General

The primary function of the Company is to monitor and oversee its investment in the Bank. The Company engages in few other activities, and the Company has no significant assets other than its investment in the Bank. As a result, the results of operations of the Company are derived primarily from operations of the Bank. The Bank's results of operations are primarily dependent on net interest margin, which is the difference between interest income on interest-earning assets and interest expense on interest-bearing liabilities. The Bank's income is also affected by the level of its noninterest expenses, such as employee salaries and benefits, occupancy expenses and other expenses. The following discussion reviews material changes in the Company's financial condition as of June 30, 2012, and the results of operations for the three and six months ended June 30, 2012 and 2011.

The discussion set forth below, as well as other portions of this Form 10-Q, may contain forward-looking comments. Such comments are based upon the information currently available to management of the Company and management's perception thereof as of the date of this Form 10-Q. When used in this Form 10-Q, words such as "anticipates," "estimates," "believes," "expects," and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements. Such statements are subject to risks and uncertainties. Actual results of the Company's operations could materially differ from those forward-looking comments. The differences could be caused by a number of factors or combination of factors including, but not limited to: changes in demand for banking services; changes in portfolio composition; changes in management strategy; increased competition from both bank and non-bank companies; changes in the general level of interest rates; changes in general or local economic conditions; changes in federal or state regulations and legislation governing the operations of the Company or the Bank; and other factors set forth in reports and other documents filed by the Company with the SEC from time to time, including the risk factors described under Item 1A. of this Form 10-Q and Item 1A. of the Company's Form 10-K for the fiscal year ended December 31, 2011.

Financial Condition

The Company's total assets increased $8,102,295 (1%) from $648,505,858 as of December 31, 2011, to $656,608,153 as of June 30, 2012.

Interest-bearing deposits decreased $5,587,654 (100%) from $5,587,654 as of December 31, 2011, to $0 as of June 30, 2012. The decrease is due to maturities during the period.

Available-for-sale securities increased $21,790,689 (27%) from $81,064,878 as of December 31, 2011, to $102,855,567 as of June 30, 2012. The increase is primarily due to purchases of $46.5 million offset by sales, maturities and principal payments received of $24.7 million.

Net loans receivable decreased by $6,530,459 (1%) from $478,960,736 as of December 31, 2011, to $472,430,277 as of June 30, 2012. The Company experienced certain anticipated payoffs of various commercial real estate loans. During the period, commercial real estate loans decreased $18,838,516 (11%). Also, commercial loans increased $8,701,816 (9%), permanent multi-family loans increased $2,650,153 (6%), construction loans increased $3,131,259 (7%), loans secured by owner occupied one to four unit residential real estate increased $425,412 (0%) and installment loans decreased $104,968 (1%). The Company continues to focus its lending efforts in the commercial and owner occupied real estate loan categories, and to reduce its concentrations in non-owner occupied commercial real estate.

Allowance for loan losses increased $2,512,993 (24%) from $10,613,145 as of December 31, 2011 to $13,126,138 as of June 30, 2012. The allowance increased due to the provision for loan losses of $3,000,000 exceeding net loan charge-offs of $487,007 recorded during the period. Management charged off certain specific loans that had been identified and classified as impaired at December 31, 2011. See discussion under "Results of Operations - Comparison of Three and Six Month Periods Ended June 30, 2012 and 2011 - Provision for Loan Losses." The allowance for loan losses, as a percentage of gross loans outstanding (excluding mortgage loans held for sale), as of June 30, 2012 and December 31, 2011 was 2.70% and 2.17%, respectively. The allowance for loan losses, as a percentage of nonperforming loans outstanding, as of June 30, 2012 and December 31, 2011 was 38.6% and 62.4%, respectively. Management believes the allowance for loan losses is at a level to be sufficient in providing for potential loan losses in the Bank's existing loan portfolio.

Deposits increased $11,771,975 (2%) from $484,583,665 as of December 31, 2011, to $496,355,640 as of June 30, 2012. For the six months ended June 30, 2012, checking and savings accounts increased by $14.7 million and certificates of deposit decreased by $2.9 million. See also the discussion under "Quantitative and Qualitative Disclosure about Market Risk - Asset/Liability Management."

Stockholders' equity (including unrealized appreciation on available-for-sale securities, net of tax) decreased $3,831,109 from $54,234,847 as of December 31, 2011, to $50,403,738 as of June 30, 2012. In conjuction with the Series A Preferred Stock, the Company redeemed $5 million in principal during the quarter ended June 30, 2012 and accrued $413,194 of dividends (5%) during the six month period. The Company's net income during the six month period was $1,178,843. On a per common share basis, stockholders' equity increased from $14.07 as of December 31, 2011 to $14.25 as of June 30, 2012.

