FORWARD LOOKING STATEMENTS

This report contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Corporation intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and is including this statement for purposes of these safe harbor provisions. Forward-looking statements which are based on certain assumptions and describe future plans, strategies, or expectations of the Corporation, are generally identifiable by use of the words "believe", "expect", "intend", "anticipate", "estimate", "project", or similar expressions. The Corporation's ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors that could cause actual results to differ from the results in forward-looking statements include, but are not limited to:

† The highly regulated environment in which the Corporation operates could adversely affect its ability to carry out its strategic plan due to restrictions on new products, funding opportunities or new market entrances;

† General economic conditions, either nationally or in the state(s) in which the Corporation does business;

† Legislation or regulatory changes which affect the business in which the Corporation is engaged;

† Changes in the level and volatility of interest rates which may negatively affect the Corporation's interest margin;

† Changes in securities markets with respect to the market value of financial assets and the level of volatility in certain markets such as foreign exchange;

† Significant increases in competition in the banking and financial services industry resulting from industry consolidation, regulatory changes and other factors, as well as action taken by particular competitors;

†          The ability of borrowers to repay loans;

†          The effects on liquidity of unusual decreases in deposits;

†          Changes in consumer spending, borrowing, and saving habits;

†          Technological changes;

†          Acquisitions and unanticipated occurrences which delay or reduce the
expected benefits of acquisitions;

†          Difficulties in hiring and retaining qualified management and banking
personnel;

†          The Corporation's ability to increase market share and control
expenses;

†          The effect of compliance with legislation or regulatory changes;

†          The effect of changes in accounting policies and practices;

†          The costs and effects of existing and future litigation and of

† An increase in the Corporation's FDIC insurance premiums, or the collection of special assessments by the FDIC.

These risks and uncertainties should be considered in evaluating forward-looking statements. Further information concerning the Corporation and its business, including additional factors that could materially affect the Corporation's financial results, is included in the Corporation's filings with the Securities and Exchange Commission. All forward-looking statements contained in this report are based upon information presently available and the Corporation assumes no obligation to update any forward-looking statements.

The following discussion will cover results of operations, asset quality, financial position, liquidity, interest rate sensitivity, and capital resources for the periods indicated. The information included in this discussion is intended to assist readers in their analysis of, and should be read in conjunction with, the consolidated financial statements and related notes and other supplemental information presented elsewhere in this report. This discussion should be read in conjunction with the consolidated financial statements and footnotes contained in the Corporation's Annual Report and Form 10-K for the year-ended December 31, 2011. Throughout this discussion, the term "Bank" refers to mBank, the principal banking subsidiary of the Corporation.

FINANCIAL OVERVIEW

The Corporation recorded a second quarter 2012 net income available to common shareholders of $4.141 million or $1.21 per share compared to net income of $.603 million, or $.18 per share for the second quarter of 2011. Operating results for the second quarter of 2012 included a valuation adjustment to the deferred tax asset of $3.000 million. Excluding the deferred tax asset, net income for the quarter was $1.141 million, or $.33 per share.

Weighted average shares outstanding totaled 3,419,736 for both periods. The common stock warrants outstanding of 379,310 shares were dilutive, at approximately $.04 per share, for the 2012 second quarter and $.05 per share for the six month period, as the market value of our stock remained above the $4.35 strike price.

The net interest margin for the second quarter of 2012 increased to $5.019 million, or 4.30%, compared to $4.178 million, of 3.79% in the second quarter of 2011. The six month margin in 2012 was $9.782 million, or 4.23% compared to $8.319 million, or 3.85%.

Total assets of the Corporation at June 30, 2012 were $524.366 million, up by $31.993 million, or 6.50% from the $492.373 million in total assets reported at June 30, 2011 and up by $26.055 million, or 5.22%, from total assets of $498.311 million at year-end 2011. The loan portfolio increased $18.207 million, or 4.54%, from December 31, 2011 balances of $401.246 million. Deposits totaled $425.381 million at June 30, 2012, an increase of $20.592 million from the $404.789 million at December 31, 2011.

