UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

Form 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended March 31, 2012
	OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________________ to _________________

Commission file number 0-54299

CHOICE BANCORP, INC.

(Exact name of registrant as specified in its charter)

Wisconsin	27-2416885
(State or other jurisdiction of incorporation	(I.R.S. Employer Identification No.)
or organization)
2450 Witzel Avenue, Oshkosh, WI	54904
(Address of principal executive offices)	(Zip Code)

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

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

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

Yes x   No o

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

Yes x   No o

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

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

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

Yes o   No x

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

 

 

EXPLANATORY NOTE

This document is intended to speak as of March 31, 2012, except as otherwise noted.

FORM 10-Q TABLE OF CONTENTS

	Page #
Part I – Financial Information
Item 1 Financial Statements (Unaudited)
Consolidated Statement of Financial Condition of Choice Bancorp, Inc. as of March 31, 2012 and as of December 31, 2011	3
Consolidated Statement of Income of Choice Bancorp, Inc. for the Three Months Ended March 31, 2012 and for the Three Months Ended March 31, 2011	4
Consolidated Statements of Comprehensive Income of Choice Bancorp, Inc. for the Three Months Ended March 31, 2012 and for the Three Months Ended March 31, 2011	5
Consolidated Statement of Stockholders’ Equity of Choice Bancorp, Inc. for the Three Months Ended March 31, 2012 and for the Three Months Ended March 31, 2011	6
Consolidated Statement of Cash Flows of Choice Bancorp, Inc. for the Three Months Ended March 31, 2012 and for the Three Months Ended March 31, 2011	7
Notes to Interim Consolidated Financial Statements (Unaudited)	8
Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
Item 3 Quantitative and Qualitative Disclosures About Market Risk	43
Item 4 Controls and Procedures	43
Part II – Other Information	45
Item 1 Legal Proceedings	45
Item 1A Risk Factors	45
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds	45
Item 3 Defaults Upon Senior Securities	45
Item 4 Mine Safety Disclosures	45
Item 5 Other Information	45
Item 6 Exhibits	46
Signatures	47

Item 1. Financial Statements

Choice Bancorp, Inc.

Consolidated Statements of Financial Condition

			March 31, 2012		December 31, 2011
			(Unaudited)
Assets
Cash and due from banks		$	1,843,280	$	1,540,825
Federal funds sold			6,624,000		409,000
Cash and cash equivalents			8,467,280		1,949,825
Securities available for sale			9,955,041		9,218,665
Loans held for sale			1,027,735		3,463,500
Loans, net			156,683,397		155,577,564
Premises and equipment, net			1,463,218		1,490,989
Other real estate owned			1,020,000		1,020,000
Deferred tax asset			1,200,000		1,200,000
Other assets			1,179,457		1,222,706
TOTAL ASSETS		$	180,996,128	$	175,143,249
Liabilities and Stockholders' Equity
Liabilities:
Non-interest bearing deposits		$	9,882,023	$	8,539,589
Interest bearing deposits			153,240,495		149,704,864
Total deposits			163,122,518		158,244,453
Other borrowings			290,000		290,000
Other liabilities			710,793		955,524
Total Liabilities			164,123,311		159,489,977
Stockholders' equity:
Common Stock - $1 par value:
Authorized - 3,177,000 shares
Issued and outstanding - 2,160,620 shares			2,160,620		2,160,620
Additional paid-in capital			20,610,177		20,579,617
Accumulated deficit			(6,098,310)		(7,291,228)
Accumulated other comprehensive income			200,330		204,263
Total stockholders' equity			16,872,817		15,653,272
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY		$	180,996,128	$	175,143,249

See Accompanying Notes to Financial Statements

3

Choice Bancorp, Inc.

Consolidated Statements of Income

(Unaudited)

			For the Three Months Ended
			March 31, 2012			March 31, 2011
Interest and dividend income:
Loans, including fees		$	2,367,697		$	2,051,658
Securities - taxable			63,006			88,891
Federal funds sold			1,451			1,727
Total interest and dividend income			2,432,154			2,142,276
Interest expense:
Deposits			540,428			559,801
Borrowed funds			4,326			994
Total interest expense			544,754			560,795
Net interest income, before provision for loan losses			1,887,400			1,581,481
Provision for loan losses			300,000			300,000
Net interest income, after provision for loan losses			1,587,400			1,281,481
Non-interest income:
Service fees			78,806			44,811
Secondary market fees			126,020			35,425
Rental income			5,774			0
Gain on sale of other assets			433,802			0
Total non-interest income			644,402			80,236
Non-interest expense:
Salaries and employee benefits			631,405			535,544
Occupancy and equipment			90,387			94,328
Data processing			44,515			32,335
Professional services			67,157			80,854
Marketing			13,625			7,995
Other investment write-down			0			100,000
Other			191,795			178,428
Total non-interest expenses			1,038,884			1,029,484
Income before income taxes			1,192,918			332,233
Provision for income taxes			0			0
Net Income		$	1,192,918		$	332,233
Earnings per share - basic and diluted		$	0.55		$	0.15

See Accompanying Notes to Financial Statements

4

Choice Bancorp, Inc.

Consolidated Statements of Comprehensive Income

(Unaudited)

		For the Three Months Ended
		March 31, 2012			March 31, 2011
Net income		$	1,192,918		$	332,233
Other comprehensive income, net of tax
Unrealized losses on securities during period			(3,933)			(2,916)
Comprehensive income		$	1,188,985		$	329,317

See Accompanying Notes to Financial Statements

5

Choice Bancorp, Inc.

Consolidated Statements of Stockholders' Equity

(Unaudited)

									Accumulated
					Additional Paid				Other		Total
		Common Stock			In-Capital-			Accumulated	Comprehensive		Stockholders'
		Shares		Amount	Common Stock			Deficit	Income		Equity
Balance at January 1, 2011		2,160,620	$	2,160,620	$	20,441,866	$	(10,534,452)	$	187,411	$	12,255,445
Comprehensive income:
Net income								332,233				332,233
Unrealized loss on
securities available for sale,
net of tax										(2,916)		(2,916)
Total comprehensive
income												329,317
Options and warants
compensation expense						3,093						3,093
Balance at March 31, 2011		2,160,620	$	2,160,620	$	20,444,959	$	(10,202,219)	$	184,495	$	12,587,855
Balance at January 1, 2012		2,160,620	$	2,160,620	$	20,579,617	$	(7,291,228)	$	204,263	$	15,653,272
Comprehensive income:
Net income								1,192,918				1,192,918
Unrealized loss on
securities available for sale,
net of tax										(3,933)		(3,933)
Total comprehensive
income												1,188,985
Options and warrants
compensation expense						30,560						30,560
Balance at March 31, 2012		2,160,620	$	2,160,620	$	20,610,177	$	(6,098,310)	$	200,330	$	16,872,817