Average Balances, Interest and Average Yields

The Company's profitability is primarily dependent upon net interest income, which represents the difference between interest and fees earned on loans and debt and equity securities, and the cost of deposits and borrowings. Net interest income is dependent on the difference between the average balances and rates earned on interest-earning assets and the average balances and rates paid on interest-bearing liabilities. Non-interest income, non-interest expense, and income taxes also impact net income.

The following table sets forth certain information relating to the Company's average consolidated statements of financial condition and reflects the average yield on assets and average cost of liabilities for the periods indicated. Such yields and costs are derived by dividing income or expense annualized by the average balance of assets or liabilities, respectively, for the periods shown. Average balances were derived from average daily balances. The average balance of loans includes loans on which the Company has discontinued accruing interest. The yields and costs include fees which are considered adjustments to yields. All dollar amounts are in thousands.

                                 Three months ended 6/30/2012                        Three months ended 6/30/2011
                          Average                                             Average
                          Balance          Interest       Yield / Cost        Balance          Interest       Yield / Cost
ASSETS
Interest-earning:
Loans                   $   478,619       $    6,330               5.30 %   $   510,425       $    6,823               5.36 %
Investment securities       103,286              471               1.83 %        99,169              738               2.98 %
Other assets                 25,068               45               0.72 %        36,260               81               0.90 %
Total
interest-earning            606,973            6,846               4.52 %       645,854            7,642               4.75 %
Noninterest-earning          44,425                                              43,495
                        $   651,398                                         $   689,349
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing:
Savings accounts        $    22,326               22               0.40 %   $    19,919               29               0.58 %
Transaction accounts        281,292              528               0.75 %       253,422              626               0.99 %
Certificates of
deposit                     149,214              497               1.34 %       172,634              855               1.99 %
FHLB advances                68,050              384               2.26 %        93,050              608               2.62 %
Securities sold under
agreements to
repurchase                   25,000              162               2.60 %        39,750              289               2.92 %
Subordinated
debentures                   15,465              139               3.61 %        15,465              134               3.48 %
Total
interest-bearing            561,347            1,732               1.24 %       594,240            2,541               1.72 %
Noninterest-bearing          35,813                                              41,419
Total liabilities           597,160                                             635,659
Stockholders' equity         54,238                                              53,690
                        $   651,398                                         $   689,349
Net earning balance     $    45,626                                         $    51,614
Earning yield less
costing rate                                                       3.28 %                                              3.03 %
Net interest income,
and net yield spread
on interest earning
assets                                    $    5,114               3.38 %                     $    5,101               3.17 %
Ratio of
interest-earning
assets to
interest-bearing
liabilities                                      108 %                                               109 %

                                    Six months ended 6/30/2012                             Six months ended 6/30/2011
                        Average Balance       Interest       Yield / Cost      Average Balance       Interest       Yield / Cost
ASSETS
Interest-earning:
Loans                   $        481,531     $   12,734               5.33 %   $        509,576     $   13,540               5.36 %
Investment securities             95,256            883               1.87 %             97,685          1,463               3.02 %
Other assets                      24,178             95               0.79 %             36,355            169               0.94 %
Total
interest-earning                 600,965         13,712               4.60 %            643,616         15,172               4.75 %
Noninterest-earning               46,512                                                 42,760
                        $        647,477                                       $        686,376
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing:
Savings accounts        $         21,897             45               0.41 %   $         19,756             61               0.62 %
Transaction accounts             272,193          1,096               0.81 %            254,076          1,321               1.05 %
Certificates of
deposit                          150,535          1,048               1.40 %            171,516          1,728               2.03 %
FHLB advances                     68,050            768               2.28 %             93,050          1,208               2.62 %
Securities sold under
agreements to
repurchase                        25,000            346               2.79 %             39,750            568               2.88 %
Subordinated
debentures                        15,465            279               3.64 %             15,465            341               4.45 %
Total
interest-bearing                 553,140          3,582               1.31 %            593,613          5,227               1.78 %
Noninterest-bearing               39,520                                                 39,458
Total liabilities                592,660                                                633,071
Stockholders' equity              54,817                                                 53,305
                        $        647,477                                       $        686,376
Net earning balance     $         47,825                                       $         50,003
Earning yield less
costing rate                                                          3.29 %                                                 2.97 %
Net interest income,
and net yield spread
on interest earning
assets                                       $   10,130               3.40 %                        $    9,945               3.12 %
Ratio of
interest-earning
assets to
interest-bearing
liabilities                                         109 %                                                  108 %

Results of Operations - Comparison of Three and Six Month Periods Ended June 30, 2012 and 2011

Net income for the three and six months ended June 30, 2012 was $344,121 and $1,178,843, respectively, compared to $789,542 and $1,312,504 for the three and six months ended June 30, 2011, respectively, which represents a decrease in net income of $445,421 (56%) for the three month period, and a decrease in net income of $133,661 (10%) for the six month period.

