GENERAL

The Company may from time to time make written or oral "forward-looking statements", including statements contained in the Company's filings with the Securities and Exchange Commission (including this Quarterly Report on Form 10-Q and the exhibits thereto), in its reports to stockholders and in other communications by the Company, which are made in good faith by the Company pursuant to the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995.

These forward-looking statements involve risks and uncertainties, such as statements of the Company's plans, objectives, expectations, estimates and intentions that are subject to change based on various important factors (some of which are beyond the Company's control). The following factors, among others, could cause the Company's financial performance to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward-looking statements: the strength of the United States economy in general and the strength of the local economies in which the Company conducts operations; the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System, inflation, interest rate, market and monetary fluctuations; the timely development of and acceptance of new products and services of the Company and the perceived overall value of these products and services by users, including the features, pricing and quality compared to competitors' products and services; the willingness of users to substitute competitors' products and services for the Company's products and services; the success of the Company in gaining regulatory approval of its products and services, when required; the impact of changes in financial services' laws and regulations (including laws concerning taxes, banking, securities and insurance); technological changes, acquisitions; changes in consumer spending and saving habits; and the success of the Company at managing the risks involved in the foregoing.

The Company cautions that the foregoing list of important factors is not exclusive. The Company does not undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by or on behalf of the Company.

Financial Condition

The Company's total assets at June 30, 2012 and December 31, 2011 were $685.4 million and $681.9 million, respectively, representing an increase of $3.5 million during the six-month period. Loans receivable, net increased by $18.1 million during the first six months of 2012. Originations of consumer and single-family residential mortgage loans totaling $62.5 million and originations of commercial loans totaling $3.6 million were offset by principal repayments of $44.9 million. The Company increased the allowance for loan losses by $1.0 million and transferred $1.9 million from loans to real estate acquired through foreclosure. Loans receivable held for sale increased $1.1 million primarily because originations of loans for sale in the secondary market of $26.8 million exceeded proceeds of $26.0 million from loan sales. Investment securities increased by $800,000 due to security purchases of $17.8 million and an increase in the fair market value of available for sale securities of $429,000 which were offset by principal repayments and maturities received of $17.1 million and net premium amortization of $265,000. Largely as a result of the increase in the loan portfolio, cash and cash equivalents decreased by $10.6 million during the first six months of 2012. The decrease in other assets was mainly due to the sale of foreclosed real estate.

Total liabilities decreased by $764,000 during the first six months of 2012. Deposit balances decreased $4.2 million during the period with checking and savings accounts increasing by $15.5 million while money market accounts decreased $3.6 million. Retail certificates of deposit ("CDs") decreased $16.1 million during the first six months of 2012, largely due to the maturity of CDs which had been originated during periods of higher market interest rates, and were converted into other non-CD products or were withdrawn from the Bank. Advances from the FHLB increased by $4.2 million, the result of new long term fixed advances of $8.2 million and an increase in the outstanding balance of the line of credit of $7.4 million, offset by scheduled amortization and maturities of $11.4 million.

Total consolidated stockholders' equity of the Company was $80.1 million or 11.7% of total assets at June 30, 2012. At June 30, 2012, there were approximately 102,000 shares available for repurchase under the previously announced share repurchase plan.

Asset Quality

Non-performing assets include real estate owned, which is carried at estimated
fair value less costs to sell and non-performing loans. Non-performing loans
include loan balances 90 days past due and impaired loans for which the accrual
of interest has been discontinued. The following table sets forth information
regarding the Company's non-performing assets:


                                                                                 At
                                                          June 30,                               June 30,
Non-Performing Assets                                       2012         December 31, 2011         2011
                                                                      (Dollars in thousands)
Loans receivable, net:
Residential
Residential mortgages                                    $    3,731     $             5,502     $    6,010
Commercial
Real estate-commercial                                        1,425                   2,711          5,317
Real estate-residential                                         840                       -              -
Construction loans                                            6,154                   4,044          6,205
Commercial and industrial loans                                   -                       6            147
Consumer
Home equity and second mortgage                                 416                     277            629
Other consumer                                                    -                       1              -
Total non-performing loans                                   12,566                  12,541         18,308
Real estate owned                                             6,625                  11,730          9,245
Total non-performing assets                              $   19,191     $            24,271     $   27,553
Total loans 90 days or more past due as to interest or
  principal and accruing interest                        $        -     $                 -     $        -
Ratio of non-performing loans to gross loans                   2.42 %                  2.49 %         3.60 %
Ratio of non-performing loans to total assets                  1.83 %                  1.84 %         2.65 %
Ratio of total non-performing assets to total assets           2.80 %                  3.56 %         3.98 %

Non-performing residential mortgages include a loan with an unpaid principal balance of $1.3 million for which the Bank has recorded a partial charge-off of $332,000. The partial charge-off represents a collateral deficiency based on the fair value of the property with respect to the outstanding balance. In addition, $71,000 of the allowance for loan losses has been allocated to this loan for potential acquisition or selling costs related to the property.

