The following discussion compares the consolidated financial condition of the Company at June 30, 2012 and December 31, 2011, and the results of operations for the three- and six-month periods ended June 30, 2012 and 2011. This discussion should be read in conjunction with the interim financial statements and footnotes included herein.

OVERVIEW

The Company currently operates as a community-oriented financial institution that accepts deposits from the general public in the communities surrounding its 8 full-service banking centers. The deposited funds, together with funds generated from operations and borrowings, are used by the Company to originate loans. The Company's principal lending activity is the origination of mortgage loans for the purchase or refinancing of one-to-four family residential properties. The Company also originates commercial and multi-family real estate loans, construction loans, commercial loans, automobile loans, home equity loans and lines of credit, and a variety of other consumer loans.

For the quarter ended June 30, 2012, the Company reported a net loss of $270,000, or $0.09 per basic and diluted share, compared to net income of $263,000, or $0.09 per basic and diluted share, for the year earlier period, a decrease of $533,000. Net income was $331,000, or $0.11 per basic and diluted share, for the six months ended June 30, 2012 as compared to $423,000, or $0.15 per share, for the same period ended June 30, 2011.

Total assets increased by $619,000, or 0.3%, from $217.0 million as of December 31, 2011 to $217.7 million as of June 30, 2012. Cash and cash equivalents decreased by $77,000 and investment securities available for sale decreased by $774,000 while net loans receivable increased $1.6 million during this time period. Total deposits increased $3.8 million from December 31, 2011 to June 30, 2012, Federal Home Loan Bank advances decreased by $2.1 million, while REPO sweep accounts decreased by $1.7 million, and equity increased by $672,000.

CRITICAL ACCOUNTING POLICIES

As of June 30, 2012, there have been no changes in the critical accounting policies as disclosed in the Company's Form 10-K for the year ended December 31, 2011. The Company's critical accounting policies are described in the Management's Discussion and Analysis and financial sections of its 2011 Annual Report. Management believes its critical accounting policies relate to the Company's allowance for loan losses, mortgage servicing rights, valuation of deferred tax assets and impairment of intangible assets.

COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 2012 AND DECEMBER 31, 2011

ASSETS: Total assets increased $619,000, or 0.3%, to $217.7 million at June 30, 2012 from $217.0 million at December 31, 2011. Investment securities available for sale decreased $774,000, or 1.5%, from December 31, 2011 to June 30, 2012. Net loans receivable increased $1.6 million, or 1.1% to $142.4 million at June 30, 2011 from $140.9 million at December 31, 2011. The increase in net loans was attributable primarily to placing in our portfolio certain high-quality 10- and 15-year fixed rate residential mortgages as opposed to selling them in the secondary market.

LIABILITIES: Deposits increased by $3.8 million to $154.4 million at June 30, 2012 from $150.6 million at December 31, 2011. However, the composition of our deposits changed during the six-month period. We experienced increases of $1.1 million in statement savings accounts, $4.9 million in non-interest bearing demand deposit accounts and $261,000 in NOW demand deposit accounts during the six-month period. Partially offsetting these increases were decreases of $1.8 million in our traditional certificates of deposit and $1.4 million in our liquid certificates of deposit (from which customers can take a penalty-free withdrawal with seven days advance written notice) as, in general, we were not the market leader in rates on these products during this time period. Total FHLB advances decreased $2.1 million to $32.5 million at June 30, 2012 from $34.5 million at December 31, 2011 as we paid off advances with deposits.

EQUITY: Stockholders' equity increased by $499,000 to $25.1 million at June 30, 2012 from $24.6 million at December 31, 2011. The increase was due primarily to net income for the six-month period of $331,000 and an increase of $167,000 in the unrealized gain on available-for-sale securities.

RESULTS OF OPERATIONS

Three Months Ended June 30, 2012 Compared to Three Months Ended June 30, 2011

General:Net income decreased by $533,000 to a loss of $270,000 for the three months ended June 30, 2012 from income of $263,000 for the same period ended June 30, 2011.

Interest Income: Interest income decreased to $2.4 million for the three months ended June 30, 2012 from $2.7 million for the year earlier period, due mainly to a decrease of 66 basis points in the average yield on interest-earning assets period over period.