Interest Income

Total interest income for the three months and six months ended June 30, 2012 decreased $795,135 (10%) and $1,459,331 (10%), respectively, as compared to the three months and six months ended June 30, 2011. For the three month and six month periods ended June 30, 2012 compared to the same periods in 2011, the average yield on interest earning assets decreased 23 basis points to 4.52% and 15 basis points to 4.60%, while the average balance of interest earning assets decreased approximately $38,881,000 and $42,651,000, respectively. The Company's decrease in the average yield on interest earning assets was primarily impacted by the average yield on investments which decreased 115 basis points to 1.83% and 115 basis points to 1.87% for the three months and six months ended June 30, 2012, as compared to the same periods in 2011. This was primarily due to a series of investment transactions in the fourth quarter of 2011 to sell certain investment securities in order to prepay $14.75 million of repurchase agreements. The securities carried a weighted average yield of 5.00% at the time of sale. Another factor that has negatively impacted the Company's average yield on interest earning assets during the quarter was the increase in nonaccrual loans which was $34.0 million as of June 30, 2012, as compared to $17.0 million as of December 31, 2011.

Interest Expense

Total interest expense for the three months and six months ended June 30, 2012 decreased $807,970 (32%) and $1,644,131 (31%), respectively, when compared to the three months and six months ended June 30, 2011. For the three month and six month periods ended June 30, 2012 compared to the same periods in 2011, the average cost of interest bearing liabilities decreased 48 basis points to 1.24% and 47 basis points to 1.31%, respectively, while the average balance of interest bearing liabilities decreased approximately $32,893,000 and $40,473,000, respectively, when compared to the same periods in 2011. The primary reason for the significant decrease in the average cost of interest bearing liabilities was the continued decline in higher cost certificates of deposits as well as reductions in the average rate paid on transaction deposit balances. Also, the Company reduced its FHLB advances and securities sold under agreements to repurchase during the latter half of 2011. As a result, interest expense on these borrowings decreased $223,075 (37%) and $439,720 (36%), respectively, for the three and six months ended June 30, 2012 as compared to the same periods in 2011.

Net Interest Income

Net interest income for the three months and six months ended June 30, 2012 increased $12,835 (0%) and $184,800 (2%), respectively, when compared to the same periods in 2011. For the three and six month periods ended June 30, 2012, the average balance of net interest earning assets decreased by approximately $5,988,000 and $2,178,000, respectively, less than the average balance in interest bearing liabilities decreased when compared to the same periods in 2011. For the three and six month periods ended June 30, 2012, the net interest margin increased 21 to 3.38% and 28 basis points to 3.40%, respectively, when compared to the same periods in 2011.

Provision for Loan Losses

Based on its internal analysis and methodology, management recorded a provision for loan losses of $2,100,000 and $3,000,000 for the three months and six months ended June 30, 2012, respectively, compared to $1,000,000 and $1,900,000 for the same periods in 2011. The Bank will continue to monitor its allowance for loan losses and make future additions based on economic and regulatory conditions. Management of the Company anticipates the need to continue increasing the allowance for loan losses through charges to the provision for loan losses if anticipated growth in the Bank's loan portfolio increases or other circumstances warrant. Although the Bank maintains its allowance for loan losses at a level which it considers to be sufficient to provide for potential loan losses in its existing loan portfolio, there can be no assurance that future loan losses will not exceed internal estimates. In addition, the amount of the allowance for loan losses is subject to review by regulatory agencies which can order the establishment of additional loan loss provisions.

Noninterest Income

Noninterest income increased $325,349 (45%) and $414,462 (28%) for the three months and six months ended June 30, 2012, respectively, when compared to the three months and six months ended June 30, 2011.

Gains on investment securities decreased $42,518 (38%) and $8,693 (8%) for the three months and six months ended June 30, 2012, respectively, when compared to the same periods in 2011. Service charges on transaction accounts decreased by $89,479 (25%) and $173,620 (25%) for the three months and six months ended June 30, 2012 when compared to the same periods in 2011, due primarily to declines in overdraft charges, which is partially due to amendments to Regulation E regarding fees on debit card and ATM transactions. Gain on sale of loans increased $222,920 (88%) and $307,074 (58%) for the three months and six months ended June 30, 2012 when compared to the same periods in 2011 due to increased volume in mortgage loan originations and sales. Losses on foreclosed assets decreased by $218,459 (76%) and $251,337 (59%) for the three months and six months ended June 30, 2012 when compared to the same periods in 2011.

Noninterest Expense

Noninterest expense decreased $15,955 (0%) and $120,671 (1%) for the three months and six months ended June 30, 2012 when compared to the same periods in 2011.