Non-performing residential mortgages also include a loan with an unpaid principal balance of $844,000 which the Bank has reported as a troubled debt restructuring. The terms of the loan have been modified to temporarily reduce the interest rate on the loan and, as a result, $30,000 of the allowance for loan losses has been allocated to this loan for the difference in the cash flows of the loan created by the modified interest rate.

Non-performing commercial real estate loans include a loan with an unpaid principal balance of $1.5 million secured by two contiguous parcels of commercial real estate and a lien on the guarantor's personal residence. The Bank has recorded a partial charge-off of $914,000 from the allowance for loan losses, equal to the difference between the loan balance and the fair value based upon a recent appraisal. The Bank has initiated foreclosure proceedings and the borrower has filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code.

Non-performing construction loans include a loan with an unpaid principal balance of $1.8 million secured by five contiguous lots approved for construction of commercial and residential buildings. The Bank recorded a partial charge-off of $430,000 from the allowance for loan losses equal to the difference between the loan balance and a recent appraisal. In addition, $200,000 of the allowance for loan losses has been allocated to this loan for potential acquisition or selling costs related to the properties. The borrower is attempting to sell the properties and apply the proceeds toward the outstanding loan balance.

Non-performing construction loans also include two loans, with a combined balance of $2.0 million secured by a parcel of land. The Bank has recorded a partial charge-off of $183,000 from the allowance for loan losses equal to the difference between the recorded investment and a recent appraisal. The borrower is attempting to sell the property and intends to apply the sale proceeds to the outstanding loan balance. In addition, $173,000 of the allowance for loan losses has been allocated to this loan for potential costs related to acquiring or selling the property.

Non-performing construction loans also include a participation in a commercial construction project with a principal balance due to the Bank of $3.1 million. The Bank has recorded a partial charge-off of $198,000 from the allowance for loan losses equal to the difference between the recorded investment and a recent appraisal.

Foreclosed property at June 30, 2012 consisted of four parcels of real estate with a combined carrying value of $6.6 million. During the first six months of 2012, the Bank foreclosed on two mortgages secured by a residential property valued at $2.0 million in the aggregate which resulted in a charge to the allowance of $40,000. Also the Bank sold 38 properties acquired through foreclosure with an aggregate book value of $6.9 million. All foreclosed properties are listed or are in the process of being listed with real estate agents for sale in a timely manner. Foreclosed real estate is included in other assets in the consolidated balance sheet.

Allowance for Loan Losses

The Bank provides valuation allowances for estimated losses from uncollectible loans. The allowance is increased by provisions charged to expense and reduced by net charge-offs. On a quarterly basis, the Company prepares an allowance for loan losses (ALLL) analysis. In the analysis, the loan portfolio is segmented into groups of homogeneous loans that share similar risk characteristics:
commercial loans secured by non-residential or non-owner occupied residential real estate, construction, commercial and industrial loans, single family residential, and consumer which is predominately real estate secured junior liens and home equity lines of credit. Each segment is assigned reserve factors based on quantitative and qualitative measurements. In addition, the Bank reviews its internally classified loans, its loans classified for regulatory purposes, delinquent loans, and other relevant information in order to isolate loans for further scrutiny as potentially impaired loans.

Quantitative factors include an actual expected loss factor based on historical loss experience over a relevant look-back period. Quantitative factors also include the Bank's actual risk ratings for the commercial loan segments as determined in accordance with loan review and loan grading policies and procedures, and additional factors as determined by management to be representative of additional risk due to the loan's geographic location, type, and other attributes. These quantitative factors are adjusted if necessary, up or down, based on actual experience and an evaluation of the qualitative factors.

Qualitative factors are based upon: (1) changes in lending policies and procedures, including but not limited to changes in underwriting standards and collection, charge-off, and recovery practices not considered elsewhere in estimating credit losses; (2) changes in international, national, regional, and local economic and business conditions and developments that affect the collectability of the portfolio, including the condition of various market segments; (3) changes in the nature and volume of the portfolio and in the terms of loans; (4) changes in the experience, ability, and depth of lending management and other relevant staff; (5) changes in the volume and severity of past due loans, the volume of nonaccrual loans, and the volume and severity of adversely classified or graded loans; (6) changes in the quality of the loan review system; (7) changes in the value of underlying collateral for collateral dependent loans; (8) the existence and effect of any concentration of credit, and changes in the level of such concentrations; and (9) the effect of other external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in the existing loan portfolio.

Potentially impaired loans selected for individual evaluation are reviewed in accordance with US GAAP which governs the accounting for impaired assets, as well as regulatory guidance regarding treatment of troubled, collateral-dependent loans. Each potentially impaired loan is evaluated using all available information such as recent appraisals, whether the loan is currently on accrual or non-accrual status, discounted cash flow analyses, guarantor financial strength, the value of additional collateral, and the loan's and borrower's past performance to determine whether in management's best judgment it is probable that the Bank will be unable to collect all contractual interest and principal in accordance with the loan's terms. Loans deemed not to be impaired are assigned a reserve factor based upon the segment from which they were selected.

