The following presents management's discussion and analysis of the consolidated financial condition of the Company as of March 31, 2012 and December 31, 2011 and results of operations for the three month periods ended March 31, 2012 and March 31, 2011. This discussion should be read in conjunction with the Company's consolidated condensed financial statements and the related notes appearing elsewhere in this report and the Company's Annual Report on Form 10-K for the year ended December 31, 2011.

Executive Overview

Net income for the first quarter of 2012 was $1.1 million compared to $782,643 for the first quarter of 2011. This $305,337, or 39.0%, increase in net income is the result of a decrease in provision expense and an increase in noninterest income. Offsetting the increases in net income was a decrease in net interest income and an increase in noninterest expenses. The decrease in provision expense was driven by a decrease in net charge-offs, a slight reduction in our impaired loans, and a decrease in the specific reserves on individual notes per ASC 310-10. The increase in noninterest income was primarily due to the increase in mortgage banking income, the decrease in other-than-temporary-impairment on available-for-sale securities, and the increase in debit card interchange income. The decrease in average loans outstanding coupled with a decrease in net interest margin from 3.83% for the first quarter of 2011 to 3.76% for the first quarter of 2012 resulted in the decrease in net interest income. Noninterest expense increased as a result of increases in salaries and benefits, data processing, and OREO expenses.

Total assets decreased $51.4 million, or 7.3%, from $700.7 million at December 31, 2011 to $649.3 million at March 31, 2012 as a result of a decrease of $47.2 million in cash and cash equivalents. As described in our Form 10-K for December 31, 2011, we had approximately $48.0 million of extremely short-term deposits held in cash and cash equivalents at December 31, 2011 that were withdrawn from the bank in January 2012. Total loans decreased by $5.3 million from December 31, 2011 to March 31, 2012, which offset an increase of $632,106 in long-term investments and a decrease in FHLB advances of $2.0 million. The decrease in total loans was the result of decreases of $2.3 million, $1.8 million and $1.3 million in commercial real estate, commercial, and consumer loans, respectively.

Total deposits decreased by $49.8 million, or 8.3%, from December 31, 2011 to March 31, 2012. The decrease in total deposits to $552.2 million at March 31, 2012 was primarily related to the $48.0 million of extremely short-term deposits held in cash and cash equivalents as described above. Offsetting the decrease was an increase of $15.5 million in health savings accounts (HSAs) from employer contributions made in January annually, which are included in interest bearing checking accounts. As a result of the cash inflow from HSAs, we were able to decrease brokered certificates of deposit by $19.3 million, of which we prepaid $9.8 million prior to their scheduled maturity. We also experienced a shift in the deposit portfolio between noninterest bearing deposits and interest bearing deposits due to the addition of a new interest bearing demand deposit product for business customers.

Financial Condition

Total assets were $649.3 million at March 31, 2012 compared to total assets of $700.7 million at December 31, 2011. The decrease was primarily in cash and cash equivalents as a result of the $48.0 million of extremely short-term deposits being withdrawn in January 2012. Also impacting the decrease in total assets was a $5.3 million decrease in total loans.

Cash and Investments. Cash and cash equivalents, which include federal funds sold, were $20.1 million at March 31, 2012. This was a $47.2 million, or 70.1%, decrease from December 31, 2011. This decrease was expected based on the $48.0 million of extremely short-term deposits reported at December 31, 2011. As previously described on Form 10-K as of December 31, 2011, these short-term deposits were withdrawn in January 2012.

Loans. Total loans decreased $5.3 million from December 31, 2011 to $457.3 million. The decrease was the result of decreases of $2.3 million, $1.8 million and $1.3 million in commercial real estate, commercial, and consumer loans, respectively.

Nonperforming Assets. Nonperforming assets include impaired securities, nonperforming loans, and OREO. Nonperforming loans include loans 90 days past due and still accruing interest, nonperforming restructured loans, and nonaccrual loans. Nonperforming assets increased by $2.5 million from $16.0 million, or 2.3% of total assets, at December 31, 2011 to $18.5 million, or 2.8% of total assets, at March 31, 2012 primarily due to a residential real estate loan, a commercial loan, and one home equity loan totaling $1.8 million moving to nonaccrual, which were previously impaired with specific reserves set per ASC 310-10 of $350,000 at December 31, 2011 and $600,000 at March 31, 2012. We also had two troubled debt restructured loan relationships totaling $1.8 million that were reported as impaired with specific reserves of $1.0 million. Subsequent to the modifications, these two relationships have defaulted on their payments and have moved to nonaccrual status with no change to the specific reserve. At March 31, 2012, management believes it has allocated adequate specific reserves for the risks associated with the loan portfolio.