See Accompanying Notes to Financial Statements

6

Choice Bancorp, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

	For the Three Months Ended
	March 31, 2012			March 31, 2011
Cash flows from operating activities:
Net income	$	1,192,918		$	332,233
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation of premises and equipment		28,985			30,101
Provision for loan losses		300,000			300,000
Gain on sale of other real estate		(433,802)			0
Compensation expense for options		30,560			3,093
Net amortization of securities		6,648			14,366
Changes in operating assets and liabilities:
Loans held for sale		2,435,765			220,328
Other assets		477,051			164,198
Other liabilities		(242,163)			(53,548)
Net cash provided by operating activities		3,795,962			1,010,771
Cash flows from investing activities:
Purchases of securities available for sale		(4,000,000)			(753,220)
Proceeds from maturities and pre-payments
of securities available for sale		3,250,475			2,441,168
Proceeds from sale of OREO		0			850,000
Loan originations and principal collections, net		(1,405,833)			(7,239,044)
Purchases of premises and equipment		(1,214)			0
Net cash used in investing activities		(2,156,572)			(4,701,096)
Cash flows from financing activities:
Net increase (decrease) in deposits		4,878,065			(6,471,867)
Proceeds from borrowed funds		0			1,846,000
Net cash provided by (used in) financing activities		4,878,065			(4,625,867)
Net increase (decrease) in cash and cash equivalents		6,517,455			(8,316,192)
Cash and cash equivalents at beginning		1,949,825			9,091,935
Cash and cash equivalents at end	$	8,467,280		$	775,743
Supplemental cash flow information:
Cash paid during the period for interest:	$	543,780	$		564,682
Noncash investing and financing activities:
Transfer of loans to OREO	$	0		$	0
Transfer of OREO to loans	$	0		$	850,000

See Accompanying Notes to Financial Statements

7

Choice Bancorp, Inc.

Selected Notes to Interim Consolidated Financial Statements

(Unaudited)

Note 1 – Basis of Presentation

Nature of Operations    

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

The preparation of the financial statements in conformity with the above-mentioned accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities as of, and for the three-month period ended March 31, 2012. Actual results could vary from those estimates.

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

Regulatory Actions

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

At March 31, 2012, the Bank's capital ratios were above the minimum levels required by the Consent Order and the Bank believes it is in substantial compliance with the other requirements set forth in the Consent Order.

8

Note 2 – Earnings per Share

Basic earnings per share represents net income divided by the weighted average number of shares outstanding during the period.  Diluted earnings per share is calculated by dividing net income by the weighted average number of shares adjusted for the potential dilutive effect of vested stock options and organizer and shareholder warrants.  For the three-month period ending March 31, 2012, there is no dilutive effect because the average market price of $6.38 was less than the weighted average strike price of $8.57 per share for options, $10.00 per share for organizer warrants, and $12.50 per share for shareholder warrants.  For the three-month period ending March 31, 2011, there is no dilutive effect because the average market prices of $5.60 was less than the strike prices of $10 per share for options and organizer warrants and $12.50 per share for shareholder warrants.  The calculation of basic and diluted income per share is presented below:

	Three Months Ended March 31,
		2012			2011
Net income	$	1,192,918		$	332,233
Average shares outstanding		2,160,620			2,160,620
Basic and dilutive net income per share	$	0.55		$	0.15

Note 3- Comprehensive Income

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

9

Note 4- Loan Impairment and Loan Losses

Activity in the allowance for loan losses for the three-month period ending March 31, 2012 is shown in the following table:

(Dollars in thousands)		March 31, 2012

		Commercial		Real Estate		Other		Total
Allowance for loan losses:
Balance, beginning of period	$	1,288	$	2,832	$	25	$	4,145
Charge-offs		0		0		6		6
Recoveries		0		0		0		0
Provision		48		249		3		300
Balance, end of period	$	1,336	$	3,081	$	22	$	4,439
Ending Balance: Individually evaluated for impairment	$	480	$	493	$	0	$	973
Ending Balance: Collectively evaluated for impairment	$	856	$	2,588	$	22	$	3,466
(Dollars in thousands)		March 31, 2012

		Commercial		Real Estate		Other		Total
Loans evaluated for impairment:
Individually	$	4,560	$	3,486	$	-	$	8,046
Collectively		22,470		129,984		623		153,077
Total	$	27,030	$	133,470	$	623	$	161,123

10

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

(Dollars in thousands)		December 31, 2011

		Commercial		Real Estate		Other		Total
Allowance for loan losses:
Balance, beginning of period	$	1,130	$	1,904	$	12	$	3,046
Charge-offs		46		55		0		101
Recoveries		0		0		0		0
Provision		204		983		13		1,200
Balance, end of period	$	1,288	$	2,832	$	25	$	4,145
Ending Balance: Individually evaluated for impairment	$	230	$	55	$	0	$	285
Ending Balance: Collectively evaluated for impairment	$	1,058	$	2,777	$	25	$	3,860
(Dollars in thousands)		December 31, 2011

		Commercial		Real Estate		Other		Total
Loans evaluated for impairment:
Individually	$	4,492	$	2,480	$	0	$	6,972
Collectively		23,822		128,283		646		152,751
Total	$	28,314	$	130,763	$	646	$	159,723

11

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

	March 31, 2012
			Commercial
(Dollars in thousands)	Commercial		real estate		Total

Unpaid principal balance	$	4,560		$	3,486		$	8,046
Impaired loans with no allowance	$	2,382		$	1,712		$	4,094
Impaired loans with allowance		2,178			1,774			3,952
Total impaired loan balance	$	4,560		$	3,486		$	8,046
Related allowance	$	480		$	493		$	973
Average balance	$	4,377		$	3,162		$	7,539
Interest Income Recognized	$	66		$	35		$	101
	December 31, 2011
				Commercial
(Dollars in thousands)		Commercial		real estate			Total

Unpaid principal balance	$	4,492		$	2,480		$	6,972
Impaired loans with no allowance	$	2,421		$	2,374		$	4,795
Impaired loans with allowance		2,071			106			2,177
Total impaired loan balance	$	4,492		$	2,480		$	6,972
Related allowance	$	230		$	55		$	285
Average balance	$	1,510		$	1,322		$	2,832
Interest Income Recognized	$	207		$	123		$	330

The impaired loans at March 31, 2012 represent thirteen loans.  Four of the loans totaling $4,559,610 are secured by equipment and inventory.  The remaining nine loans totaling $3,485,862 are secured by real estate.  All but four impaired loans totaling $1,283,532 were performing and accruing interest at March 31, 2012.

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

A specific reserve on impaired loans of $973,000 was provided for at March 31, 2012, versus a specific reserve of $285,000 on such loans at December 31, 2011.

GAAP accounting for contingencies requires recognition of a loss and disclosure of a loss contingency if two conditions are met.  First, information available prior to the issuance of financial statements indicates that an asset has been impaired. Management and the Board of Directors recognized that the above referenced loans at March 31, 2012 were impaired.  Second, the amount of loss can be reasonably estimated. For the impaired loans at March 31, 2012, the amount of potential loss was reasonably estimated and management believed that the specific

12

reserve of $973,000 was appropriate.  The specific reserve for the impaired loans was based on the fair value of collateral.

