This Quarterly Report on Form 10-Q may contain certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), that involve substantial risks and uncertainties. When used in this report, or in the documents incorporated by reference herein, the words "anticipate," "believe," "estimate," "expect," "intend," "may," "plan," "seek," and similar expressions identify such forward-looking statements. These forward-looking statements include statements regarding the Company's business plans, prospects, growth and operating strategies, statements regarding the asset quality of the Company's loan and investment portfolios, and estimates of the Company's risks and future costs and benefits.

These forward-looking statements are based largely on the expectations of the Company's management and are subject to a number of risks and uncertainties, including but not limited to general economic conditions, either nationally or in the Company's market areas, that are worse than expected; increased competition among depository or other financial institutions; inflation and changes in the interest rate environment that reduce the Company's margins or reduce the fair value of financial instruments; changes in laws or government regulations affecting financial institutions, including changes in regulatory fees, monetary policy, and capital requirements; the Company's ability to enter new markets successfully and capitalize on growth opportunities; the Company's ability to successfully integrate acquired entities; changes in accounting pronouncements and practices, as adopted by financial institution regulatory agencies, the Financial Accounting Standards Board and the Public Company Accounting Oversight Board; changes in consumer spending, borrowing and saving habits; changes in the Company's organization, compensation and benefit plans; and other factors discussed elsewhere in this Quarterly Report on Form 10-Q, as well as in the Company's periodic reports filed with the SEC, in particular the "Risk Factors" discussed in Item 1A of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2011. Many of these factors are beyond the Company's control and are difficult to predict.

Because of these and other uncertainties, the Company's actual results, performance or achievements could differ materially from those contemplated, expressed or implied by the forward-looking statements contained herein. Forward-looking statements speak only as of the date they are made. The Company undertakes no obligation to publicly update or revise forward-looking information, whether as a result of new, updated information, future events or otherwise.

APPLICATION OF CRITICAL ACCOUNTING ESTIMATES

The Company's Unaudited Consolidated Financial Statements included in this Quarterly Report on Form 10-Q are prepared in accordance with U.S. GAAP and follow general practices within the industries in which it operates. Application of these principles requires management to make estimates, assumptions and judgments that affect the amounts reported in the Company's Unaudited Consolidated Financial Statements and Notes. These estimates, assumptions and judgments are based on information available as of the date of the Unaudited Consolidated Financial Statements. Accordingly, as this information changes, the Unaudited Consolidated Financial Statements could reflect different estimates, assumptions and judgments. Certain policies inherently have a greater reliance on the use of estimates, assumptions and judgments, and as such, have a greater possibility of producing results that could be materially different than originally reported. Estimates, assumptions and judgments are necessary when assets and liabilities are required to be recorded at fair value, when a decline in the value of an asset not carried on the financial statements at fair value warrants an impairment write-down or valuation reserve to be established, or when an asset or liability needs to be recorded contingent upon a future event. Carrying assets and liabilities at fair value inherently results in more financial statement volatility. The fair values and the information used to record valuation adjustments for certain assets and liabilities are based either on quoted market prices or are provided by other third-party sources, when available. When third-party information is not available, valuation adjustments are estimated in good faith by management primarily through the use of internal cash flow modeling techniques. Refer to Note 3 - "Fair Value Measurements" to the Company's Unaudited Consolidated Financial Statements included in Item 1 of this Quarterly Report on Form 10-Q for further detail on fair value measurement.

Significant accounting policies followed by the Company are presented in Note 1
- "Organization and Summary of Significant Accounting Policies" to the Audited Consolidated Financial Statements included in Item 8 in its Annual

Report on Form 10-K for the year ended December 31, 2011. These policies, along with the disclosures presented in the other Notes to the Company's Audited Consolidated Financial Statements contained in its Annual Report on Form 10-K and in this financial review, provide information on how significant assets and liabilities are presented in the Company's Unaudited Consolidated Financial Statements and how those values are determined.

Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions and estimates underlying those amounts, management has identified the determination of the allowance for loan and lease losses and valuation of goodwill to be the accounting areas that require the most subjective or complex judgments, and as such, could be most subject to revision as new information becomes available.

