General

The Company is a Maryland corporation which was organized to be the stock holding company for the Bank in connection with our second-step conversion and reorganization completed on April 10, 2008. Effective September 30, 2011, the Bank became a Maryland state chartered commercial bank. The Bank's deposit accounts are insured up to a maximum of $250,000 by the FDIC. The Bank's noninterest earning demand deposit accounts have unlimited FDIC insurance.

The Company's net income is dependent primarily on its net interest income, which is the difference between interest income earned on its interest-earning assets and interest paid on interest-bearing liabilities. Net interest income is determined by (i) the difference between yields earned on interest-earning assets and rates paid on interest-bearing liabilities ("interest rate spread") and (ii) the relative amounts of interest-earning assets and interest-bearing liabilities. The Company's interest rate spread is affected by regulatory, economic and competitive factors that influence interest rates, loan demand and deposit flows. To a lesser extent, the Company's net income also is affected by the level of other income, which primarily consists of fees and charges, and levels of non-interest expenses such as salaries and related expenses.

The operations of the Company are significantly affected by prevailing economic conditions, competition and the monetary, fiscal and regulatory policies of governmental agencies. Lending activities are influenced by the demand for and supply of housing, competition among lenders, the level of interest rates and the availability of funds. Deposit flows and costs of funds are influenced by prevailing market rates of interest, primarily on competing investments, account maturities and the levels of personal income and savings in the Company's market area.

Critical Accounting Policies and Estimates

Management's discussion and analysis of the Company's financial condition is based on the consolidated financial statements, which are prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of such financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. On an ongoing basis, management evaluates its estimates, including those related to the allowance for loan losses.

Management believes the allowance for loan losses is a critical accounting policy that requires the most significant estimates and assumptions used in the preparation of the consolidated financial statements. The allowance for loan losses is based on management's evaluation of the level of the allowance required in relation to the estimated loss exposure in the loan portfolio. Management believes the allowance for loan losses is a significant estimated loss and therefore regularly evaluates it for adequacy by taking into consideration factors such as prior loan loss experience, the character and size of the loan portfolio, business and economic conditions and management's estimation of losses. The use of different estimates or assumptions could produce different provisions for loan losses.

Impaired loans are reviewed individually for potential loss. In instances where loan balances exceed estimated realizable values, specific loss allocations are identified.

Under our methodology for calculating the allowance for loan losses, loss rates are determined for the following loan pools: construction, residential owner occupied, residential non-owner occupied, home equity loans, loan acquisition and development, secured commercial loans, unsecured commercial loans, leases and consumer loans. Loss rates are then applied to loan balances of these portfolio segments exclusive of loans with specific loss allocations that were reviewed individually. This methodology provides an in-depth analysis of the Bank's portfolio and reflects the probable inherent losses within it. Reserve allocations are then reviewed and consolidated. This process is performed on a quarterly basis.

During the three months ended March 31, 2012, we modified our loss reserve assessment approach to expand analysis of loss rates from a period of the previous one year to the prior two years on a rolling quarter-to-quarter basis. The result was then annualized and applied to loan pools specified above. Also during the three months ended March 31, 2012, the Company isolated a segment of the loan portfolio, residential non-owner occupied loans, to perform more detailed analysis for potential losses.

A two year look back period of charge-off experience is considered to more reasonably approximate current loss exposure within the portfolio. The Company has experienced net recoveries, rather than net charge-offs, during the three and six months ended March 31, 2012. Assumption that this favorable loss experience trend would continue going forward was determined to be aggressive in terms of assessing adequacy of loan loss reserves.

As mentioned above, we also employed a more detailed approach in reviewing residential non-owner occupied loans during the three months ended March 31, 2012. Loss rates for this category have been noticeably higher than other types of loans. Additionally, geographic concentration is considered to be more of a risk factor for this type of product. Loans within this category are segregated by internal risk ratings, with higher reserves allocated as risk ratings reflect more potential for loss.