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

		March 31, 2012

(Dollars in thousands)				Greater than		Total
		30 - 89 days		90 days and		past due and		Current		Total
		past due		nonaccruing		nonaccruing		loans		loans
Commercial	$	190	$	283	$	473	$	26,557	$	27,030
Real estate:
Commercial		457		894		1,351		67,272	$	68,623
Residential		66		107		173		42,287	$	42,460
Construction		0		0		0		14,316	`$	`  14,316
Second mortgages		0		0		0		1,987	$	1,987
Equity lines of credit		0		0		0		6,084	$	6,084
Consumer		0		0		0		623		623
Total	$	713	$	1,284	$	1,997	$	159,126	$	161,123

		December 31, 2011

(Dollars in thousands)				Greater than		Total
		30 - 89 days		90 days and		past due and		Current		Total
		past due		nonaccruing		nonaccruing		loans		loans
Commercial	$	0	$	141	$	141	$	28,173	$	28,314
Real estate:
Commercial		0		0		0		71,172	$	71,172
Residential		0		993		993		39,122	$	40,115
Construction		0		0		0		11,656	$	11,656
Second mortgages		0		0		0		1,904	$	1,904
Equity lines of credit		0		0		0		5,916	$	5,916
Consumer		0		0		0		646		646
Total	$	0	$	1,134	$	1,134	$	158,589	$	159,723

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

13

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

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

Risk Grade 1 – Superior

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

Risk Grade 2 – Minimal

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

Risk Grade 3 – Low

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

Risk Grade 4 – Modest

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

Risk Grade 5 – Average

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

Risk Grade 6 – Acceptable

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

Risk Grade 7 – Watch

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

Risk Grade 8 – Problem

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

Risk Grade 9 – Impaired

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

14

Non-Business Purpose Loans

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

Non-Performing Loans

Loans are reported as non-performing when principal or interest has been in default for a period of ninety-days or more or if the collection of interest is in question.  Both business purpose and non-business purpose loans are included in this category as appropriate.  Business purpose loans that are classified as non-performing are presented together with non-business purpose loans that are classified as non-performing, and separately from their risk-grade category.   

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

(Dollars in Thousands)
			March 31, 2012
Risk Grade			Commercial		Real Estate		Consumer		Total
Grade - 1		$	0	$	0	$	0	$	0
Grade - 2			0		1,262		0		1,262
Grade - 3			109		1,119		0		1,228
Grade - 4			4,268		4,405		0		8,673
Grade - 5			14,928		73,886		0		88,814
Grade - 6			1,626		17,153		0		18,779
Grade - 7			57		4,298		0		4,355
Grade - 8			1,482		4,442		0		5,924
Grade - 9			4,560		1,965		0		6,525
		$	27,030	$	108,530	$	0	$	135,560
Not Graded
Performing		$	0	$	24,940	$	623	$	25,563
Non-performing			0		0		0		0
		$	27,030	$	133,470	$	623	$	161,123

15

(Dollars in thousands)
		December 31, 2011
Risk Grade			Commercial		Real Estate		Consumer		Total
Grade - 1		$	0	$	0	$	0	$	0
Grade - 2			0		1,274		0		1,274
Grade - 3			99		1,062		0		1,161
Grade - 4			5,657		2,584		0		8,241
Grade - 5			14,953		79,213		0		94,166
Grade - 6			1,563		14,893		0		16,456
Grade - 7			0		0		0		0
Grade - 8			6,042		8,347		0		14,389
		$	28,314	$	107,373	$	0	$	135,687
Not Graded
Performing		$	0	$	22,397	$	646	$	23,043
Non-performing			0		993		0		993
		$	28,314	$	130,763	$	646	$	159,723

The following is a summary of information pertaining to loans that have been modified during the three month period ended March 31, 2012:

		Troubled Debt Restructuring
		For the Three Month Period Ended March 31, 2012
		Number		Pre-Modification		Post-Modification		March 31, 2012		Related
		of Loans		Balance		Balance		Balance		Allowance
Real Estate		1	$	375,872	$	375,872	$	375,872	$	19
		1	$	375,872	$	375,872	$	375,872	$	19

The loan modification included reduction of the contractual interest rate on one commercial real estate loan.  The risk rating on the modified loan remained unchanged after modification.  The related allowance for loan loss for modified loans is consistent with the classification of pooled loans in the above table.

Note 5- Commitments and Contingencies

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

16

and unfunded commitments of approximately $0.8 million and $19.3 million, respectively.  At December 31, 2011, the Company had commitments to extend credit and unfunded commitments of approximately $0.1 million and $18.6 million, respectively.

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

Note 6 – Share-based Compensation

The Choice Bank 2006 Stock Incentive Plan was approved by shareholders on July 11, 2006 and assumed by the Company on the Reorganization Date.  The Board of Directors reserved 360,000 shares of Company stock for use as option awards to officers and directors under the Plan.  As of March 31, 2012, 219,000 option awards have been granted to Company directors and employees including 100,833 options that have fully vested and 118,167 in non-vested options.  The options vest ratably over an average vesting period of 2.4 years, and have a 7.6 year average life from the date of issuance.

During the first quarter of 2012, 10,000 options were issued, none of which were vested as of March 31, 2012.  As of March 31, 2012, 141,000 options remain available for future grants.

The fair value of stock options granted is estimated on the date of grant using a Black-Scholes option pricing model. The fair values of stock grants are amortized as compensation expense on a straight-line basis over the vesting period of the grants. Compensation expense recognized for the three-month period ended March 31, 2012 totaled $30,560 and is included in personnel expense in the statement of income for the period.

Assumptions are used in estimating the fair value of stock options granted.  The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant.  The expected volatility is based on the historical volatility of the Bank’s or the Company’s stock as applicable.  The weighted average assumptions utilized for options granted during the three month period ended March 31, 2012 are as follows:  

		Weighted Ave
Fair Value		$	3.38
Stock price		$	6.65
Option strike price		$	8.63
Maturity			7.0
Risk-free interest rate			1.51%
Volatility			55.72%

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

17

purchase Bank stock were converted into warrants to purchase Company stock at the same price.  As of March 31, 2012, 620 shareholder warrants had been exercised and 431,370 shareholder warrants remained outstanding.

The Bank’s organizers advanced funds and guaranteed loans for organizational and other pre-opening expenses. As consideration for the financial risk assumed, the organizers received warrants to purchase one share of common stock for every $10 placed at risk, up to a maximum of 11,250 warrants per organizer (“organizer warrants”).  A total of 213,750 organizer warrants have been issued. The organizer warrants are exercisable at a price of $10.00 per share at any time until July 24, 2016. The organizer warrants were accounted for in accordance with the fair value method and recognized as stock compensation included in start-up expenses at July 24, 2006. As part of the Reorganization Transaction, organizer warrants to purchase Company stock were converted into warrants to purchase Bank stock at the same price.  None of the organizer warrants had been exercised as of March 31, 2012.