Interest Expense: Interest expense decreased to $427,000 for the three months ended June 30, 2012 from $581,000 for the three months ended June 30, 2011. The decrease in interest expense for the three-month period was due primarily to a decrease in our cost of funds related to certificates of deposit and FHLB advances. The average cost of our certificates of deposit decreased from 1.76% for the three months ended June 30, 2011 to 1.27% for the three months ended June 30, 2012 as higher costing deposits matured and either left the Bank as we were not a market leader in rates or were re-priced at a lower rate. In addition, the cost of our FHLB advances decreased 35 basis points from 2.25% for the three months ended June 30, 2011 to 1.90% for the three months ended June 30, 2012 due to decreases in market interest rates.

The following table sets forth information regarding the changes in interest income and interest expense of the Bank during the periods indicated.

                                         Quarter ended June 30, 2012
                                                 Compared to
                                         Quarter ended June 30, 2011
                                         Increase (Decrease) Due to:
                                      Volume           Rate        Total
                                                (In thousands)
Interest-earning assets:
Loans receivable                     $    (120 )     $    (185 )   $ (305 )
Investment securities                      308            (341 )   $  (33 )
Other investments                          (14 )            13     $   (1 )
Total interest-earning assets              174            (513 )     (339 )

Interest-bearing liabilities:
Money Market/NOW accounts                   (2 )           (18 )      (20 )
Certificates of Deposit                    (37 )           (87 )     (124 )
Deposits                                   (39 )          (105 )     (144 )
Borrowed funds                              22             (31 )       (9 )
Total interest-bearing liabilities         (17 )          (136 )     (153 )

Change in net interest income.       $     191       $    (377 )   $ (186 )

Net Interest Income:Net interest income decreased to $1.9 million for the three-month period ended June 30, 2012 from $2.1 million for the same period in 2011. For the three months ended June 30, 2012, average interest-earning assets decreased $151,000, or 0.1% when compared to the same period in 2011. Average interest-bearing liabilities decreased $4.2 million, or 2.4%, to $174.7 million for the quarter ended June 30, 2012 from $178.9 million for the quarter ended June 30, 2011. The yield on average interest-earning assets decreased to 4.68% for the three-month period ended June 30, 2012 from 5.34% for the same period ended in 2011, and the cost of average interest-bearing liabilities decreased to 0.98% from 1.30% for the three-month periods ended June 30, 2012 and 2011, respectively. The net interest margin decreased to 3.82% for the three-month period ended June 30, 2012 from 4.19% for same period in 2011.

Provision for Loan Losses:The allowance for loan losses is established through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibiity of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is evaluated on a regular basis by management and is based upon management's periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available.

The provision for loan losses for the three-month period ended June 30, 2012 was $578,000 as compared to income of $19,000 for the prior year period. Prior to 2012, our provision for loan losses was based on an eight-quarter rolling average of actual net charge-offs adjusted for environmental factors for each segment of loans in our portfolio. Management has decided that eight quarters is no longer reflective of the inherent loss in the loan portfolios. In 2012, we began moving towards a twelve-quarter rolling average of actual net charge-offs by adding an additional quarter of net charge-offs each quarter in 2012. By the end of 2012 we will be using a twelve-quarter rolling average. During the quarter ended June 30, 2012, we charged off $386,000 in mortgage loans as compared to only $242,000 during the quarter ended June 30, 2011 due in large part to continued declines in residential real estate values in our markets. The direct effect of the increase in charge-offs quarter over quarter combined with the impact the increased charge-offs had on the general reserve factor applied to the entire pool of mortgage loans for the quarter ended June 30, 2012, was a main cause of the increase in provision period over period. In addition, during the quarter ended June 30, 2012, we added $95,000 in specific reserves on two impaired commercial credits and also increased our general reserve pool for special mention and substandard commercial credits by approximately $250,000. The provision was based on management's review of the components of the overall loan portfolio, the status of non-performing loans and various subjective factors.

Non Interest Income:Non interest income decreased slightly to $391,000 for the three months ended June 30, 2012 from $393,000 for the three months ended June 30, 2011. In 2012 we experienced an increase in mortgage banking activities, resulting in a $32,000 increase in income period over period. The increase in mortgage banking activities income was offset by an increase in losses on sale of real estate owned and other repossessed assets of $30,000 for the three months ended June 30, 2012 as compared to the prior-year period due to a continued decline in real estate values in our markets.