The following table summarizes the Company's nonperforming assets at the dates indicated:

                                                        March 31, 2012       December 31, 2011

Loans past due over 90 days and still accruing         $        902,389     $         2,007,098
Nonperforming restructured loans                                      -               1,804,724
Nonaccrual loans                                             14,374,511               8,682,161
Total nonperforming loans                              $     15,276,900     $        12,493,983
Other real estate owned                                       2,877,591               3,129,231
Impaired Securities                                             313,819                 331,464
Total nonperforming assets                             $     18,468,310     $        15,954,678

Nonperforming assets to total assets                               2.84 %                  2.28 %

Nonperforming loans to total loans                                 3.34 %                  2.70 %

While nonperforming assets have increased, loans reported as impaired decreased slightly to $17.3 million from the $17.6 million reported at December 31, 2011. During the three months ended March 31, 2012, we added $5.7 million in loans to non-accrual status during the quarter. $3.6 million of these loans were already deemed impaired at December 31, 2011 and adding these types of loans to non-accrual status is a typical migration as we work to dispose of these assets. The remaining $2.1 million in the growth in non-accruals was offset by dispositions or resolutions of loans already deemed impaired.

During the first quarter of 2012, five commercial loans totaling $2.4 million, three commercial real estate loans totaling $1.9 million, one residential loan in the amount of $1.2 million, and two home equity loans totaling $747,833 were added to nonaccrual status. These additions were offset by approximately $350,000 of payments received on loans classified as nonaccrual.

Impaired loans, with specific loss allocations, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying value of $9.9 million, with a valuation allowance of $2.5 million, resulting in an additional provision for loan losses of $743,000 for three months ended March 31, 2012 compared to additional provision expense of $428,000 for three months ended March 31, 2011. At December 31, 2011, impaired loans had a carrying value of $10.8 million and a valuation allowance of $3.1 million. The decrease in the valuation allowance from December 31, 2011 to March 31, 2012 was primarily due to a charge off taken on one impaired commercial real estate relationship with a carrying value of $2.3 million and a valuation allowance of $930,000.

Adjustments to certain commercial and residential real estate properties classified as other real estate owned (OREO) are measured at the lower of carrying amount or fair value, less costs to sell. Fair values are generally based on third party appraisals of the property that include certain assumptions and unobservable inputs used many times by appraisers, resulting in a Level 3 classification. In cases where the carrying amount exceeds the fair value, less costs to sell, an impairment loss is recognized. Whenever a new fair value is determined, which is typically done on an annual basis in the other real estate owned category, we report the property at that new value. Our internal policy on OREO properties requires an updated appraisal every 12 months. Three appraisals were received in the first quarter of 2012 at which time those properties were written down to fair value. OREO decreased by $251,640 as a result of two sales totaling $47,420 and write-downs on three properties totaling $204,220. There were no additions to OREO for the three months ending March 31, 2012 and the carrying value was $864,700, with no valuation allowance. At March 31, 2011, the carrying value of OREO properties was $1.6 million, with a valuation allowance of $60,000, resulting in additional OREO expense of approximately $113,780 for the three months ended March 31, 2011.

Allowance for Loan Losses. In each quarter the allowance for loan loss is adjusted to the amount management believes is necessary to maintain the allowance at adequate levels. Management allocates specific portions of the allowance for loan losses to specific problem loans. Problem loans are identified through a loan risk rating system and monitored through watchlist reporting. Specific reserves are determined for each identified problem loan based on delinquency rates, collateral and other risk factors specific to that problem loan. Management's allocation of the allowance to other loan pools considers various factors including historical loss experience, the present and prospective financial condition of borrowers, industry concentrations within the loan portfolio, general economic conditions, and peer industry data of comparable banks.

The allowance for loan losses at March 31, 2012 was $9.1 million, or 1.99% of total loans outstanding, a decrease of $299,566 from $9.4 million, or 2.03% of total loans outstanding, at December 31, 2011. The provision for loan losses for the first three months in 2012 was $750,000 compared to $1.2 million for the first three months in 2012.

For the first quarter of 2012, we were in a net charge-off position of $1.0 million compared to a net charge-off position of $1.8 million at March 31, 2011. Of the $1.2 million in charge-offs, one $2.2 million commercial real estate development loan recorded a charge-off of $931,150 (which was completely reserved for at December 31, 2011) as a result of the sale of the project at the net amount, which was approximately the appraised value.