Note 7 - Income Taxes

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

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

The Company’s net deferred tax asset, resulting largely from its net operating loss carryforwards, was $2,226,526 as of March 31, 2012.  All available evidence, both positive and negative, was considered to determine whether, based on the weight of that evidence, impairment should be recognized.  Based on management’s consideration of the available evidence including historical losses which must be treated as substantial negative evidence and an uncertain economy and the potential effect on the Company’s asset quality, a valuation allowance for the entire amount of the deferred tax asset was established in 2010.  A $1,200,000 partial reversal of the valuation allowance was recognized at December 31, 2011 based on an evaluation of the ability of the Company to recognize its net deferred assets.  The valuation allowance remained at $1,026,526 at March 31, 2012.

Note 8 – New Authoritative Accounting Guidance

ASU No. 2011-02, “Receivables (Topic 310) - A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring.” ASU 2011-02 clarifies which loan modifications constitute troubled debt restructurings and is intended to assist creditors in determining whether a modification of the terms of a receivable meets the criteria to be considered a troubled debt restructuring, both for purposes of recording an impairment loss and for disclosure of troubled debt restructurings. In evaluating whether a restructuring constitutes a troubled debt restructuring, a creditor must separately conclude, under the guidance clarified by ASU 2011-02, that both of the following exist: (a) the restructuring constitutes a concession; and (b) the debtor is experiencing financial difficulties. ASU 2011-02 became effective for the Company on July 1, 2011, and applies retrospectively to restructurings occurring on or after January 1, 2011.  The

18

adoption of this guidance did not have any impact on the Company’s consolidated statement of income, its consolidated balance sheet, or its consolidated statement of cash flows.

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

ASU 2011-04, “Fair Value Measurement (Topic 820) - Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in U.S. GAAP and IFRSs.” ASU 2011-04 amends Topic 820, “Fair Value Measurements and Disclosures,” to converge the fair value measurement guidance in U.S. generally accepted accounting principles and International Financial Reporting Standards. ASU 2011-04 clarifies the application of existing fair value measurement requirements, changes certain principles in Topic 820 and requires additional fair value disclosures. ASU 2011-04 is effective for annual periods beginning after December 15, 2011, and is not expected to have a significant impact on the Company’s financial statements.

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

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

Note 9 – Fair Value Measurement

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

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

·

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

·

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

·

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

Some assets and liabilities, such as securities available for sale, are measured at fair value on a recurring basis under accounting principles generally accepted in the United States. Other assets and liabilities, such as impaired loans, are measured at fair value on a non-recurring basis.

Following is a description of the valuation methodology used for each asset and liability measured at fair value on a recurring or non-recurring basis, as well as the classification of the asset or liability within the fair value hierarchy.

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

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

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

Other real estate owned - Real estate and other property acquired through or in lieu of loan foreclosure are not measured at fair value on a recurring basis.  However, foreclosed assets are initially measured at fair value (less estimated costs to sell) when they are acquired and may also be measured at fair value (less estimated costs to sell) if they become subsequently impaired.  The fair value measurement for each asset may be obtained from an independent firm or prepared internally.  Fair value measurements obtained from independent firms are generally based on sales of comparable assets and other observable market data and are considered Level 2 measurements.  Fair value measurements prepared internally are based on observable

20

market data but include significant unobservable data and are therefore considered Level 3 measurements.

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

		Assets measured on a recurring basis at:
		March 31, 2012
				Fair Value Measurements Using
Description		Fair Value		Level 1		Level 2		Level 3
Securities available for sale	$	9,955,041	$	0	$	9,955,041	$	0
Loans held for sale		1,027,735		1,027,735		0		0
	$	10,982,776	$	1,027,735	$	9,955,041	$	0
		Assets measured on a recurring basis at:
		December 31, 2011
				Fair Value Measurements Using
Description		Fair Value		Level 1		Level 2		Level 3
Securities available for sale	$	9,218,665	$	0	$	9,218,665	$	0
Loans held for sale		3,463,500		3,463,500		0		0
	$	12,682,165	$	3,463,500	$	9,218,665	$	0

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

		Assets measured on a non-recurring basis at:
		March 31, 2012
				Fair Value Measurements Using
Description		Fair Value		Level 1		Level 2		Level 3
Impaired Loans		$  2,978,935		$                  0		$  2,978,935		$                  0
Other real estate owned		1,020,000		0		1,020,000		0
		$  3,998,935		$                  0		$  3,998,935		$                  0
		Assets measured on a non-recurring basis at:
		December 31, 2011
				Fair Value Measurements Using
Description		Fair Value		Level 1		Level 2		Level 3
Impaired Loans		$  1,892,440		$                  0		$  1,892,440		$                  0
Other real estate owned		1,020,000		0		1,020,000		0
		$  2,912,440		$                  0		$  2,912,440		$                  0

Impaired loans with a carrying amount of $3,951,960 at March 31, 2012 were determined to have a fair value of $2,978,935 based on the fair value of the collateral securing the loans.  As a result, the Company allocated specific reserves in the amount of $973,025 for impaired loans at March 31, 2012.  Impaired loans with a carrying amount of $2,177,440 at December 31, 2011 were determined to have a fair value of $1,892,440 based on the fair value of the collateral securing the loans.  As a result, the Company allocated specific reserves in the amount of $285,000 for impaired loans as of December 31, 2011.

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

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

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

22

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

Cash and cash equivalents – Fair value approximates the carrying value

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

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

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

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

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

		March 31, 2012										December 31, 2011
(In thousands)		Carrying		Estimated Fair Value								Carrying		Estimated
		Value		Total		Level 1		Level 2		Level 3		Value		Fair Value
Financial Assets
Cash and cash equivalents	$	8,467	$	8,467	$	8,467	$	0	$	0	$	1,950	$	1,950
Securities available for sale		9,955		9,955		0		9,955		0		9,219		9,219
Loans held for sale		1,028		1,028		1,028		0		0		3,463		3,463
Loans, net		156,683		160,161		0		2,979		157,182		155,578		159,450
Accrued interest receivable		594		594		594		0		0		593		594
Total financial assets	$	176,727	$	180,205	$	10,089	$	12,934	$	157,182	$	170,803	$	174,676
Financial Liabilities
Deposits	$	163,123	$	164,865	$	61,109	$	0	$	103,756	$	158,245	$	158,770
Other borrowings		290		290		290		0		0		290		290
Accrued interest payable		169		169		169		0		0		168		168
Total financial liabilities	$	163,582	$	165,324	$	61,568	$	0	$	103,756	$	158,703	$	159,228

Limitations – The fair value of a financial instrument is the current amount that would be exchanged between willing parties, other than in a forced liquidation. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation

23

techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. Consequently, the aggregate fair value amounts presented may not necessarily represent fair value of the Company.