Non Interest Expense: Non interest expense decreased from $2.3 million for the three months ended June 30, 2011 to $2.1 million for the three months ended June 30, 2012. Most notably, other expenses, consisting primarily of expenses related to problem credits, decreased $64,000 period over period as asset quality has improved. In addition, our amortization of intangible assets decreased by $29,000 period over period as core deposits intangible for certain branches were fully amortized during the three month period ended June 30, 2012, and our occupancy expenses decreased by $30,000 due primarily to furniture, fixtures and equipment which became fully depreciated in 2011. Partially offsetting these positive factors period over period was compensation and benefits expense which was higher in 2012 than in 2011 due to the addition of a commercial lender and Treasury Management professional in 2012. In addition we spent $16,000 more in advertising during the three-month period ended June 30, 2012 as a result of a concerted effort to increase awareness of our status as a community bank and to promote certain loan products.

Income Taxes: The Company had a federal income tax benefit of $135,000 for the three months ended June 30, 2012 due to the pre-tax net loss for the period.

Six Months Ended June 30, 2012 Compared to Six Months Ended June 30, 2011

General:Net income decreased by $93,000 to $331,000 for the six months ended June 30, 2012 from $423,000 for the same period ended June 30, 2011.

Interest Income: Interest income decreased by $523,000 to $4.8 million for the six-month period ended June 30, 2012 from $5.3 million for the same period in 2011. This decrease was primarily attributed to a decline in the average balance of interest earning assets of $573,000 to $201.3 million for the six-month period ended June 30, 2012 from $201.9 million for the six-month period ended June 30, 2011. In addition, we experienced a decrease in the yield on our interest earning assets of 52 basis points period over period due mainly to lower market interest rates period over period.

Interest Expense: Interest expense for the six months ended June 30, 2012 decreased to $891,000 from $1.2 million for the six months ended June 30, 2011. The decrease in interest expense for the six-month period was due primarily to a decrease in the cost of our certificates of deposit and FHLB advances. The cost of our certificates of deposit decreased 52 basis points from 1.82% for the six months ended June 30, 2011 to 1.30% for the six months ended June 30, 2012, as higher costing deposits matured and either left the Bank or were re-priced at lower rates. In addition, the cost of our FHLB advances decreased 29 basis points from 2.27% for the six months ended June 30, 2011 to 1.98% for the six months ended June 30, 2012 due primarily to lower market interest rates period over period.

The following table sets forth information regarding the changes in interest income and interest expense of the Bank during the periods indicated.

                                         Six Months ended June 30, 2012
                                                   Compared to
                                         Six Months ended June 30, 2011
                                           Increase (Decrease) Due to:
                                       Volume            Rate         Total
                                                 (In thousands)
Interest-earning assets:
Loans receivable                     $     (355 )     $     (184 )    $ (539 )
Investment securities                        50              (34 )        16
Other investments                           (22 )             22           -
Total interest-earning assets              (327 )           (196 )      (523 )

Interest-bearing liabilities:
Money Market/NOW accounts                    (4 )            (43 )       (47 )
Certificates of Deposit                     (75 )           (179 )      (254 )
Deposits                                    (79 )           (222 )      (301 )
Borrowed funds                               58              (52 )         6
Total interest-bearing liabilities          (21 )           (274 )      (295 )

Change in net interest income        $     (306 )     $       78      $ (228 )

Net Interest Income: Net interest income decreased by $228,000 for the six-month period ended June 30, 2012 compared to the same period in 2011. For the six months ended June 30, 2012, average interest-earning assets decreased $573,000, or 0.2%, when compared to the same period in 2011. Average interest-bearing liabilities decreased $3.1 million, or 1.72%, to $176.1 million for the six-month period ended June 30, 2012 from $179.1 million for the six-month period ended June 30, 2011. The yield on average interest-earning assets decreased to 4.74% for the six month period ended June 30, 2012 from 5.26% for the same period ended in 2011 while the cost of average interest-bearing liabilities decreased to 1.02% from 1.34% for the six-month periods ended June 30, 2012 and 2011, respectively. The net interest margin decreased to 3.86% for the six month period ended June 30, 2012 from 4.08% for same period in 2011.