All Other Assets. All other assets decreased $1.2 million as a result of decreases in accrued interest receivable, OREO, and prepaid FDIC insurance by $366,835, $251,640, and $235,789, respectively. Accrued interest receivable decreased as a result of the $5.3 million decrease in loans outstanding from December 31, 2011 coupled with a decrease in the net interest margin. OREO decreased due to sales of $47,420 and write-downs on three properties totaling $204,220.

Deposits. Total deposits were $552.2 million at March 31, 2012 compared to $602.0 million at December 31, 2011. Of the $49.8 million decrease from December 31, 2011, there were approximately $48.0 million of extremely short-term deposits that were withdrawn in January 2012 as previously disclosed in the Company's Form 10-K as of December 31, 2011. These deposits comprised of funds from two customers who had significant business transactions at the end of 2011 and needed a short-term option for holding the funds until a permanent option had been selected.

Aside from these short-term deposits, we experienced a shift in our balance sheet that we anticipate will have a positive impact on our net interest margin going forward. In January, we received a large inflow of cash from employer funded contributions to HSA accounts, which resulted in a $15.5 million increase from $65.1 million at December 31, 2011 to $80.6 million at March 31, 2012 at an average rate of 0.12%. This increase in funding allowed us to reduce the amount of brokered deposits outstanding from $102.6 million at December 31, 2011 to $83.3 million. Of the $19.3 million decrease in brokered deposits, $9.8 million were called prior to maturity with a weighted average rate of 2.59%. While we accelerated the amortization of the brokered deposit fees causing net additional interest expense of approximately $70,000 for the quarter ending March 31, 2012, we expect to save approximately $20,000 per month in interest expense beginning in March 2012 and going forward until this funding would need to be replaced.

We also experienced a shift between noninterest bearing demand deposits and interest bearing demand deposits as a result of the new deposit product that pays interest on business deposits, which only recently became possible with the enactment of the Frank-Dodd Act. This new deposit product had a balance of $24.0 million at March 31, 2012, which primarily came from existing accounts previously included in the noninterest bearing demand deposits.

The following table summarizes the Company's deposit balances at the dates indicated:

                                        March 31, 2012               December 31, 2011
                                      Balance           %           Balance           %
Core deposits:
Noninterest-bearing demand         $  99,985,755        18.1 %   $ 169,757,998        28.2 %
Interest-bearing checking            154,840,739        28.1 %     114,864,680        19.1 %
Money market                         130,956,327        23.7 %     127,986,494        21.3 %
Savings                               24,719,341         4.5 %      22,397,928         3.7 %
Time, under $100,000                  35,058,808         6.3 %      38,573,165         6.4 %
Total core deposits                  445,560,970        80.7 %     473,580,265        78.7 %
Non-core deposits:
In-market non-core deposits:
Time, $100,000 and over               23,298,715         4.2 %      25,828,697         4.3 %
Out-of-market non-core deposits:
Money market                          12,033,648         2.2 %      12,032,097         2.0 %
Brokered certificate of deposits      71,297,595        12.9 %      90,595,777        15.0 %
Total out-of-market deposits          83,331,243        15.1 %     102,627,874        17.0 %
Total non-core deposits              106,629,958        19.3 %     128,456,571        21.3 %

Total deposits $ 552,190,928 100.0 % $ 602,036,836 100.0 %

Borrowings. The Company had borrowings of $27.5 million at March 31, 2012 compared to $29.5 million at December 31, 2011. The decrease was due to not replacing the 3.55% fixed rate bullet for $2.0 million that matured in March 2012. The remaining $10.0 million of FHLB advances at March 31, 2012 were fixed rate bullets with maturities ranging from May 2012 to August 2013. We also had $17.5 million of aggregate principal amount in junior subordinated debenture outstanding at March 31, 2012 and December 31, 2011. We currently have two statutory trust subsidiaries, TCT2 and TCT 3. TCT 2 moved from a fixed rate of 6.21% to a floating rate of LIBOR plus 1.34% in December 2010 on $8.0 million of debt. TCT 3 moved from a fixed rate of 6.56% to a floating rate of LIBOR plus 1.69% on March 1, 2012 on the remaining $9.0 million of debt. Interest rates at March 31, 2011 for TCT 2 and TCT 3 were 1.92% and 2.18%, respectively.