Securities are evaluated periodically to determine whether a decline in their value is other than temporary. The term "other than temporary" is not intended to indicate a permanent decline in value. Rather, it means that the prospects for near term recovery of value are not necessarily favorable, or that there is a lack of evidence to support fair values equal to, or greater than, the carrying value of the investment. Under the revised guidance for recognition and presentation of other-than-temporary impairments, the amount of other-than-temporary impairment that is recognized through earnings for debt securities is determined by comparing the present value of the expected cash flows to the amortized cost of the security. The revised guidance also requires that an evaluation be done to determine whether the Company has the intent to sell or is more likely than not required to sell these securities. The discount rate used to determine the credit loss is the expected book yield on the security.

The Company accounts for income taxes under the asset/liability method. Deferred tax assets are recognized for the future consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis, as well as operating loss and tax credit carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period indicated by the enactment date. A valuation allowance is established for deferred tax assets when, in the judgment of management, it is more likely than not that such deferred tax assets will not become realizable. The judgment about the level of future taxable income is dependent to a great extent on matters that may, at least in part, be beyond the Company's control. It is at least reasonably possible that management's judgment about the need for a valuation allowance for deferred tax assets could change in the near term.

Available Information

The Company and Bank maintain an Internet website at http://www.baltcosavings.com. The Company makes available its Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to such reports filed with the Securities and Exchange Commission ("SEC") as well as other information related to the Company, free of charge. SEC reports are available on this site as soon as reasonably practicable after electronically filed.

Forward-Looking Statements

When used in this Quarterly Report on Form 10-Q, the words or phrases "will likely result," "are expected to," "will continue," "is anticipated," "estimate," "project" or similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties including changes in economic conditions in the Company's market area, changes in policies by regulatory agencies, fluctuations in interest rates, demand for loans in the Company's market area, competition and information provided by third-party vendors that could cause actual results to differ materially from historical earnings and those presently anticipated or projected and the risk factors described in Item 1A of the Company's Annual Report on Form 10-K for the year ended September 30, 2011. The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The Company wishes to advise readers that the factors listed above could affect the Company's financial performance and could cause the Company's actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements.

The Company does not undertake, and specifically disclaims any obligation, to publicly release the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

Comparison of Financial Condition at March 31, 2012 and September 30, 2011

During the six months ended March 31, 2012, assets increased by $14.5 million, or 2.3%, from $624.8 million at September 30, 2011 to $639.4 million at March 31, 2012. During the six months ended March 31, 2012 investment securities decreased by $2.6 million, or 37.2% from $6.9 million at September 30, 2011 to $4.3 million at March 31, 2012 due to maturity of certain government agency bonds. Net loans receivable decreased $16.8 million, or 4.6%, from $364.8 million at September 30, 2011 to $348.1 million at March 31, 2012. Management's lending strategy remains focused on commercial real estate, commercial business and home equity lending. During this low rate environment the Company has employed a strategy of selling most residential loans into the secondary loan market. The reduction in residential loans combined with a decline in demand for other lending products is the primary reason for the decrease in our loan portfolio. Mortgage-backed securities available for sale increased by $34.5 million, or 22.9%, from $150.9 million at September 30, 2011 to $185.4 million at March 31, 2012 due primarily to security purchases made during the six months ended March 31, 2012 in order to deploy available liquidity from the declining loan portfolio coupled with an increase in deposits. At March 31, 2012, all mortgage-backed securities were classified as available for sale for liquidity purposes.

Deposits increased by $11.8 million, or 2.1%, from $550.0 million at September 30, 2011 to $561.8 million at March 31, 2012. The Bank has been successful in attracting new transaction account deposits, which decreases the overall cost for funds.

Stockholders' equity increased by $1.2 million, or 2.3%, from $51.9 million at September 30, 2011 to $53.2 million at March 31, 2012. This increase was due primarily to net income of more than $1.0 million during the period.

Comparison of Operating Results for the Six Months Ended March 31, 2012 and 2011

Net Income. Net income (loss) available to common shareholders was $1.0 million for the six months ended March 31, 2012 and $(340,000) for the six months ended March 31, 2011. This increase in income was primarily due to a variety of factors, including increased net interest income, reduced provision for losses on loans, gains on sale of repossessed assets, reduced non-interest expenses and the elimination during 2012 of preferred stock dividends and discount accretion as compared with the prior fiscal year.