FINANCIAL CONDITION

Cash and Cash Equivalents

Cash and cash equivalents decreased $.822 million during the first half of 2012. See further discussion of the change in cash and cash equivalents in the Liquidity section.

Investment Securities

Securities available for sale increased $.327 million from December 31, 2011 to June 30, 2012, with the balance on June 30, 2012, totaling $39.054 million. The Corporation purchased $6.293 million of investments during the 2012 first half mainly to replace maturities and paydowns of investments. Investment securities are utilized in an effort to manage interest rate risk and liquidity. As of June 30, 2012, investment securities with an estimated fair value of $9.242 million were pledged.

Loans

Through the first half of 2012, loan balances increased by $18.207 million, or 4.54%, from December 31, 2011 balances of $401.246 million. During the first half of 2012, the Bank had total loan production of $101 million, which included $29 million of secondary market loan production. This loan production, however, was offset by loan principal runoff, paydowns and amortization, and also SBA/USDA loan sales of $7.364 million, and nonperforming loans transferred to other real estate owned ("OREO") amounting to $.685 million.

Management continues to actively manage the loan portfolio, seeking to identify and resolve problem assets at an early stage. Management believes a properly positioned loan portfolio provides the most attractive earning asset yield available to the Corporation and, with a diligent loan approval process and exception reporting, management can effectively manage the risk in the loan portfolio. Management intends to continue loan growth within its

markets for mortgage, consumer, and commercial loan products while concentrating on loan quality, industry concentration issues, and competitive pricing.

Following is a summary of the loan portfolio at June 30, 2012, December 31, 2011 and June 30, 2011 (dollars in thousands):

                        June 30,    Percent of     December 31,    Percent of    June 30,    Percent of
                          2012        Total            2011          Total         2011        Total
Commercial real
estate                  $ 211,506        50.42 %  $      199,201        49.64 %  $ 198,285        50.22 %
Commercial,
financial, and
agricultural               85,099        20.29            92,269        23.00       84,405        21.38
One to four family
residential real
estate                     84,665        20.19            77,332        19.27       79,013        20.01
Construction:
Consumer                    5,595         1.33             5,774         1.44       23,062         5.84
Commercial                 22,793         5.43            19,745         4.92        4,181         1.06
Consumer                    9,795         2.34             6,925         1.73        5,866         1.49
Total loans             $ 419,453       100.00 %  $      401,246       100.00 %  $ 394,812       100.00 %

Following is a table showing the significant industry types in the commercial loan portfolio as of June 30, 2012, December 31, 2011 and June 30, 2011 (dollars in thousands):

                                        June 30, 2012                             December 31, 2011                             June 30, 2011
                            Outstanding    Percent of   Percent of      Outstanding    Percent of   Percent of      Outstanding    Percent of   Percent of
                              Balance        Loans       Capital          Balance        Loans       Capital          Balance        Loans       Capital

Real estate - operators
of nonres bldgs            $      83,539        26.15 %     138.42 %   $      75,391        24.22 %     135.53 %   $      59,587        19.49 %     108.77 %
Hospitality and tourism           36,557        11.45        60.57            33,306        10.70        59.87            33,467        10.94        61.09
Commercial construction           22,793         7.14        37.77            19,745         6.34        35.50            23,062         7.54        42.10
Lessors of
nonresidential buildings          13,358         4.18        22.13            16,499         5.30        29.66            16,316         5.34        29.78
Real estate agents and
managers                          12,860         4.03        21.31            10,617         3.41        19.09            14,909         4.88        27.21
Other                            150,291        47.05       249.02           155,657        50.02       279.83           158,411        51.81       289.16

Total Commercial Loans     $     319,398       100.00 %                $     311,215       100.00 %                $     305,752       100.00 %

Management recognizes the additional risk presented by the concentration in certain segments of the portfolio. On a historical basis, the Corporation's highest concentration of credit risk was the hospitality and tourism industry. Management does not consider the current loan concentrations in hospitality and tourism to be problematic, and has no intention of further reducing loans to this industry segment. Management does not believe that its current portfolio composition has increased exposure related to any specific industry concentration as of June 30, 2012. The current concentration of real estate related loans represents a broad customer base composed of a high percentage of owner occupied developments.