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

Management has reviewed the Company’s operations for potential disclosure of information or financial statement impacts related to events occurring after March 31, 2012, but prior to the release of these financial statements.  Based on the results of this review, Management has determined that no subsequent event disclosures are required as of the release date.

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

Forward Looking Statements

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

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

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

The Reorganization

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

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

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

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

Regulatory Considerations

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

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Critical Accounting Policies

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

Income Taxes

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

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

Allowance for Loan Losses

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

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

26

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

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

Other factors considered in the analysis of General Reserves include:

·

Annual loan review performed by the Company’s Risk Management Officer;

·

Changes in the national and local economy and business conditions, including underwriting standards, collections, charge off and recovery practices;

·

The asset quality of individual loans;

·

Changes in the nature and volume of the loan portfolio;

·

Changes in the experience, ability and depth of the Company’s lending staff and management;

·

Possible deterioration in collateral segments or other portfolio concentrations;

·

Changes in the quality of the Company’s loan review system and the degree of oversight by its board of directors;

·

The effect of external factors such as competition and the legal and regulatory requirement on the level of estimated credit losses in the Company’s current loan portfolio; and

·

Off-balance sheet credit risks.

The factors cited above have been, and will continue to be, evaluated at least quarterly. Changes in the asset quality of individual loans will be evaluated more frequently as needed.  Following guidelines established by the FDIC and the Wisconsin Department of Financial Institutions (“DFI”), the Company has established minimum General Reserves based on the asset quality of the loan.  General Reserve factors applied to each type of loan are based upon management’s experience and common industry and regulatory guidelines.  After a loan is underwritten and booked, loans are monitored or reviewed by the account officer, management, and external loan review personnel during the life of the loan.  Payment performance is monitored monthly for the entire loan portfolio.  Account officers contact customers in the ordinary course of business and may be able to ascertain if weaknesses are developing with the borrower. External loan personnel perform an independent review annually, and federal and state banking regulators perform periodic reviews of the loan portfolio.  If weaknesses develop in an individual loan relationship and are detected, the loan will be downgraded and higher reserves will be assigned based upon management’s assessment of the weaknesses in the loan that may affect full collection of the debt.  If a loan does not appear to be fully collectible as to principal and interest, the loan will be recorded as a non-accruing loan and further accrual of interest will be discontinued while previously accrued but uncollected interest is reversed against income.  If a loan will not be collected in full, the allowance for loan losses is increased to reflect management’s estimate of potential exposure of loss.

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

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Management’s Discussion & Analysis

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

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

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

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

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

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

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

July 2006 thru December 2009							March 2010 thru March 2012
Date		Total Assets		% Growth			Date		Total Assets		% Growth
Jul-06	$	20,824,545					Mar-10	$	122,940,295			2%
Sep-06	$	26,737,176		28%			Jun-10	$	147,394,234			20%
Dec-06	$	32,600,536		22%			Sep-10	$	161,221,291			9%
Mar-07	$	39,447,477		21%			Dec-10	$	163,697,874			2%
Jun-07	$	44,966,989		14%			Mar-11	$	159,438,965			-3%	[1]
Sep-07	$	58,190,302		29%			Jun-11	$	167,825,844			5%	[1]
Dec-07	$	71,851,968		23%			Sep-11	$	175,169,581			4%	[1]
Mar-08	$	86,699,212		21%			Dec-11	$	175,143,249			0%	[1]
Jun-08	$	92,258,664		6%			Mar-12	$	180,996,128			3%	[1]
Sep-08	$	105,211,742		14%
Dec-08	$	119,041,620		13%
Mar-09	$	121,815,492		2%
Jun-09	$	121,626,414		0%
Sep-09	$	118,964,450		-2%
Dec-09	$	120,807,482		2%

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

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

29

commercial lending officer with established ties to the Oshkosh community.  This addition had an immediate impact, enabling the Bank to increase total loans by about $32.2 million during the last three quarters of 2010.  Total asset growth for 2010 and 2011 was $42.9 million or 35.5%, and $11.4 million or 7.0%, respectively.  Management has implemented a measured growth strategy for 2012 in accordance with the Company’s capital management guidelines.  Total asset growth is $5.9 million or 3.3% for the three-month period ended March 31, 2012.

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

Ø

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

Ø

Attracting primarily local deposits;

Ø

Maintaining loan growth without sacrificing credit quality; and

Ø

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

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

Allowance for Loan Losses and Provision for Loan Losses

The provision for loan losses charged to earnings for each of the three-month periods ended March 31, 2012 and March 31, 2011 was $300,000.  As of March 31, 2012, the loan portfolio increased $1.4 million or 0.9% compared to the loan portfolio balance as of December 31, 2011.  The provision for loan losses for the three-month period ended March 31, 2012 is supported by Management’s ongoing assessment of risk associated with the current loan portfolio.

A summary of past due and non-accruing loans as of March 31, 2012 is reported in the table below:

									Over 90 days
									and
Past Due Loans		30 - 59 days			60 - 89 days			nonaccruing			Total
Principal balance		$	370,829		$	342,288		$	1,283,532		$	1,996,649
Number of loans			4			1			4			9
% of Gross Loans			0.23%			0.21%			0.80%			1.24%

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

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For the quarter ended March 31, 2012, interest payments of $6,234 were received on loans classified as non-accrual.  The amount of additional interest that would have been recorded as interest income had the non-accrual loans been current during the quarter ended March 31, 2012 is approximately $6,674.

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

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

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

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Financial Condition

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

During the three-months ended March 31, 2012, total assets increased by $5.9 million or approximately 3.3%.  Cash and cash equivalents increased $6.5 million, including a $0.3 million increase in cash balances and a $6.2 million increase in federal funds sold as compared to balances held at December 31, 2011.  Net loans increased $1.1 million, or 0.71% compared to year-end 2011.  Loans held for sale declined $2.4 million during the three-months ended March 31, 2012, primarily due to the slowdown in mortgage financing activity experienced at the end of the first quarter of 2012.

For the three months ended March 31, 2012, total deposits increased $4.9 million, or 3.1%, as compared to balances held at December 31, 2011.

The composition of the balance sheet has changed to include 10.2% liquid assets, (cash and cash equivalents and securities), compared to 6.4% as of December 31, 2011.  Management increased short-term liquidity to bolster the Company’s ability to meet potential funding needs under unforeseen market conditions.  The effort to bolster the Company’s liquidity position also included the containment of loan growth during the first quarter 2012.  Loans represent 86.5% of total assets as of March 31, 2012, down from 88.8% of total assets as of December 31, 2011.

