/Liability Management Committee of the Board of Directors (ALCO), is to maximize net interest income while achieving adequate returns on equity capital and managing our balance sheet within the established interest rate risk policy limits prescribed by the ALCO.

We maintain a written Asset/Liability Management Policy that establishes written guidelines for the asset/liability management function, including the management of net interest margin, IRR, and liquidity. The Asset/Liability Management Policy falls under the authority of the Board of Directors which in turn assigns its formulation, revision, and administration to the ALCO. The ALCO meets monthly and consists of certain senior officers and one outside director. The results of the monthly meetings are reported to the Board of Directors. The primary duties of the ALCO are to develop reports and establish procedures to measure and monitor IRR, verify compliance with Board approved IRR tolerance limits, take appropriate actions to mitigate those risks, monitor and discuss the status and results of implemented strategies and tactics, monitor our capital position, review the current and prospective liquidity positions, and monitor alternative funding sources. The policy requires management to measure overall IRR exposure using Net Present Value analysis and earnings-at-risk analysis.

We use Net Portfolio Value Analysis as the primary measurement of our interest rate risk. Under OTS Thrift Bulletin 13a, we are required to measure our interest rate risk assuming various increases and decreases in general interest rates and their effect on our market value of portfolio equity. The Board of Directors has established limits to changes in Net Portfolio Value (NPV), (including limits regarding the change in net interest income discussed below), across a range of hypothetical interest rate changes. If estimated changes to NPV and net interest income are not within these limits, the Board may direct management to adjust its asset/liability mix to bring its interest rate risk within Board limits. NPV is computed as the difference between the market value of assets and the market value of liabilities, adjusted for the value of off-balance sheet items.

Net Portfolio Value Analysis measures our interest rate risk by calculating the estimated change in NPV of our cash flows from interest-sensitive assets and liabilities, as well as certain off-balance sheet items, in the event of a shock in interest rates ranging down 200 to up 300 basis points. The following table shows the change in NPV applying the various instantaneous rate shocks to the Bank’s interest-earning assets and interest-bearing liabilities as of March 31, 2011 and December 31, 2010.

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			Net Portfolio Value
		At March 31, 2011								At December 31, 2010
		$ Amount		$ Change			% Change			$ Amount		$ Change			% Change
			(Dollars in thousands)
Assumed Change in Interest Rates
(Basis Points)
	+300	$	132,593	$	5,257			4.1	%	$	135,273	$	5,530			4.3	%
	+200		132,381		5,044			4.0			135,380		5,637			4.3
	+100		130,800		3,464			2.7			132,500		2,757			2.1
	0		127,337		—			—			129,743		—			—
	-100		117,130		(10,206	)		(8.0	)		119,664		(10,079	)		(7.8	)
	-200		108,366		(18,971	)		(19.6	)		111,927		(21,763	)		(16.8	)

Our earnings at risk analysis models the impact of instantaneous parallel shifts in yield curve changes in interest rates (assuming interest rates rise and fall in increments of 100 basis points), on anticipated net interest income over a 12-month horizon. These models are modeling underlying cash flows in each of our interest-sensitive portfolios under these changing rate environments. This includes adjusting anticipated prepayments, changing expected business volumes and mix as well as modeling anticipated changes in interest rates paid on core deposit accounts, whose rates do not necessarily move in any relationship to movements in Treasury rates. We compare these results to our results assuming flat interest rates.

The following table presents the projected changes in net interest income over a twelve month period for the various interest rate change (rate shocks) scenarios at March 31, 2011 and December 31, 2010, respectively.

		Change In
		Net Interest Income
		Over a Twelve
		Month Period
		March 31, 2011						December 31, 2010
		$ Change			% Change			$ Change			% Change
		(Dollars in thousands)
Assumed Change in Interest Rates
(Basis Points)
	+300	$	(1,663	)		(4.4	)%	$	(504	)		(1.3	)%
	+200		(1,291	)		(3.4	)		(334	)		(.9	)
	+100		(823	)		(2.2	)		(231	)		(.6	)
	-100		1,516			4.0			1,276			3.4
	-200		1,120			3.0			808			2.2