Allowance for Loan and Lease Losses

The allowance for loan and lease losses represents management's estimate of probable losses in the Company's loan and lease portfolio. Determining the amount of the allowance for loan and lease losses is considered a critical accounting estimate because it requires significant judgment on the part of management and the use of estimates related to the amount and timing of expected future cash flows on impaired loans and leases, estimated losses on pools of homogeneous loans and leases based on historical loss experience and consideration of current economic trends and conditions, all of which may be susceptible to significant change. The loan and lease portfolio also represents the largest asset type on the Company's Unaudited Consolidated Balance Sheets. Note 1 to the Audited Consolidated Financial Statements included in Item 8 in the Company's Annual Report on Form 10-K for the year ended December 31, 2011, describes the methodology used to determine the allowance for loan and lease losses.

Goodwill

The amount of goodwill reflected in the Company's Unaudited Consolidated Financial Statements is required to be tested by management for impairment on at least an annual basis. The test for impairment of goodwill on the identified reporting unit is considered a critical accounting estimate because it requires judgment on the part of management and the use of estimates related to the growth assumptions and market multiples used in the valuation model. The goodwill impairment testing is typically performed annually on December 31st. No impairment charges were incurred in the most recent test and the fair value of the tested reporting unit substantially exceeded its fair value. There were no triggering events in the three and six month periods ended June 30, 2012 that resulted in an interim impairment test.

ANALYSIS OF FINANCIAL CONDITION

Loan and Lease Activity

Total loans and leases grew to $597.9 million at June 30, 2012, reflecting an $18.2 million or 3.1% increase from March 31, 2012 and a $14.5 million or 2.5% increase from December 31, 2011. The national direct financing lease portfolio declined $1.1 million during the second quarter to $3.4 million at June 30, 2012 as the Company ceased lease originations in the second quarter of 2009 and is winding down the portfolio and exiting this business line.

Core loans, defined as total loans less leases, were $594.6 million at June 30, 2012, a $19.4 million, or 3.4% increase from $575.2 million at March 31, 2012 and a $17.2 million, or 3.0% increase from December 31, 2011. The large amount of loans closed in the fourth quarter of 2011 left the Company's loan pipeline relatively lighter to start 2012. The Company re-filled the pipeline in the first quarter and early second quarter and was able to generate significant loan closings in the second quarter, with the highest level of growth coming in commercial and multi-family real estate loans. Compared with gross core loan balances of $532.2 million at June 30, 2011, the growth rate over the past twelve months has been 11.7%.

Loans secured by real estate were $482.6 million at June 30, 2012, an increase of $12.8 million or 2.7% from March 31, 2012, and $17.4 million or 3.7% from December 31, 2011. The strongest growth was in commercial and multi-family real estate loans, which increased $12.4 million or 4.0% in the second quarter of 2012. Year-to-date, growth in commercial real estate was $16.8 million, or 5.5%. Commercial real estate lending has long been a strength of the Bank and its loan officers and the historical strong performance has continued in 2012.

Residential mortgages decreased to $69.3 million at June 30, 2012, compared with $71.7 million at March 31, 2012 and $73.6 million at December 31, 2011. The Company has sold the majority of its originated residential mortgage loans as long-term fixed rate mortgage loan rates remain near all-time historic lows. This, along with prepayments from existing customers re-financing their homes, has resulted in the decrease in residential mortgage balances in 2012. Residential mortgage originations declined to $7.1 million and $14.4 million in the three and six month periods ended June 30, 2012, respectively, compared with $8.6 million and $17.6 million in the three and six month periods ended June 30, 2011, respectively, as the Company has been less aggressive in pricing its mortgage products in 2012.