			March 31, 2012		December 31, 2011

Assets		Dollar Amount			%		Dollar Amount			%
Cash and cash equivalents		$	8,467,280		4.7%		$	1,949,825		1.1%
Securities available for sale			9,955,041		5.5%			9,218,665		5.3%
Loans held for sale			1,027,735		0.5%			3,463,500		2.0%
Loans			156,683,397		86.5%			155,577,564		88.8%
Premises and equipment, net			1,463,218		0.8%			1,490,989		0.8%
Other real estate owned			1,020,000		0.6%			1,020,000		0.6%
Deferred tax asset			1,200,000		0.7%			1,200,000		0.7%
Prepaid FDIC premium			63,089		0.1%			125,867		0.1%
Other assets			1,116,368		0.6%			1,096,839		0.6%
Total assets		$	180,996,128		100.0%		$	175,143,249		100.0%
Liabilities and Equity
Deposits		$	163,122,518		90.1%		$	158,244,453		90.4%
Other liabilities			1,000,793		0.6%			1,245,524		0.7%
Stockholders' equity			16,872,817		9.3%			15,653,272		8.9%
Total liabilities and equity		$	180,996,128		100.0%		$	175,143,249		100.0%

32

Loans

As shown in the table below, gross loans increased $1.4 million from December 31, 2011 to March 31, 2012.  The primary source for new loans has been the real estate construction and development and the residential real estate market segments.  The commercial and commercial real estate segments declined due to the planned reduction of credit concentrations.   The Company intends to continue to pursue loan opportunities when it is able to do so without sacrificing prudent underwriting standards.

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

	March 31, 2012			%		December 31, 2011			%
Commercial	$	27,029,969		16.8%		$	28,313,560		17.7%
Real estate:
Commercial		68,622,951		42.6%			71,171,639		44.6%
Residential		42,459,355		26.3%			40,115,377		25.1%
Construction & Development		14,316,142		8.9%			11,655,897		7.3%
Second Mortgages		1,987,346		1.2%			1,904,291		1.2%
Equity lines of credit		6,084,176		3.8%			5,915,822		3.7%
Consumer		622,838		0.4%			646,033		0.4%
Subtotals		161,122,777		100.0%			159,722,619		100.0%
Allowance for loan losses		4,439,380					4,145,055
Loans, net	$	156,683,397				$	155,577,564

As of March 31, 2012, approximately 43% of loans were made to finance commercial real estate, approximately 17% of loans were made to finance commercial enterprises, and approximately 26% of loans were made to finance residential property.  There were no other loan categories that exceeded 10% of total loans as of March 31, 2012.   

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Investments

The estimated fair market value of the investment portfolio as of March 31, 2012 was $9,955,041 including a pre-tax unrealized gain of $331,124.  As of December 31, 2011, estimated fair market value was $9,218,665 including pre-tax unrealized gain of $337,626.  There were no significant pre-tax unrealized losses at March 31, 2012 or December 31, 2011.

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

 

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

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

(In thousands)	Amount			Yield			Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield
At March 31, 2012:
US Agency Securities	$	1,999		0.20%		$	0		0.00%		$	2,000		1.32%		$	0		0.00%		$	3,999		0.76%
Municipal Securities		1,820		3.04%			2,801		4.93%			0		0.00%			0		0.00%			4,621		4.18%
Mortgage Backed Securities		280		3.92%			1,055		4.85%			0		0.00%			0		0.00%			1,335		4.66%
Total	$	4,099		1.72%		$	3,856		4.90%		$	2,000		1.32%		$	0		0.00%		$	9,955		2.87%

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

(In thousands)		Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield
At December 31, 2011:
US Agency Securities	$	482		3.91%		$	0		0.00%		$	2,003		1.32%		$	501		1.01%		$	2,986		1.69%
Municipal Securities		2,323		3.52%			2,803		4.92%			0		0.00%			0		0.00%			5,126		4.29%
Mortgage Backed Securities		0		0.00%			1,107		4.85%			0		0.00%			0		0.00%			1,107		4.85%
Total	$	2,805		3.58%		$	3,910		4.90%		$	2,003		1.32%		$	501		1.01%		$	9,219		3.51%

34

Deposits

During the three-month period ended March 31, 2012, deposits increased $4.9 million or 3.1%, compared to December 31, 2011.

Noninterest-bearing deposits increased $1.3 million, or 15.7%, during the first three months of 2012.  Management believes that some of this increase may be temporary as deposit customers evaluate other investment options.

Interest-bearing deposits increased by $3.5 million, or 2.4%, during the three-month period ended March 31, 2012.  Certificates of deposit balances increased $7.6 million, or 7.9%, offset by a $4.1 million, or 8.8% decrease in money market accounts during this period.  Interest bearing checking and savings balances remained relatively stable for the three months ended March 31, 2012.

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

The $7.6 million increase in certificates of deposit during the first three months of 2012 includes $4.3 million of term deposits having maturities beyond three years.  Management targeted long-term funding to help reduce interest rate risk within the balance sheet.  Management monitors funding to ensure compliance with the Company’s Asset and Liability Management Policy.

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

		March 31, 2012								December 31, 2011
Deposits			Dollars-$			%				Dollars-$				%
Non interest-bearing deposits			$	9,882,023			6.0%				$	8,539,589			5.4%
Interest-bearing demand				3,682,260			2.3%					3,737,126			2.4%
Money market accounts				42,364,650			26.0%					46,432,343			29.3%
Savings accounts				3,570,925			2.2%					3,484,348			2.2%
Certificates of deposit less than $100,000				67,343,056			41.3%					60,618,445			38.3%
Certificates of deposit $100,000 and greater				36,279,604			22.2%					35,432,602			22.4%
			$	163,122,518			100.0%				$	158,244,453			100.0%

The following table shows a breakdown by dollar amount and maturity of certificates of deposit as of March 31, 2012.

			Certificates			Certificates
			of Deposit			of Deposit
			Less Than			$100,000
			$100,000			and Greater			Total
Due three months or less		$	8,226,429		$	6,119,450		$	14,345,879
Due more than three months to six months			5,463,689			4,509,445			9,973,134
More than six months to one year			9,774,312			8,724,219			18,498,531
Over one year			43,878,626			16,926,490			60,805,116
		$	67,343,056		$	36,279,604		$	103,622,660

35

Income Taxes

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

The Company’s net deferred tax asset, resulting largely from its net operating loss carryforwards, was $2,226,526 as of March 31, 2012.  All available evidence, both positive and negative, was considered to determine whether, based on the weight of that evidence, impairment should be recognized.  Based on management’s consideration of the available evidence including historical losses which must be treated as substantial negative evidence and an uncertain economy and the potential effect on the Company’s asset quality, a valuation allowance for the entire amount of the deferred tax asset was established in 2010.  A $1,200,000 partial reversal of the valuation allowance was recognized at December 31, 2011 based on an evaluation of the ability of the Company to recognize its net deferred assets.  The valuation allowance remained at $1,026,526 at March 31, 2012.