Delinquent Loans and Nonperforming Assets. Nonperforming assets decreased by $379,000 from December 31, 2011 to June 30, 2012 due in large part to commercial real estate being reclassified as real estate owned during the six month period ended June 30, 2012.

                                                                   June 30,       December 31,
                                                                     2012             2011
                                                                     (Dollars in thousands)
Total non-accrual loans                                           $     2,592     $       3,101

Accrual loans delinquent 90 days or more:
One- to four-family residential                                            90               238
Other real estate loans                                                     0                 0
Construction                                                                0                 0
Purchased Out-of-State                                                      0                 0
Commerical                                                                 19                 0
Consumer & other                                                            8                 -
Total accrual loans delinquent 90 days or more                    $       117     $         238

Total nonperforming loans (1)                                           2,709             3,339
Total real estate owned-residential mortgages (2)                         923             1,087
Total real estate owned-Commercial (2)                                    466             1,015
Total real estate owned-Consumer & other repossessed assets (2)         1,122             1,306
Total nonperforming assets                                        $     5,220     $       6,747

Total nonperforming loans to loans receivable                            1.88 %            2.35 %
Total nonperforming assets to total assets                               2.40 %            3.11 %

(1) All of the Bank's loans delinquent more than 90 days are classified as nonperforming.

(2) Represents the net book value of property acquired by the Bank through foreclosure or deed in lieu of foreclosure. Upon acquisition, this property is recorded at the lower of its fair market value or the principal balance of the related loan.

Provision for Loan Losses: For the six-month period ended June 30, 2012, the provision for loan losses was $955,000 as compared to $48,000 for the same period ended June 30, 2011. As discussed above in the discussion for the three-month period ended June 30, 2012, our provision for loan losses is based on a ten-quarter rolling average of actual net charge-offs adjusted for various environmental factors for each pool of loans in our portfolio. During the six-month period ended June 30, 2012, we added specific reserves of approximately $295,000 on four commercial credit relationships, two of which were reclassified as Troubled Debt Restructurings, increased the general reserve factor applied to the entire portfolio of residential mortgages as a result of increased charge-off history in 2012, and increased our general reserve pool for special mention and substandard commercial credits by approximately $250,000 based on the inherent increased risk in those credits. The provision was based on management's review of the components of the overall loan portfolio, the status of non-performing loans and various subjective factors.

The ratio of nonperforming loans to total loans was 1.88% and 2.35% at June 30, 2012 and December 31, 2011, respectively. As a percent of total assets, nonperforming loans decreased to 2.40% at June 30, 2012 from 3.11% at December 31, 2011.

The following table sets forth the details of our loan portfolio at the dates indicated:

                                                                   Delinquent
                                                   Portfolio          Loans          Non-Accrual
                                                    Balance       Over 90 Days          Loans
                                                              (Dollars in thousands)
At June 30, 2012
Real estate loans:
Construction                                      $       705     $           -     $         173
One - to four - family                                 66,830                90             1,706
Commercial Mortgages                                   54,933                 -               571
Home equity lines of credit/ Junior liens              12,169                 -               130
Commercial loans                                        8,618                19                 -
Consumer loans                                          1,272                 8                12

Total gross loans                                     144,527               117             2,592
Less:
Net deferred loan fees                                   (305 )              (1 )              (3 )
Allowance for loan losses                              (1,773 )               -                 -
Total loans, net                                  $   142,449     $         116     $       2,589

At December 31, 2011
Real estate loans:
Construction                                      $       762     $           -     $         173
One - to four - family                                 66,101               282             2,420
Commercial Mortgages                                   53,938                82               356
Home equity lines of credit/Junior liens               13,395                 -               148
Commercial loans                                        7,002                 -                 -
Consumer loans                                          1,477                 2                 4

Total gross loans                                     142,675               366             3,101
Less:
Net deferred loan fees                                   (273 )              (1 )              (7 )
Allowance for loan losses                              (1,518 )               -              (261 )
Total loans, net                                  $   140,884     $         365     $       2,833

Non Interest Income: Non interest income decreased from $842,000 for the six months ended June 30, 2011 to $837,000 for the six months ended June 30, 2012, mainly due to an increase on loss on sale of real estate owned and other repossessed assets of $24,000 due to continued decline in real estate values in our markets, partially offset by increases in mortgage banking activities income of $16,000 and service charge income of $11,000, period over period.