The Bank sells certain fixed rate residential mortgages to FNMA, while maintaining the servicing rights for those mortgages. During the three and six month periods ended June 30, 2012, the Bank sold mortgages to FNMA totaling $4.9 million and $11.1 million, respectively as compared with $5.8 million and $13.1 million sold during the three and six month periods ended June 30, 2011, respectively. At June 30, 2012, the Bank had a loan servicing portfolio principal balance of $68.4 million upon which it earns servicing fees, as compared with $67.0 million at March 31, 2012 and $62.4 million at December 31, 2011. The value of the mortgage servicing rights for that portfolio was $0.4 million at June 30, 2012, March 31, 2012 and December 31, 2011. Residential mortgage loans held-for-sale were $1.0 million at June 30, 2012, compared with $1.4 million at March 31, 2012 and $3.6 million at December 31, 2011. The Company has never been contacted by FNMA to repurchase any loans due to improper documentation or fraud.

The Company continues to focus on commercial and industrial ("C&I") lending as a way to diversify its loan portfolio, which has historically experienced strong growth rates in real estate loans. However, the Company faces the headwinds of a low growth economy and a very competitive local market. With line of credit usage down at March 31, 2012 compared with December 31, 2011, C&I loans had declined from $109.5 million to $103.1 million. Line of credit commitments and line of credit usage both increased in the second quarter, resulting in C&I balances growing to $107.8 million at June 30, 2012.

Leasing Portfolio

As noted above, management made the strategic decision in April 2009 to exit the national direct financing lease business and market the portfolio for sale. This decision resulted in the classification of the leasing portfolio as held-for-sale and the portfolio being marked to its market value at June 30, 2009. The mark-to-market adjustment was $7.2 million. At September 30, 2009, management determined to keep the lease portfolio and service it to maturity, terminated its plans to actively market the portfolio for sale, and the portfolio was placed back into held-for-investment at the revised carrying amount as of June 30, 2009. The difference between the principal value and the carrying value, initially created by the mark-to-market adjustment at June 30, 2009, reduces over time as individual leases deteriorate, become uncollectible, and are written off. The allowance for lease losses was zero at June 30, 2009 when the portfolio was classified as held-for-sale and reported at its fair market value. With the portfolio classified as held-for-investment at June 30, 2012, the portfolio has been evaluated in accordance with the Company's normal credit review policies in determining the appropriate allowance for lease losses. During the second quarter of 2012, $351 thousand in leases were written off and the difference between the principal value and carrying value of the leasing portfolio declined from $0.4 million to $0.1 million. While second quarter write-offs were at their highest point in the last five quarters, the charge-offs were not totally unexpected. The Company has consistently maintained a significant reserve for non-performing leases. Non-performing leases of $0.4 million at June 30, 2012 declined from $1.0 million at March 31, 2012 and $1.2 million at December 31, 2011. There were no leases placed in nonaccrual in the second quarter. With both performing and non-performing lease balances declining, management determined that the allowance for leasing losses should decrease by $0.2 million in the second quarter of 2012, following a $0.4 million decrease in the first quarter of 2012. The following table illustrates the write-off and allowance activity related to the leasing portfolio over the past five quarters.

                                                  2012                                          2011
                                       June 30,         March 31,        December 31,         September 30,        June 30,
Leasing Principal Balance             $    3,445       $     4,953       $       6,509       $         8,467       $  10,736
Mark                                         (90 )            (441 )              (488 )                (684 )          (779 )

Leasing Carrying Value                $    3,355       $     4,512       $       6,021       $         7,783       $   9,957


Mark-to-Market Adjustment             $      441       $       488       $         684       $           779       $     890
Net Write-Offs                              (351 )             (47 )              (196 )                 (95 )          (111 )

Remaining Mark                        $       90       $       441       $         488       $           684       $     779


                                                                    For the three months ended
                                         2012             2012                                  2011
                                       June 30,         March 31,        December 31,         September 30,        June 30,
Allowance for lease losses            $      583       $       994       $       1,229       $         1,471       $   1,471
Provision for leases                        (216 )            (411 )              (235 )                (242 )            -
Leasing net charge-offs                       -                 -                   -                     -               -

Allowance for lease losses            $      367       $       583       $         994       $         1,229       $   1,471


Total mark plus allowance             $      457       $     1,024       $       1,482       $         1,913       $   2,250
Mark + allowance/leasing principal
balance                                    13.27 %           20.67 %             22.77 %               22.59 %         20.96 %

Credit Quality of Loan Portfolio

Total non-performing loans and leases, defined as accruing loans and leases greater than 90 days past due and non-accrual loans and leases, totaled $11.0 million, or 1.84% of total loans and leases outstanding, at June 30, 2012, compared with $13.0 million, or 2.25%, at March 31, 2012 and $15.2 million, or 2.60% of total loans and leases outstanding at December 31, 2011. There were several reasons for the decline in non-performing loans and leases during the past two quarters.