Liquidity and Sensitivity

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

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

The Company’s primary potential source of funds on a short-term basis is access to overnight lines of credit established with two correspondent banks.  As of March 31, 2012, the Bank had access to a $10.8 million line of credit (of which $5.1 million is unsecured) at Banker’s Bank, Madison and $3.0 million (unsecured) at BMO Harris Bank, Milwaukee.  Nothing was drawn on either line of credit at March 31, 2012, nor did the Company draw funds against either line of credit at any time during the quarter.

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

The Company also has approximately $4.0 million of deposits in the CDARs Reciprocal Program. Those are local deposits transferred to other institutions to ensure complete FDIC insurance coverage, with an equal amount transferred to the Company from other financial institutions participating in the program. This program allows the Company to retain local deposits in excess of the FDIC insurance amount, while providing full insurance coverage to its customers.

All deposits obtained through third-party deposit brokers or through the CDARS program are reported as brokered deposits in the Company’s financial reports.  The Company’s Asset-Liability Management Policy allows a maximum ratio of 20% brokered deposits to total deposits.  As of March 31, 2012 the percentage of brokered deposits to total deposits was 16.3%.

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

36

declining rate environment. The theoretical advantage is mitigated by the fact that borrowers refinance loans as rates decline, and certificate of deposit holders move to higher yielding CDs in a rising rate environment. The gap analysis is a tool that assists the ALCO in monitoring maturities and setting loan and deposit rates. As of March 31, 2012, the Company is liability sensitive, meaning that it is better positioned in a declining interest rate environment.  Management has focused attention on reducing short-term sensitivity to rising interest rates by implementing strategies to extend deposit maturities and securing match-funding for larger credits.  Management will continue to manage assets and liabilities to minimize interest rate risk to the balance sheet.

Capital Resources

Management monitors the Company’s and the Bank’s capital levels and has not identified significant capital expenditure needs that would have an impact on capital requirements at this time.  As of March 31, 2012, the Bank’s Tier 1 risk-weighted capital ratio, total risk-weighted capital, and Tier 1 leverage ratio were in excess of regulatory minimums and the Bank was classified as “adequately capitalized”.  The Bank does not anticipate changes in the mix and relative costs of capital at this time.

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

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

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

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

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

50%, which includes 1 to 4 family residential mortgages

100%, which includes any assets not designated elsewhere

As of March 31, 2012, the most recent notification from the FDIC categorized the Bank as adequately capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table below and not be subject to any written regulatory order, capital directives or prompt corrective action directives issued by its bank regulator.

As part of the Consent Order, the Bank is required to maintain a Tier 1 Leverage Capital ratio of at least 9 percent of total assets and a Total Risk-Based Capital ratio level of at least 12 percent.  At March 31, 2012, the Bank was in compliance with these directives, with a Tier 1 Leverage Capital ratio of 9.52% and a Total Risk-Based Capital ratio of 13.52%.  The Bank continues to pursue strategies to enhance its capital position to remain in compliance with the levels established pursuant to the initiative indicated above.

37

															To Be Well Capitalized
									For Capital						Under Prompt Corrective
Choice Bank	Actual								Adequacy Purposes						Action Provisions
	Amount				Ratio				Amount			Ratio			Amount		Ratio
	(In Thousands)
As of March 31, 2012
Total Risk-based Capital (to risk-
weighted assets)	$	18,667				13.52%				$	11,042		≥  8.00%		$	13,802		≥  10.00%
Tier 1 Capital (to risk-
weighted assets)	$	16,908				12.25%				$	5,521		≥  4.00%		$	8,281		≥    6.00%
Tier 1 Capital (to average
assets)	$	16,908				9.52%				$	7,107		≥  4.00%		$	8,884		≥    5.00%
As of December 31, 2011
Total Risk-based Capital (to risk-
weighted assets)	$	17,421				12.61%				$	11,055		≥  8.00%		$	13,818		≥  10.00%
Tier 1 Capital (to risk-
weighted assets)	$	15,662				11.33%				$	5,527		≥  4.00%		$	8,291		≥    6.00%
Tier 1 Capital (to average
assets)	$	15,662				8.87%				$	7,064		≥  4.00%		$	8,830		≥    5.00%

38

Results of Operations

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

	Three months ended March 31
	2012			2011
Net interest income	$	1,887,400		$	1,581,481
Provision for loan loss		300,000			300,000
Non-interest income		644,402			80,236
Non-interest expense		1,038,884			1,029,484
		1,192,918			332,233
Income taxes		0			0
Net income	$	1,192,918		$	332,233
Financial Ratios:
Return on average equity		29.68%			10.73%
Return on average assets		2.69%			0.83%
Average equity to average assets		9.07%			7.74%

Net income for the quarter ended March 31, 2012, was $1,192,918, an increase of $860,685 from net income of $332,233 for the corresponding period in 2011.  This increase was primarily attributable to a $433,802 gain on sale of other assets, an increase of $305,919 in net interest income and an increase in mortgage fee income of $90,595.

The Company did not report federal and state income tax expense for the three months periods ended March 31, for 2012 and 2011 due to the offset of the deferred tax valuation allowance.

Net Interest Income

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

Net interest income for the quarter ended March 31, 2012 was $1,887,400, an increase of $305,919, compared to $1,581,481 for the quarter ended March 31, 2011.  Management has managed the earning assets and interest-bearing liabilities to increase net interest performance under a prevailing low rate environment.

39

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

		Comparison 3-Months Ended
		March 31, 2012 versus 2011
		Increase (Decrease)
		Due to Change In
(In thousands)		Average		Average		Total
		Balance		Rate		Change
Interest income:
Investment securities		(17)		(9)		(26)
Federal Funds sold		0		0		0
Loans		270		46		316
Total interest income		253		37		290
Interest expense:
Interest-bearing demand		(14)		(25)		(39)
Savings deposits		0		0		0
Certificates of deposit		93		(73)		20
Borrowed funds		0		4		4
				0
Total interest expense		79		(94)		(15)
Net interest income		174		131		305

The increase in net interest income for the three-month period ended March 31, 2012 relative to the comparable period in 2011 is due to the combination of growth in earning assets and the increase in net interest spread.  Average earning assets held during the first quarter of 2012 were $16.0 million greater than the average earning assets held during the first quarter of 2011.  The growth in earning assets generated $252,667 in additional interest income and provided a $174,142 increase to net interest income when offset by a $78,525 increase in interest expense resulting from the growth in deposit balances.  The increase in net interest spread between the three-month-periods ended March 31, 2012 and 2011 generated additional net interest income of $131,777 million for the first quarter 2012.  The net interest spread for the first quarter 2012 was 4.13% compared to net interest spread of 3.83% for the first quarter 2011.

The improvement in net interest spread for the three-month period ended March 31, 2012 is attributed to a rise in yield on earning assets combined with a reduction in the cost of funds.  The rise in yield on earning assets during the current period enabled the Company to generate additional net interest income of $37,211 for the first quarter.  The reduction in cost of funds during the current period enabled the Company to generate additional net interest income of $94,566 for the first quarter.