Our residential real estate portfolio predominantly includes one to four family adjustable rate mortgages that have repricing terms generally from one to three years, construction loans to individuals and bridge financing loans for qualifying customers. As of June 30, 2012, our residential loan portfolio totaled $84.665 million, or 20.19% of our total outstanding loans.

The Corporation has also extended credit to governmental units, including Native American organizations. Tax-exempt loans and leases decreased from $1.991 million at the end of December 31, 2011 to $1.736 million at June 30, 2012. The Corporation has elected to reduce its tax-exempt portfolio, since it provides no current tax benefit, due to tax net operating loss carryforwards.

Due to the seasonal nature of many of the Corporation's commercial loan customers, loan payment terms provide flexibility by structuring payments to coincide with the customer's business cycle. The lending staff evaluates the collectability of the past due loans based on documented collateral values and payment history. The Corporation discontinues the accrual of interest on loans when, in the opinion of management, there is an indication that the borrower may be unable to meet the payments as they become due. Upon such discontinuance, all unpaid accrued interest is reversed. Loans are returned to accrual status when all principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Credit Quality

Management analyzes the allowance for loan losses in detail on a monthly basis to determine whether the losses inherent in the portfolio are properly reserved for. Net charge-offs for the six months ended June 30, 2012 amounted to $.813 million, or .20% of average loans outstanding, compared to $1.058 million, or .28% of average loans outstanding, for the same period in 2011. The current reserve balance is representative of the relevant risk inherent within the Corporation's loan portfolio. Additions or reductions to the reserve in future periods will be dependent upon a combination of future loan growth, nonperforming loan balances and charge-off activity.

The table below shows period end balances of nonperforming assets (dollars in thousands):

                                         June 30,     December 31,    June 30,
                                           2012           2011          2011
Nonperforming Assets:
Nonaccrual Loans                        $    5,375   $        5,490   $   7,639
Loans past due 90 days or more                   -                -           -
Restructured loans                               -            2,503       1,802
Total nonperforming loans                    5,375            7,993       9,441
Other real estate owned                      3,518            3,162       4,806
Total nonperforming assets              $    8,893   $       11,155   $  14,247
Nonperforming loans as a % of loans           1.28 %           1.99 %      2.39 %
Nonperforming assets as a % of assets         1.70 %           2.24 %      2.89 %
Reserve for Loan Losses:
At period end                           $    5,083   $        5,251   $   6,155
As a % of loans                               1.21 %           1.35 %      1.56 %
As a % of nonperforming loans                94.57 %          65.69 %     65.19 %
As a % of nonaccrual loans                   94.57 %          95.65 %     80.57 %
Texas ratio*                                 13.59 %          18.43 %     23.38 %

Nonperforming assets at $8.893 million have been reduced in 2012 by $2.262 million from the $11.155 million at 2011 year end. This reduction in nonperforming assets reflects management's efforts in the aggressive remediation of problem credits and disposition of OREO properties.