The primary reason for the decrease in the first quarter was related to two commercial constructions loans which totaled $1.2 million as of December 31, 2011. These loans were converted to permanent loans that were current and accruing as of March 31, 2012 and June 30, 2012, but were 90 days past their maturity date as of December 31, 2011 due to administrative delays in closing the permanent loans. Also in the first quarter, two previously non-accruing residential construction loans with a combined balance of $0.2 million were converted to permanent residential mortgage loans and were current and performing as of March 31, 2012 and June 30, 2012. The remaining decrease in the first quarter was from payoffs ($0.3 million), continued improvement in leasing ($0.2 million), and charge-offs ($0.2 million).

In the second quarter, in addition to further decreases in leasing non-accruals of $0.5 million, a non-accruing commercial construction loan for $0.6 million paid off, a previously non-accruing commercial real estate loan for $0.5 million was moved to accrual status after six months of timely payments, and there was the partial charge-off of a commercial real estate loan of $0.4 million. For the loan that was partially charged off, $0.5 million remains outstanding after the borrower received an offer on the property that serves as the Company's collateral.

The allowance for loan and lease losses totaled $10.7 million, or 1.78% of total loans and leases outstanding as of June 30, 2012, compared with $10.8 million or 1.86% at March 31, 2012,and $11.5 million or 1.97% at December 31, 2011. The decrease in the allowance over the prior year resulted from a $0.6 million release of reserves on the leasing portfolio and net charge-offs of $0.9 million in the six month period ended June 30, 2012, partially offset by a $0.7 million provision for loan losses. The provision for loan losses resulted from the charge-off of three loans that exceeded the reserve associated with those loans at the time of the charge-offs, as well as the loan growth in the second quarter. The $0.4 million in net charge-offs in the second quarter of 2012 equates to a 0.30% annualized ratio as a percentage of average net loans and leases. This compares with a 0.32% ratio in the first quarter of 2012 and 0.63% in the second quarter of 2011. For the six months ended June 30, 2012, the $0.9 million in net charge-

offs equated to 0.31% of average net loans and leases, compared with $1.3 million in net charge-offs for a ratio of 0.47% in the first six months of 2011.

The coverage ratio of the allowance for loan and lease losses to non-performing loans and leases increased from 76% at December 31, 2011 to 83% at March 31, 2012 and 97% at June 30, 2012. There are two factors that significantly influence these ratios. The first factor is the covered loan portfolio acquired in the Waterford transaction which are covered by an FDIC loss-sharing agreement that guarantees 80% of any losses incurred in the portfolio up $5.6 million, and 95% of losses beyond that threshold. The second factor is the leasing portfolio, which carries significantly higher risk, but also has the remaining mark to consider as depicted in the table above. The following table depicts the allowance and non-performing ratios by segregating the covered and non-covered loan portfolios and the leasing portfolio as of the following dates:

                                                                                    June 30, 2012
                                                                                   ($ in thousands)
                                                                                                                                  Allowance
                                                                                          Allowance             Non-            for loan  and
                                                                                        for loan  and        performing             lease
                                                       Allowance          Non-              lease             loans and          losses/Non-
                                                       for loan        performing         losses /          leases/Total         performing
                                                       and lease       loans and         Total loans          loans and           loans and
                                         Balance        losses           leases          and leases            leases              leases
Non-covered loans                       $ 571,160     $    10,175     $      8,586                1.78 %             1.50 %             118.51 %
Covered loans                              23,408             116            1,992                0.50 %             8.51 %               5.82 %
Leases                                      3,355             367              430               10.94 %            12.82 %              85.35 %

Total                                   $ 597,923     $    10,658     $     11,008                1.78 %             1.84 %              96.82 %