Net Interest Income. Net interest income increased by $511,000, or 5.7%, from $9.0 million for the six months ended March 31, 2011 to $9.5 million for the six months ended March 31, 2012. The increase in net interest income primarily was due to higher average balances on mortgage-backed securities and a declining cost of funds rate on the deposit portfolio. These increases were partially offset by a decrease in interest and fees on loans.

Interest Income. Interest income decreased by $255,000, or 1.9% from $13.5 million for the six months ended March 31, 2011 to $13.2 million for the six months ended March 31, 2012. Interest and fees on loans decreased by $891,000, or 7.6%, from $11.7 million for the six months ended March 31, 2011 to $10.8 million for the six months ended March 31, 2012. This was primarily due to lower average balances on loans. Average loans declined by $27.6 million during the six months ended March 31, 2012 as compared to the same period in 2011. This decline was partially offset by an increase in interest on mortgage-backed securities of $698,000, or 47.1% from $1.5 million for the six months ended March 31, 2011 to $2.2 million for the six months ended March 31, 2012. This increase was primarily due to higher average balances on mortgage-backed securities. The average balance of mortgage-backed securities increased by $91.2 million, from $71.5 million during the six months ended March 31, 2011 to $162.7 million during the six months ended March 31, 2012. The Company continues to invest in securities to supplement the declining loan portfolio and deploy available excess liquidity.

Interest Expense. Interest expense, which consists of interest on deposits, interest on junior subordinated debentures and other interest expense, decreased from $4.4 million for the six months ended March 31, 2011 to $3.7 million for the six months ended March 31, 2012, a decrease of $766,000 or 17.2%. Interest on deposits decreased $778,000, or 18.8%, from $4.1 million for the six months ended March 31, 2011 to $3.4 million for the six months ended March 31, 2012. This decrease was due to the decrease in the average cost of deposits of 32 basis points from 1.53% for the six months ended March 31, 2011 to 1.21% for the six months ended March 31, 2012. This decrease in interest expense was partially offset by an increase in the average balance of deposits of $16.1 million, or 3.0%, from $541.4 million for the six months ended March 31, 2011 to $557.5 million for the six months ended March 31, 2012.

Average Balance Sheet. The following table sets forth certain information relating to the Company's average balance sheet and reflects the average yield on assets and cost of liabilities for the periods indicated and the yields earned and rates paid. Such yields and costs are derived by dividing income or expense by the average daily balance of assets or liabilities, respectively, for the six month periods ended March 31, 2012 and 2011. Total average assets are computed using month-end balances.

The table also presents information for the periods indicated with respect to the differences between the average yield earned on interest-earning assets and average rate paid on interest-bearing liabilities, or "interest rate spread," which banks have traditionally used as an indicator of profitability. Another indicator of net interest income is "net interest margin," which is net interest income divided by the average balance of interest-earning assets.

                                                              For the Six Months Ended March 31,
                                                        2012                                      2011
                                         Average                    Average        Average                    Average
                                         Balance      Interest        Rate         Balance      Interest        Rate
                                                                    (Dollars in thousands)
Interest-earning assets:
Loans receivable, net (1)               $ 356,503     $  10,782         6.05 %    $ 384,145     $  11,673         6.08 %
Mortgage-backed securities                162,759         2,179         2.68         71,545         1,481         4.14
FHLB stock and Investment securities        7,426           184         4.96         13,576           187         2.75
Other interest earning assets              60,427            70          .23        104,861           129          .25

Total Interest-earning assets             587,115        13,215         4.50        574,127        13,470         4.69
Bank Owned Life Insurance                  16,370                                    15,802
Noninterest-earning assets                 31,062                                    30,717

Total assets                            $ 634,547                                 $ 620,646