The following ratios provide additional information relative to the Corporation's credit quality:

                                                  At Period End
                              June 30, 2012     December 31, 2011     June 30, 2011

Total loans, at period end   $       419,453   $           401,246   $       394,812
Average loans for the year   $       413,467   $           388,115   $       379,153




                                                             For the Period Ended
                                        Six Months Ended      Twelve Months Ended      Six Months Ended
                                         June 30, 2012         December 31, 2011        June 30, 2011

Net charge-offs during the period      $              813    $               3,662    $            1,058
Net charge-offs to average loans                      .20 %                    .94 %                 .28 %
Net charge-offs to beginning
allowance balance                                   15.48 %                  55.38 %               16.00 %

Management continues to address market issues impacting its loan customer base. In conjunction with the Corporation's senior lending staff and the bank regulatory examinations, management reviews the Corporation's loans, related collateral evaluations, and the overall lending process. The Corporation also utilizes an outside loan review consultant to perform a review of the loan portfolio. Historically, this independent review has provided findings similar to management as to the overall adequacy of the loan loss reserve and has substantiated the Corporation's loan rating system. In 2012, the Corporation will again utilize a consultant for loan review.

As of June 30, 2012, the allowance for loan losses represented 1.21% of total loans. At June 30, 2012, the allowance included specific reserves in the amount of $1.196 million, as compared to $1.200 million at December 31, 2011 and $2.389 million at June 30, 2011. In management's opinion, the allowance for loan losses is adequate to cover probable losses related to specifically identified loans, as well as probable losses inherent in the balance of the loan portfolio.

As part of the process of resolving problem credits, the Corporation may acquire ownership of collateral which secured such credits. The Corporation carries this collateral in other real estate on the balance sheet.

The following table represents the activity in other real estate for the periods indicated (dollars in thousands):

                                           Six Months Ended         Year Ended          Six Months Ended
                                             June 30 2012        December 31, 2011       June 30, 2011

Balance at beginning of period            $            3,162    $             5,562    $            5,562
Other real estate transferred from
loans due to foreclosure                                 685                  4,194                 2,105
Other real estate sold                                  (144 )               (5,457 )              (2,429 )
Writedowns on other real estate held
for sale                                                (174 )                 (855 )                (496 )
Loss on sale of other real estate held
for sale                                                 (11 )                 (282 )                  64

Balance at end of period                  $            3,518    $             3,162    $            4,806

During the second quarter of 2012, the Corporation received real estate in lieu of loan payments of $.685 million. Other real estate is initially valued at the lower of cost or the fair value less selling costs. After the initial receipt, management periodically re-evaluates the recorded balances and any additional reductions in the fair value result in a write-down of other real estate.

Deposits

The Corporation had an increase in deposits in the first six months of 2012. Total deposits increased by $20.592 million, or 5.09%, in the first half of 2012. The increase in deposits for the first half of 2012 is composed of an increase in noncore deposits of $11.383 million and an increase in core deposits of $9.389 million. In 2012, the rate of growth on core deposits slowed from that experienced in recent years. The Corporation, as part of an overall strategy to increase interest margins, reduced rates on some of its deposits to be more in line with competitors. This has resulted in slower core deposit growth and some migration of deposit dollars to short-term certificates of deposit. Management will continue to monitor deposit flows and adjust rates when it is deemed necessary to maintain or increase core deposits.

Management continues to monitor existing deposit products in order to stay competitive as to both terms and pricing. It is the intent of management to be aggressive in its markets to grow core deposits with an emphasis placed on transactional deposits.

The following table represents detail of deposits at the end of the periods indicated (dollars in thousands):

                      June 30,                   December 31,                  June 30,
                        2012      % of Total         2011        % of Total      2011      % of Total

Noninterest bearing   $  59,872        14.07 %  $       51,273        12.67 %  $  49,769        12.45 %
NOW, money market,
checking                143,795        33.80           152,563        37.69      149,448        37.40
Savings                  14,248         3.35            14,203         3.51       16,526         4.13
Certificates of
Deposit <$100,000       140,018        32.92           130,685        32.28      114,215        28.58
Total core deposits     357,933        84.14           348,724        86.15      329,958        82.56

Certificates of
Deposit >$100,000        25,975         6.11            23,229         5.74       23,102         5.78
Brokered CDs             41,473         9.75            32,836         8.11       46,607        11.66
Total non-core
deposits                 67,448        15.86            56,065        13.85       69,709        17.44

Total deposits        $ 425,381       100.00 %  $      404,789       100.00 %  $ 399,667       100.00 %

Borrowings

The Corporation also utilizes FHLB borrowings as a source of funding. At June 30, 2012, this source of funding totaled $35 million and the Corporation secured this funding by pledging loans and investments. The $35 million of FHLB borrowings has a weighted average maturity of 2.53 years and a weighted average rate of 1.82% at June 30, 2012. The Corporation also has a USDA Rural Development loan held by its wholly owned subsidiary, First Rural Relending that has a fixed interest rate of 1% and matures in August 2024.