The Company’s average interest-earning assets of $175.6 million for the first quarter of 2012 yielded an average return of 5.57% compared to average interest-earning assets of $159.6 million and a 5.45% average return for the first quarter of 2011.

Interest-bearing liabilities averaged $151.9 million for the first quarter of 2012 and posted an average interest rate of 1.44%.  The average balance and average interest rate paid on interest-bearing liabilities were $140.7 million and 1.62%, respectively, for the first quarter of 2011.

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Provision for Loan Losses

A $300,000 provision for loan loss was charged to earnings for the first quarter of 2012 and the first quarter 2011.  Provision expense is determined based on management’s ongoing assessment of risk associated with the loan portfolio.

Non-Interest Income

The following table reflects the various components of non-interest income for the three-month periods ending March 31, 2012 and 2011, respectively:

		Three months ended
Non-interest income		March 31, 2012			March 31, 2011		% Change
Loan document preparation fees	$	39,439		$	13,838		185.0%
Other customer service fees		39,367			30,973		27.1%
Total customer service fees		78,806			44,811		75.9%
Secondary market fees		126,020			35,425		255.7%
Rental income on other real estate		5,774			0		100.0%
Gain on sale of other assets		433,802			0		100.0%
Total non-interest income	$	644,402		$	80,236		703.1%

Non-interest income increased $564,166, or 703.1%, for the three months ended March 31, 2012 versus the comparable period in 2011.

A gain on sale of other real estate had the most notable impact on non-interest income for the quarter ended March 31, 2012.  The $433,802 gain included a $400,000 gain recognized on the sale of a residential property and a $33,802 gain on the sale of a commercial real estate property.

An increase of $90,595 in secondary market fees and an increase of $25,601 in loan document preparation fees are attributed to higher levels of mortgage financing activity for the first quarter 2012 relative to the same period in 2011.

Rental income on other real estate was $5,774 for the three months ended March 31, 2012 compared to no reported rental income for the three months ended March 31, 2011.  The Company did not own rental properties during the first quarter of 2011.

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Non-Interest Expense

The following table reflects the various components of non-interest expense for the three-month periods ended March 31, 2012 and 2011, respectively.

		Three months ended
Non-interest expense		March 31, 2012			March 31, 2011			% Change
Salaries and benefits		$	631,405		$	535,544		17.9%
Occupancy and equipment			90,387			94,328		-4.2%
Data processing			44,515			32,335		37.7%
Marketing			13,625			7,995		70.4%
Legal fees			15,762			19,262		-18.2%
Professional fees			51,395			61,592		-16.6%
FDIC Premium			65,419			84,358		-22.5%
Director Fees			18,750			18,750		0.0%
Other investment write-down			0			100,000		N/A
Other operating expenses			107,626			75,320		42.9%
		$	1,038,884		$	1,029,484		0.9%

Non-interest expense increased $9,400, or 0.9%, for the three months ended March 31, 2012 versus the comparable period in 2011.

For the three-months ended March 31, 2012, salaries and benefits increased $95,861 relative to the same period for 2011.  The increase in salaries and benefits expense is attributed to staff expansion for the first quarter 2012 relative to the comparable period in 2011.

Data processing expense increased $12,180 for the three months ended March 31, 2012 relative to the same period for 2011 due to continued growth in number of customer accounts and volume of banking transactions.

Marketing expense increased $5,630 for the three months ended March 31, 2012 relative to the same period for 2011 and is attributed to additional community support initiatives undertaken during the first quarter 2012.

Professional fees decreased $10,197 for the three months ended March 31, 2012 compared to the first quarter in 2011.  Professional fees for 2011 included expense associated with the conversion of bank stock to holding company stock that occurred last year.

FDIC premium expense decreased $18,939 for the three months ended March 31, 2012 relative to the same period for 2011.  The first quarter 2011 expense included an adjustment to reflect a rise in the Company’s assessment rate.

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

An increase of $32,306 for other operating expenses for the first three months ended March 31, 2012 compared to the first quarter in 2011 is primarily attributed to expense to maintain other real estate owned.

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Income Tax Expense

The Company did not report federal and state income tax expense during the three months ended March 31, 2012 or March 31, 2011 due to the offset of the deferred tax valuation allowance.

Off-Balance Sheet Arrangements

The Company has no material off-balance sheet arrangements, other than through the Company’s commitments to extend credit and unfunded commitments.  At March 31, 2012, the Company had commitments to extend credit and unfunded commitments of approximately $0.8 million and $19.3 million, respectively.   

ITEM 3. Quantitative and Qualitative Disclosures about Market Risk

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

ITEM 4. Controls and Procedures

As of the end of the period covered by this quarterly report on Form 10-Q for the quarter ended March 31, 2012, the Company carried out an evaluation, under the supervision and with the participation of its management, including its chief executive officer and chief financial officer, of the effectiveness of the design and operation of its “disclosure controls and procedures,” as such term is defined under Exchange Act Rule 13a-15(e) and 15d-15(e).

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

As reported in the Company's Annual Report on Form 10-K for the year ended December 31, 2011 (the "2011 Form 10-K"), the Chief Executive Officer and Chief Financial Officer identified a material weakness as of December 31, 2011 in the Company's internal controls over its financial reporting processes. The material weakness related to the failure of the Company's internal controls to provide a proper and timely review and reporting of the Company's asset necessary for the Board of Directors to evaluate and establish an adequate allowance and make adequate provision for inherent and identified losses. In the 2011 Form 10-K the Company reported that it engaged an outside professional consultant to conduct a review of the Company's system of internal controls and procedures and assist management in making any changes appropriate to remedy the material weakness and any other deficiencies and to improve the design of such system to assure the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. There were no changes in the Company’s internal controls over financial reporting during the quarter ended March 31, 2012 that materially affected, or were reasonably likely to materially affect, its internal controls over financial reporting.  As of the date of this Report, management believes that the

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material weakness identified in the 2011 Form 10-K continues to exist, although the Company continues to pursue the steps noted above, including engagement of an outside consulting firm, to assist the Company in remediating the identified weakness and improving the design of its system of internal controls and procedures.  Management expects that the material weakness will be substantially remediated prior to the end of 2012, although there can be no assurance that management will be successful in such remedial efforts by that date, or at all.

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PART II OTHER INFORMATION

ITEM 1. Legal Proceedings

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

ITEM 1A. Risk Factors

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

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

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

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

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

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

ITEM 3. Default Upon Senior Securities

Not applicable.

ITEM 4. Mine Safety Disclosures

Not applicable.

ITEM 5. Other Information

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

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

ITEM 6. Exhibits

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

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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.

			CHOICE BANCORP, INC.
Date:	May 15, 2012		/s/ J. Scott Sitter
			J. Scott Sitter
			President and Chief Executive Officer (Principal Executive Officer)
Date:	May  15, 2012		/s/ John F. Glynn
			John F. Glynn
			Chief Financial Officer (Principal Accounting Officer)

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