The table above indicates that if interest rates were to move up 200 basis points, net interest income would be expected to decrease 3.4% in year one; and if interest rates were to move down 100 basis points, net interest income would be expected to increase 4.0% in year one. Interest income projections for rates moving down 100 basis points are greater than for rates moving down 200 basis points as rates on short-term liabilities have limited room to reprice lower while rates on certain assets are at contractual or absolute floors. The primary causes for the changes in net interest income over the twelve month period were a result of the changes in the composition of interest earning assets and interest bearing liabilities and related interest rates, their repricing characteristics and frequencies, and related interest rates. Actual results will differ from the above model results due to timing, magnitude and frequency of interest rate changes, as well as changes in market conditions and management strategy. The above table does not reflect any actions we might take in response to changes in interest rates.

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We manage our IRR position by holding assets with various desired IRR characteristics, implementing certain pricing strategies for loans and deposits, and implementing various investment securities portfolio strategies. On a quarterly basis, the ALCO reviews the calculations of all IRR measures for compliance with the Board approved tolerance limits. At March 31, 2011, we were in compliance with all of our tolerance limits with the exception of the NPV tolerance limit for a movement in rates down 200 basis points. Given the current low level of interest rates, we do not believe this exception is material because this interest scenario is not probable.

The IRR analyses include the assets and liabilities of the Bank only. Inclusion of Company-only assets and liabilities would not have a material impact on the results presented.

Item 4. Controls and Procedures

No change in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) under the Securities Exchange Act of 1934, as amended) occurred during the quarter ended March 31, 2011 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Management evaluated, with the participation of the Chief Executive Officer and Chief Financial Officer, the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) or 15(d)-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based on such evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and regulations and are operating in an effective manner as of such date.

Part II. OTHER INFORMATION

Item 1. Legal Proceedings

The Company is involved in routine legal proceedings occurring in the ordinary course of business, which, in the aggregate, are believed to be immaterial to the financial condition, results of operations, and cash flows of the Company.

Item 1A. Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed in “Item 1A. Risk Factors” contained in our Annual Report on Form 10-K for the year ended December 31, 2010, which could materially affect our business, financial condition, or future results. There have been no material changes from the risk factors as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2010.

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

(a)	Not applicable.

(b)	Not applicable.

(c)	We did not repurchase any shares of our common stock during the quarter ended March 31, 2011. Under our repurchase plan publicly announced on March 20, 2008 for 530,000 shares, we have 448,612 shares that may yet be purchased. We are currently prohibited from repurchasing our common stock without prior approval pursuant to an informal regulatory agreement with the OTS.

Item 3. Defaults Upon Senior Securities

(a)	None.

(b)	Not applicable.

Item 4. (Removed and Reserved)

Item 5. Other Information

(a)	Not applicable.

(b)	None.

Item 6. Exhibits

(a)	List of exhibits (filed herewith unless otherwise noted).
3.1	Articles of Incorporation of CFS Bancorp, Inc. (1)
3.2	Amended and Restated Bylaws of CFS Bancorp, Inc. (2)
4.0	Form of Stock Certificate of CFS Bancorp, Inc. (3)
10.25	Employment Agreement entered into between CFS Bancorp, Inc., Citizens Financial Bank, and Jerry A. Weberling (4)
31.1	Rule 13a-14(a) Certification of Chief Executive Officer
31.2	Rule 13a-14(a) Certification of Chief Financial Officer
32.0	Section 1350 Certifications

________

____________

(1)	Incorporated herein by Reference to the Company’s Definitive Proxy Statement from the Annual Meeting of Shareholders filed with the SEC on March 25, 2005 (File No. 000-24611).

(2)	Incorporated herein by Reference to the Company’s Form 8-K filed with the SEC on December 17, 2010.

(3)	Incorporated herein by Reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2006 filed with the SEC on March 15, 2007.

(4)	Incorporated herein by Reference to the Company’s Form 8-K filed with the SEC on February 23, 2011.

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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.

CFS BANCORP, INC.

Date: April 29, 2011	By:	/s/ Thomas F. Prisby
		Thomas F. Prisby, Chairman of the Board and
		Chief Executive Officer

Date: April 29, 2011	By:	/s/ Jerry A. Weberling
		Jerry A. Weberling, Executive Vice President
		and Chief Financial Officer

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