Salaries and employee benefits increased $91,369 (4%) and $161,314 (4%) for the three months and six months ended June 30, 2012 when compared to the same periods in 2011. This increase was primarily due to additions of associates throughout 2011 in the areas of human resources, information systems and risk management, as well as normal pay raises. FDIC deposit insurance premiums decreased $23,893 (10%) and $93,431 (18%) for the three months and six months ended June 30, 2012 when compared to the same periods in 2011 primarily due to the change in the assessment base and rate structure that went into effect in the second quarter of 2011. The Company also experienced a significant decrease in legal expenses of $119,959 (62%) and $240,386 (61%) for the three months and six months ended June 30, 2012 when compared to the same periods in 2011 due to related costs incurred on a few specific troubled borrowers.

Provision for Income Taxes

The decrease in the provision for income taxes for the three months and six months ended June 30, 2012 as compared to the same periods in 2011 is primarily due to the effect of increased utilization of federal income tax credits.

Nonperforming Assets

The allowance for loan losses is calculated based upon an evaluation of pertinent factors underlying the various types and quality of the Bank's existing loan portfolio. When making such evaluation, management considers such factors as the repayment status of its loans, the estimated net realizable value of the underlying collateral, borrowers' intent (to the extent known by the Bank) and ability to repay the loan, local economic conditions and the Bank's historical loss ratios. The allowance for loan losses, as a percentage of nonperforming loans outstanding, as of June 30, 2012 and December 31, 2011 was 38.6% and 62.4%, respectively. Total loans classified as substandard, doubtful or loss as of June 30, 2012, were $41.6 million or 6.34% of total assets as compared to $32.9 million, or 5.08% of total assets at December 31, 2011. Management considered nonperforming and total classified loans in evaluating the adequacy of the Bank's allowance for loan losses.

The ratio of nonperforming assets to total assets is another useful tool in evaluating exposure to credit risk. Nonperforming assets of the Bank include nonperforming loans and assets which have been acquired as a result of foreclosure or deed-in-lieu of foreclosure. All dollar amounts are in thousands.

                                                      6/30/2012       12/31/2011       12/31/2010
Nonperforming loans                                  $    33,982     $     17,002     $     23,012
Real estate acquired in settlement of loans                8,116           10,012           10,540
Total nonperforming assets                           $    42,098     $     27,014     $     33,552

Total nonperforming assets as a percentage of
total assets                                                6.41 %           4.17 %           4.91 %
Allowance for loan losses                            $    13,126     $     10,613     $     13,083
Allowance for loan losses as a percentage of gross
loans                                                       2.70 %           2.17 %           2.54 %

Liquidity and Capital Resources

Liquidity refers to the ability to manage future cash flows to meet the needs of depositors and borrowers and fund operations. Maintaining appropriate levels of liquidity allows the Company to have sufficient funds available for customer demand for loans, withdrawal of deposit balances and maturities of deposits and other liabilities. The Company's primary sources of liquidity include cash and cash equivalents, customer deposits and Federal Home Loan Bank of Des Moines borrowings. The Company also has established borrowing lines available from the Federal Reserve Bank which is considered a secondary source of funds.

The Company's most liquid assets are cash and cash equivalents, which are cash on hand, amounts due from financial institutions, and certificates of deposit with other financial institutions that have an original maturity of three months or less. The levels of such assets are dependent on the Bank's operating, financing, and investment activities at any given time. The Company's cash and cash equivalents totaled $26,071,791 as of June 30, 2012 and $26,574,082 as of December 31, 2011, representing a decline of $502,291. The variations in levels of cash and cash equivalents are influenced by deposit flows and anticipated future deposit flows, which are subject to, and influenced by, many factors.

The Bank's capital ratios are above the levels required to be considered a well-capitalized financial institution. As of June 30, 2012, the Bank's Tier 1 leverage ratio was 9.51%, its Tier 1 risk-based capital ratio was 11.87% and the Bank's total risk-based capital ratio was 13.13% - all exceeding the minimums of 5%, 6% and 10%, respectively.

With regards to the securities sold to the Treasury under CPP, on June 13, 2012, the Company used $5,019,444 of its available cash to redeem 5,000 shares of the Company's Series A Preferred Stock held by the Treasury which included accrued and unpaid dividends of $19,444. As a result of this redemption, quarterly dividends on the Series A Preferred Stock will be reduced by $62,500 per quarter beginning in the third quarter of 2012. If the Company is unable to redeem the remaining Series A Preferred Stock within five years of its issuance, the cost of capital to the Company will increase significantly from 5% per annum ($600,000 annually) to 9% per annum ($1,080,000 annually). Depending on the Company's financial condition at the time, the increase in the annual dividend rate on the Series A Preferred Stock could have a material adverse effect on the Company's liquidity and net income available to common stockholders.