Shareholders' Equity

Total shareholders' equity increased $5.089 million from December 31, 2011 to June 30, 2012. Contributing to the increase in shareholders' equity was net income of $4.639 million, an increase in the market value of securities of $.371 million and the accretion of the discount on preferred stock of $.079 million.

RESULTS OF OPERATIONS

Summary

The Corporation reported net income available to common shareholders of $4.639 million, or $1.36 per share, in the first half of 2012, compared to $.859 million or $.25 per share for the first half of 2011. Fully diluted earnings per share amounted to $1.31 per share for the 2012 six-month period and $.25 per share in 2011. The warrants outstanding were more dilutive in 2012 due to the increased market value of our common stock. The first half results include a valuation adjustment to the deferred tax asset of $3 million, a provision for loan losses of $.645 million and OREO writedowns and losses of $.185 million. Operating results for the same period in 2011 include a $.600 million provision for loan losses, and $.432 million of OREO writedowns and losses.

Net Interest Income

Net interest income is the Corporation's primary source of core earnings. Net interest income represents the difference between the average yield earned on interest earning assets and the average rate paid on interest bearing obligations. The net interest income is impacted by economic and competitive factors that influence rates, loan demand, and the availability of funding.

Net interest margin on a fully taxable equivalent basis amounted to $5.038 million, 4.32% of average earning assets, in the second quarter of 2012, compared to $4.201 million, and 3.81% of average earning assets, in the second quarter of 2011. In the first six months of 2012, net interest margin increased to $9.821 million, 4.25% of average earning assets, compared to $8.367 million, 3.87 % of average earning assets, for the same period in 2011. Margin improvement in 2012 was primarily due to a reduction in funding costs between periods.

The following table presents the amount of interest income from average interest-earning assets and the yields earned on those assets, as well as the interest expense on average interest-bearing obligations and the rates paid on those obligations. All average balances are daily average balances.

                                                                                Three Months Ended
                                                                                                                              2012-2011
                                   Average Balances                Average Rates           Interest         Income/                               Rate/
                                June 30,            Increase/         June 30,             June 30,         Expense     Volume        Rate        Volume
(dollars in thousands)      2012         2011      (Decrease)     2012       2011       2012      2011     Variance    Variance     Variance     Variance

Loans (1,2,3)            $  422,888   $  378,250   $    44,638      5.63 %     5.57 %  $ 5,917   $ 5,254   $     663   $     618   $       53   $       (8 )
Taxable securities           37,306       37,248            58      2.57       3.14        238       292         (54 )         -          (54 )          -
Nontaxable securities
(2)                             852          849             3      4.72       4.72         11        10           1           -            -            1
Federal funds sold            5,363       22,286       (16,923 )     .22        .13          3         7          (4 )        (5 )          5           (4 )
Other interest-earning
assets                        3,070        3,753          (683 )    3.54       2.56         27        24           3          (4 )          9           (2 )
Total earning assets        469,479      442,386        27,093      5.31       5.07      6,196     5,587         609         609           13          (13 )
Reserve for loan
losses                       (5,187 )     (6,135 )         948
Cash and due from
banks                        20,737       29,608        (8,871 )
Fixed Assets                  9,933        9,693           240
Other Real Estate             3,483        4,721        (1,238 )
Other assets                 13,236       14,208          (972 )
Total assets             $  511,681   $  494,481   $    17,200

NOW and money market
. . .