Interest-bearing liabilities:
Deposits                                $ 557,500     $   3,365         1.21 %    $ 541,441     $   4,143         1.53 %
Junior Subordinated Debentures             17,011           319         3.75         17,011           307         3.61
Other liabilities                           1,175            -            -           1,033            -            -

Total interest-bearing liabilities        575,686         3,684         1.28        559,485         4,450         1.59

Noninterest-bearing liabilities             6,559                                     5,172

Total liabilities                         582,245                                   564,657
Stockholders' Equity                       52,302                                    55,989

Total liabilities and stockholders'
equity                                  $ 634,547                                 $ 620,646


Net interest income                                   $   9,531                                 $   9,020

Interest rate spread                                                    3.22 %                                    3.10 %

Net interest margin                                                     3.25 %                                    3.14 %

Ratio average interest earning
assets/interest-bearing liabilities                                   101.99 %                                  102.62 %

(1) Interest and fees on loans and investments exclude tax equivalent adjustments.

Rate/Volume Analysis. The table below sets forth certain information regarding changes in interest income and interest expense for the periods indicated. For each category of interest-earning asset and interest-bearing liability, information is provided on changes attributable to: (i) changes in volume (changes in volume multiplied by old rate); (ii) changes in rates (change in rate multiplied by old volume); and (iii) changes in rate/volume (changes in rate multiplied by the changes in volume).

                                                  For Six Months Ended March 31,
                                                          2012 Vs. 2011
                                                    Increase (Decrease) Due to
                                        Volume        Rate        Rate/Volume       Total
                                                          (In Thousands)
   Interest income:
   Loans receivable, net                $  (836 )    $  (58 )    $           3      $ (891 )
   Mortgage-backed securities             1,886        (522 )             (666 )       698
   Investment securities                    (84 )       149                (68 )        (3 )
   Other interest-earning assets            (53 )       (10 )                4         (59 )

   Total interest-earning assets            913        (441 )             (727 )      (255 )

   Interest expense:
   Deposits                                 123        (875 )              (26 )      (778 )
   Junior Subordinated Debentures            -           12                 -           12

   Total interest-bearing liabilities       123        (863 )              (26 )      (766 )


   Change in net interest income        $   790      $  422      $        (701 )    $  511

Provision for Loan Losses. We charge or credit to income provisions for loan losses to maintain the total allowance for loan losses at a level we consider adequate to provide for losses inherent in the loan portfolio as of the balance sheet date. In determining the provision, we consider a number of factors such as existing loan levels, prior loss experience, current economic conditions and the probability of these conditions affecting existing loans. We established a $600,000 provision for losses on loans during the six months ended March 31, 2012 as compared to a provision of $800,000 for the six months ended March 31, 2011. The decrease in loan loss provisions during the six months ended March 31, 2012 as compared to March 31, 2011 was primarily due to a decline in loan charge-offs during the six months ended March 31, 2012. Nonperforming loans were $21.2 million at March 31, 2012 versus $18.3 million at September 30, 2011. Loan charge-offs for the six months ended March 31, 2012 were $19,000 as compared to $2.5 million for the six months ended March 31, 2011.Loan recoveries were $29,000 for the six months ended March 31, 2012 compared to $46,000 for the six months ended March 31, 2011. In establishing such provisions, we considered an analysis of the risk inherent in the loan portfolio. For additional information see "Asset Quality."

Other Income. Other income increased $289,000, or 21.8%, from $1.3 million for the six months ended March 31, 2011 to $1.6 million for the six months ended March 31, 2012. The increase in other income for the six months ended March 31, 2012 was primarily attributable to an increase in gains on sale of repossessed assets of $395,000, from $7,000 for the six months ended March 31, 2011 to $402,000 for the six months ended March 31, 2012. Mortgage Banking Operations increased by $42,000, or 120.0% from $35,000 for the six months ended March 31, 2011 to $77,000 for the six months ended March 31, 2012. Income from Bank Owned Life Insurance also increased by $35,000, or 10.8% from $324,000 for the six months ended March 31, 2011 to $359,000 for the six months ended March 31, 2012. These increases were partially offset by a decrease of $183,000, or 28.2%, in miscellaneous income due to lower commissions from investment sales from $650,000 for the six months ended March 31, 2011, to $467,000 for the six months ended March 31, 2012.