All Other Liabilities. All other liabilities decreased by $768,544 due to paying out year end accruals, including profit sharing, incentive bonuses, and deferred director fees. These decreases were offset by an increase in accrued interest payable from continuing to defer the interest payments on our trust preferred debt.

Results of Operations

For the Three-Month Periods Ended March 31

Results of operations for the three-month period ended March 31, 2012 reflected net income of $1.1 million, or $0.22 per diluted share. This was a $305,337 increase from net income of $782,643, or $0.16 per diluted share, reported for the three-month period ending March 31, 2011. The increase in net income was primarily due to the decrease in provision expense of $470,000 and the increase in noninterest income of $368,532. These increases were offset by a decrease in net interest income of $230,823 and an increase in noninterest expenses of $156,240.

                  Performance Ratios                 March 31
                                                 2012        2011

                  Return on average assets *       0.65 %      0.48 %
                  Return on average equity *       6.94 %      5.91 %
                  Net interest margin (TEY) *      3.76 %      3.83 %
                  Efficiency ratio                70.67 %     69.86 %

* annualized

Net Interest Income. Interest income for the three-month periods ended March 31, 2012 and 2011 was $6.6 million and $7.3 million, respectively, while interest expense for the first quarter was $1.2 million in 2012 and $1.6 million in 2011, resulting in net interest income of $5.4 million and $5.6 million for the same three-month periods in 2012 and 2011, respectively. The reduction of net interest income from 2011 to 2012 was due to a decrease in net interest margin coupled with a decrease of $12.8 million in average earning assets. The tax equivalent net interest margin for the first quarter of 2012 was 3.76%, while the tax equivalent net interest margin for the first quarter of 2011 was 3.83%. The decrease in our net interest margin was two-fold. First, we moved approximately $6.2 million of loans to nonaccrual status, which reversed approximately $117,000 in accrued interest during the first quarter. Second, we prepaid $9.8 million of brokered certificates of deposit prior to their maturity during the first quarter of 2012 causing an acceleration in the amortization of the brokered deposit fees, which amounted to approximately $70,000 of net additional interest expense during the quarter. To combat the decrease in net interest margin, we aggressively reduced the interest rates paid on deposits throughout 2011 and shifted the deposit portfolio from higher cost certificates of deposit and money market accounts to noninterest bearing or interest bearing demand deposit accounts.

The following table reflects the average balance, interest earned or paid, and yields or costs of the Company's assets, liabilities and stockholders' equity at and for the dates indicated:

                                            As of and For The Three Month Period Ended
                                    March 31, 2012                               March 31, 2011
                                      Interest      Annualized                     Interest      Annualized
                        Average        Earned          Yield         Average        Earned          Yield
($ in thousands)        Balance       or Paid         or Cost        Balance       or Paid         or Cost
Assets
Short-term
investments
and interest-earning
deposits               $   2,601     $       21            3.25 %   $   2,785     $       13            1.89 %
Federal funds sold         3,274              1            0.12 %       2,013              1            0.20 %
Securities - taxable      77,211            500            2.60 %      80,112            579            3.00 %
Securities - tax
exempt (1)                57,035            736            5.19 %      41,668            596            5.81 %
Loans held for sale        2,647              -            0.00 %       1,689              -            0.00 %
Loans                    462,661          5,643            4.91 %     489,999          6,289            5.21 %
Total
interest-earning
assets                   605,429          6,901            4.58 %     618,266          7,478            4.91 %
Allowance for loan
losses                    (9,620 )                                    (12,964 )
Cash and due from
banks                     34,724                                       19,509
Other assets              41,153                                       39,753
Total assets           $ 671,686                                    $ 664,564
Liabilities and
Stockholders' Equity
Interest-bearing
checking               $ 154,398     $       52            0.14 %   $ 115,584     $       46            0.16 %
Savings                   23,068              3            0.05 %      23,156             15            0.26 %
Money market             128,351            105            0.33 %     167,363            194            0.47 %
Certificates of
deposit                  151,071            854            2.27 %     185,183          1,106            2.42 %
Short-term
borrowings                     4              -            0.00 %          67              -            0.00 %
FHLB advances             11,872             47            1.59 %      10,489             72            2.78 %
Junior subordinated
debt                      17,527            178            4.08 %      17,527            200            4.63 %
Total
interest-bearing
liabilities              486,291          1,239            1.02 %     519,369          1,633            1.28 %
Noninterest-bearing
checking                 115,246                                       86,368
Other liabilities          7,128                                        5,165
Stockholders' equity      63,021                                       53,662
Total liabilities
and stockholders'
equity                 $ 671,686                                    $ 664,564
Net interest income                  $    5,662                                   $    5,845
Rate spread                                                3.56 %                                       3.63 %
Net interest income
as a percent of
average earning
assets                                                     3.76 %                                       3.83 %

(1) Computed on a tax equivalent basis for tax exempt securities using a 34% statutory tax rate.