Non Interest Expense. Non interest expense decreased from $4.5 million for the six months ended June 30, 2011 to $4.4 million for the six months ended June 30, 2012. The decrease was primarily due to decreases of $58,000 in occupancy expenses, $28,000 in our FDIC premiums due in part to an improvement in our risk profile, and $93,000 in other expenses associated with reduced costs associated with real estate owned and other repossessed assets, these decreased were offset by an increase in compensation and employee benefits of $120,000 during the six-month period ended June 30, 2012, as we added a commercial lender and Treasury Management professional.

Income Taxes:A valuation allowance is provided against deferred tax assets when it is more likely than not that some or all of the deferred tax asset will not be realized. At March 31, 2012, management evaluated the Company's valuation allowance related to its deferred tax asset. An analysis of the deferred tax asset was made to determine the utilization of those tax benefits based upon projected future taxable income. Based upon management's determination and in accordance with the generally accepted accounting principles, Management concluded that the utilization of this asset was "more likely than not." At March 31, 2012, $866,000 of the valuation allowance was credited to income tax expense. Among the criteria that management considered in evaluating the deferred tax asset were: improved core profitability of the Bank in 2010 and 2011; substantial improvement over the past two years in non-performing assets, which were driving losses in prior years; and positive forecast for taxable income looking forward over the next three years. A valuation allowance of $2.2 million remains on $3.5 million of the current deferred tax asset at June 30, 2012.

The valuation of deferred tax assets is a subjective calculation. Management reviewed several factors in determining the value of deferred tax assets that the Company expects to realize over the next three years, including:

· Despite the Company's loss for the six months ended June 30, 2012, we expect that trend to reverse for the remaining quarters in 2012.

· The six months ended June 30, 2012 included expenses associated with the decline in value of certain of our REO properties that we consider to be "one-time expenses" in 2012.

· The level of our non-performing assets continues to decrease each quarter, from $8.9 million at June 30, 2011 to $6.7 million at December 31, 2011 to $5.2 million at June 30, 2012. We expect that trend to continue, which will have a positive impact on earnings in future quarters.

· We sold our two largest pieces of REO property at the end of 2011, therefore 2012 earnings will not be burdened with carrying costs on those properties.

As of June 30, 2012 the Company had a net operating loss carryforward for tax purposes of approximately $10.0 million and related deferred tax asset of $3.4 million. The Company will continue to evaluate the future benefits from these carryforwards and at such time as it becomes "more likely than not" that they would be utilized prior to expiration, the Company will recognize the additional benefits as an adjustment to the valuation allowance. The net operating loss carryforwards expire twenty years from the date they originated. These carryforwards, if not utilized, will expire in the year 2031.

LIQUIDITY

The Company's current liquidity position is more than adequate to fund expected asset growth. The Company's primary sources of funds are deposits, FHLB advances, proceeds from principal and interest payments, prepayments on loans and mortgage-backed and investment securities and sale of long-term fixed-rate mortgages into the secondary market. While maturities and scheduled amortization of loans and mortgage-backed securities are a predictable source of funds, deposit flows, mortgage prepayments and sale of mortgage loans into the secondary market are greatly influenced by general interest rates, economic conditions and competition.

Liquidity represents the amount of an institution's assets that can be quickly and easily converted into cash without significant loss. The most liquid assets are cash, short-term U.S. Government securities, U.S. Government agency securities and certificates of deposit. The Company is required to maintain sufficient levels of liquidity as defined by OCC regulations. This requirement may be varied at the direction of the OCC. Regulations currently in effect require that the Bank must maintain sufficient liquidity to ensure its safe and sound operation. The Company's objective for liquidity is to be above 20%. Liquidity as of June 30, 2012 was $45.6 million, or 37.94% compared to $44.6 million, or 39.9% at December 31, 2011. The levels of these assets are dependent on the Company's operating, financing, lending and investing activities during any given period. The liquidity calculated by the Company includes additional borrowing capacity available with the FHLB. This borrowing capacity is based on pledged collateral.

The Company intends to retain for its portfolio certain originated residential mortgage loans (primarily adjustable rate and shorter term fixed rate mortgage loans) and to generally sell the remainder in the secondary market. The Bank will from time to time participate in or originate commercial real estate loans, . . .