Non-interest Expenses. Total non-interest expenses decreased by $346,000, or 3.7%, from $9.3 million for the six months ended March 31, 2011 to $9.0 million for the six months ended March 31, 2012. This overall decline was due to decreases in several expense categories compared to the corresponding period of the prior year, including Occupancy, Data Processing, FDIC premiums, Property and equipment, Professional fees, Advertising and Other expenses. The Company has successfully implemented a variety of expense reduction initiatives that have favorably impacted operating expenses. Occupancy expense decreased by $133,000, or 10.4% from $1.3 million for the six months ended March 31, 2011 to $1.1 million for the six months ended March 31, 2012. Subsequent to March 31, 2011, the Company closed one branch office and purchased another branch office that was previously leased. Both of these events helped to reduce occupancy costs. Data Processing expenses decreased by $222,000, or 24.7% from $900,000 for the six months ended March 31, 2011 to $678,000 for the six months ended March 31, 2012. The Company has benefited from terms of a renewed service agreement with its primary third party data processor. Federal Insurance premiums decreased by $173,000, or 32.5% from $533,000 for the six months ended March 31, 2011 to $360,000 for the six months ended March 31, 2012. FDIC insurance premiums have declined as

a result of the agency's revised assessment formulas. Property and equipment expense decreased by $76,000, or 22.1%, from $344,000 for the six months ended March 31, 2011 to $268,000 for the six months ended March 31, 2012, primarily due to reduced depreciation expense as certain capitalized fixed assets have become fully depreciated. Professional fees decreased $129,000, or 31.5% from $410,000 for the six months ended March 31, 2011 to $281,000 for the six months ended March 31, 2012, primarily due to reduced legal fees. Advertising expense decreased $84,000, or 34.4% from $244,000 for the six months ended March 31, 2011 to $160,000 for the six months ended March 31, 2012. The Company has significantly reduced its marketing budget in comparison with the prior fiscal year…Other expenses decreased $139,000, or 33.7% from $413,000 for the six months ended March 31, 2011 to $274,000 for the six months ended March 31, 2012, primarily due to reductions in a variety of miscellaneous expense items. Decreases in these non-interest expense categories were partially offset by increases in salaries and related expenses and foreclosure and impaired loan expense. Salaries and related benefits increased by $581,000, or 11.8% from $4.9 million for the six months ended March 31, 2011 to $5.5 million for the six months ended March 31, 2012. The increase related primarily to additional personnel and increased benefits costs. Foreclosure and impaired loan expense increased by $30,000, or 30.3% from $99,000 for the six months ended March 31, 2011 to $129,000 for the six months ended March 31, 2012 due to increased activity related to disposition of problem assets.

Income Taxes. Our income tax expense (benefit) was $532,000 and $(11,000) for the six months ended March 31, 2012 and 2011, respectively. The change in income taxes for the six months ended March 31, 2012 as compared to the same period in the prior year was primarily due to increased pretax earnings.

Comparison of Operating Results for the Three Months Ended March 31, 2012 and 2011

Net Income. Net income (loss) available to common shareholders was $573,000 for the three months ended March 31, 2012 and $(229,000) for the three months ended March 31, 2011. This increase was primarily due to an increase in net interest income, gains on sale of repossessed assets, reduced non-interest expenses and the elimination during 2012 of preferred stock dividends and discount accretion as compared with the prior fiscal year. These increases to income were partially offset by a higher provision for losses on loans during the three months ended March 31, 2012 as compared with the same period in 2011.

Net Interest Income. Net interest income increased by $200,000, or 4.4%, from $4.6 million for the three months ended March 31, 2011 to $4.8 million for the three months ended March 31, 2012. The increase in net interest income primarily was due to higher average balances on mortgage-backed securities and a declining cost of funds rate on the deposit portfolio. These increases were partially offset by a decrease in interest and fees on loans.

Interest Income. Interest income decreased by $151,000, or 2.3% from $6.7 . . .