                                                                                  December 31, 2011
                                                                                   ($ in thousands)
                                                                                                                                  Allowance
                                                                                          Allowance             Non-            for loan  and
                                                                                        for loan  and        performing             lease
                                                       Allowance          Non-              lease             loans and          losses/Non-
                                                       for loan        performing         losses /          leases/Total         performing
                                                       and lease       loans and         Total loans          loans and           loans and
                                         Balance        losses           leases          and leases            leases              leases
Non-covered loans                       $ 550,955     $    10,400     $     11,488                1.89 %             2.09 %              90.53 %
Covered loans                              26,429             101            2,528                0.38 %             9.57 %               4.00 %
Leases                                      6,021             994            1,160               16.51 %            19.27 %              85.69 %

Total                                   $ 583,405     $    11,495     $     15,176                1.97 %             2.60 %              75.74 %

Investing Activities

Total securities were $96.8 million at June 30, 2012, compared with $112.5 million at March 31, 2012 and $103.8 million at December 31, 2011. The reduction in the investment securities portfolio from March 31, 2012 reflects the use of excess liquidity garnered in the first quarter 2012 to fund the loan growth in the second quarter 2012. The growth in securities in the first quarter of 2012 was primarily in short-term U.S. Treasury bonds with the expectation of deployment into loans in the second quarter 2012. Interest-bearing deposits at other banks, which consist of overnight funds kept at correspondent banks, increased from $3.2 million at December 31, 2011 to $31.9 million at March 31, 2012 and $31.4 million at June 30, 2012. Interest-bearing cash has increased as deposit growth outpaced loan growth. The Company plans to eventually deploy these short-term investments into loans. Securities and interest-bearing deposits at correspondent banks made up 19.6 % of the Bank's total average interest earning assets in the second quarter of 2012, compared with 18.4% in the first quarter of 2012.

The Company's highest concentration in its securities portfolio is in government-sponsored mortgage-backed securities with 37.1% at June 30, 2012, compared with 36.0% at December 31, 2011. Tax-advantaged municipal bonds comprised 36.7% of the total portfolio at June 30, 2012, compared with 34.8% at December 31, 2011, while

the concentration in U.S. government-sponsored agency bonds was 26.1% of the portfolio at June 30, 2012, compared with 29.2% of the portfolio at December 31, 2011.

The credit quality of the securities portfolio as a whole is believed to be strong as the portfolio has no individual securities in a significant unrealized loss position. With interest rates remaining near historic lows, the net unrealized gain position of the investment portfolio decreased slightly from $4.1 million at December 31, 2011 to $4.0 million at June 30, 2012. However, this was an increase from $3.9 million at March 31, 2012.

The Company monitors extension and prepayment risk in the securities portfolio to limit potential exposures. Available-for-sale securities with a total fair value of $75.2 million at June 30, 2012, as compared with $76.7 million at December 31, 2011, were pledged as collateral to secure public deposits and for other purposes required or permitted by law. The Company has no direct exposure to subprime mortgages, nor does the Company hold private mortgage-backed securities, credit default swaps, or FNMA or FHLMC preferred stock investments in its investment portfolio.

Funding Activities

Total deposits at June 30, 2012 were $653.9 million, reflecting a $4.2 million or 0.7% increase from March 31, 2012 and a $37.7 million, or 6.1%, increase from December 31, 2011. Total demand deposits at June 30, 2012 were $116.2 million, reflecting a $1.8 million or 1.6% increase from March 31, 2012, but a $1.8 million or 1.5% decrease from December 31, 2011. Demand deposit balances fluctuate day-to-day based on the high volume of transactions normally associated with the demand product, and therefore average demand deposit growth is a better measure of sustained growth. Average demand deposits of $115.0 million during the three month period ended June 30, 2012 was 0.2% higher than the first quarter of 2012, but 8.8% higher than the prior year's second quarter. Most of the Company's growth in the past year in demand deposits has come from commercial customers.

The Company's retail deposit growth vehicle continues to be the complementary Better Checking and Better Savings products, which are included in the NOW and . . .