Provision for Loan Losses. A provision for loan losses was recorded in the amount of $750,000, or 65 basis points, annualized, on average loans during the first quarter of 2012 as compared to $1.2 million, or 101 basis points, annualized, on average loans for the first quarter of 2011. The allowance for loan losses at March 31, 2012 totaled $9.1 million and was 1.99% of total loans outstanding on that date. For the three-month period ended March 31, 2012 we were in a net charge-off position of $1.0 million, or 91 basis points, annualized, on average loans compared to net charge-off of $1.8 million, or 149 basis points, annualized, on average loans during the same period a year ago. The charge-offs taken in 2012 were mainly made up of one loan. One commercial real estate loan recorded a $931,150 charge-off (which was completely reserved for at December 31, 2011) as a result of the sale of the project at the net amount, which was approximately the appraised value.

Noninterest income. Noninterest income was $2.0 million for the first quarter of 2012 compared to $1.6 million for the first quarter of 2011. This was a $368,532, or 22.4%, increase from the same period in the prior year. The majority of the increase was the result of increases of $121,668 and $72,177 in mortgage banking income and net debit card interchange income, respectively, and a decrease in the impairment on available-for-sale securities of $124,999. The increase in mortgage banking income was due to an increase in the loans originated for sale compared to the same period in 2011 and an increase in the origination fees charged for each loan. Net debit card interchange income increased due to higher volume related to increased deposit accounts and cards issued. The increase in accounts and card issuance came primarily from our HSA product. We have experienced significant growth in our HSA product over the past several years. As of March 31, 2012, we have approximately 45,000 accounts, which represents an increase of 7,000 accounts, or 18% percent, from March 31, 2011. HSA's are a key item in our strategy to grow core deposits, as well as provide for opportunities outside our normal market area. The decrease in the impairment on available-for-sale securities was the result of an improvement in the cash flows of the security resulting in no additional impairment for the quarter ending March 31, 2012 compared to March 31, 2011. Also adding to the increase in noninterest income was the $60,660 increase in trust and brokerage fees as a result of an increase in assets under management, which was comprised of a combination of sales and an improvement in market conditions.

Noninterest Expenses. Noninterest expenses were $5.2 million for the first quarter of 2012 compared to $5.1 million reported in the first quarter of 2011. The main components of noninterest expense for the first three months of 2012 were salaries and benefits of $2.8 million, occupancy and equipment of $628,353, data processing of $371,053, and loan and professional of $331,415. The increase of $156,240 in noninterest expenses from the same three months in 2011 to 2012 was primarily due to increases of $232,871, $66,325, and $61,748 in salaries and benefits expenses, OREO expenses, and data processing expenses, respectively. Offsetting the increases was a decrease in FDIC insurance premiums of $261,356. Salaries and benefits expense increased $232,871 primarily due to annual employee raises based on merit, increased brokerage commissions based on the increase in brokerage sales, and the additional compensation cost associated with the Long-term Incentive Plan based on an increase in the stock price from December 31, 2011 by $2.29 per share. OREO expenses were up due to receiving three new appraisals that resulted in additional write-downs to fair value. Data processing was up primarily due to the increase in the number of accounts we have open and the timing of certain expenses specific to year end reporting. FDIC insurance premiums decreased $261,356 due to a change in the calculation of assessment rates on smaller financial institutions and a subsequent reduction in the assessment rates specific to our premiums during the second quarter of 2011.

Income Taxes. During the quarters ended March 31, 2012 and 2011, the Company recorded $340,993 and $194,861 in income taxes, respectively. The effective tax rate recorded was 23.9% for 2012 compared to 19.9% for 2011. The increase in the effective tax rate from 2011 was due to recording state income tax as a result of the liquidation of the real estate investment trust, Tower Funding Corp, and the investment subsidiary, Tower Capital Investments, Inc., as of September 30, 2011.

Liquidity and Capital Resources

Liquidity. Our general liquidity strategy is to fund growth with deposits and to . . .