Loans deemed impaired are evaluated to determine the estimated fair value of the collateral, and a portion of the ALLL will be allocated to the deficiency. Troubled collateral-dependent real estate secured loans are valued using the appraised value of the collateral, and a portion of the ALLL will be allocated to these loans based on the difference between the loan amount and the appraised value. If such amounts are judged by management to be permanent, they will be charged-off. In addition, if foreclosure is probable, a portion of the ALLL will be allocated to the estimated additional costs to acquire and the estimated costs to sell. Upon completion of the foreclosure process, these amounts will be charged-off.

The ALLL needed as a result of the foregoing evaluation is compared with the unadjusted amount, and an adjustment is made by means of a provision to the allowance for loan losses. Recognizing the inherently imprecise nature of the loss estimates and the large number of assumptions needed in order to perform the analysis, the required reserve may be less than the actual level of reserves at the end of any evaluation period, and thus there may be an unallocated portion of the ALLL. Management adjusts the unallocated portion to an amount which management considers reasonable under the circumstances.

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2012 AND 2011

Net Income. The Company recorded net income of $1.2 million, or $0.46 per diluted share, for the three months ended June 30, 2012 as compared to net income of $699,000, or $0.26 per diluted share, for the three months ended June 30, 2011.

Average Balance Sheet

The following table sets forth information (dollars in thousands) relating to
the Company's average balance sheet and reflects the average yield on assets and
average cost of liabilities for the periods indicated. Yields and costs are
computed by dividing income or expense by the average daily balance of
interest-earning assets or interest-bearing liabilities, respectively, for the
three-month periods indicated.

                                                         Three Months Ended June 30,
                                             2012                                              2011
                                                             Average         Average                        Average
                         Average balance     Interest       yld/cost         balance        Interest       yld/cost
ASSETS
Interest-earning
assets:
Loans receivable(1)     $       501,757     $    6,231            4.99 %    $  499,024     $    6,695            5.38 %
Mortgage-backed
securities                       61,580            564            3.68 %        63,940            671            4.21 %
Investment
securities(2)                    68,181            731            4.31 %        68,439            731            4.28 %
Other
interest-earning
assets(3)                         3,074              -               - %*        4,420              1            0.09 %
Total
interest-earning
assets                          634,592          7,526            4.77 %       635,823          8,098            5.11 %
Non interest-earning
assets                           48,329                                         50,346
Total assets            $       682,921                                     $  686,169
LIABILITIES AND
 STOCKHOLDERS' EQUITY
Interest-bearing
liabilities:
Deposits                $       550,040     $      926            0.68 %    $  546,215     $    1,438            1.06 %
Borrowings from the
FHLB                             46,785            351            3.02 %        57,972            505            3.49 %
Total
interest-bearing
liabilities                     596,825          1,277            0.86 %       604,187          1,943            1.29 %
Non interest-bearing
liabilities                       6,486                                          7,039
Total liabilities               603,311                                        611,226
Stockholders' equity             79,610                                         74,943
Total liabilities and
stockholders' equity    $       682,921                                     $  686,169
Net interest
income-tax equivalent
basis                                            6,249                                          6,155
Interest rate
spread(4)-tax
equivalent basis                                                  3.91 %                                         3.82 %
Net yield on interest-earning
assets(5)-tax
 equivalent basis                                                 3.96 %                                         3.88 %
Ratio of average interest-earning
assets to
 average interest-bearing liabilities                           106.33 %                                       105.24 %
Less: tax-equivalent
interest adjustments                              (198 )                                         (166 )
Net interest income                         $    6,051                                     $    5,989
Interest rate
spread(4)                                                         3.78 %                                         3.71 %
Net yield on
interest-earning
assets(5)                                                         3.84 %                                         3.78 %

(1 ) Non-performing loans have been included in the appropriate average loan balance category, but interest on non-performing loans has not been included for purposes of determining interest income.
(2 ) Tax equivalent adjustments to interest on investment securities were $198,000 and $166,000 for the quarter ended June 30, 2012 and 2011, respectively. Tax equivalent interest income is based upon a marginal effective tax rate of 34%.
(3 ) Includes interest-bearing deposits in other banks.
(4 ) Interest rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities.
Net yield on interest-earning assets represents net interest income as (5 ) a percentage of average interest-earning assets.
* Is less than $500 for period indicated.

Rate/Volume Analysis

The following table presents, for the periods indicated, the change in interest income and interest expense (dollars in thousands) attributed to (i) changes in volume (changes in the weighted average balance of the total interest earning asset and interest bearing liability portfolios multiplied by the prior year rate), and (ii) changes in rate (changes in rate multiplied by prior year volume). Changes attributable to the combined impact of volume and rate have been allocated proportionately based on the absolute value of changes due to volume and changes due to rate.

                                              For the three months ended June 30,
                                                         2012 vs 2011
                                                  Increase (decrease) due to
                                          Volume            Rate               Net
    Interest income:
    Loans receivable, net                $     240       $      (704 )     $      (464 )
    Mortgage-backed securities                 (24 )             (83 )            (107 )
    Investment securities (1)                  (14 )              14                 -
    Other interest-earning assets                -                (1 )              (1 )
    Total interest-earning assets              202              (774 )            (572 )
    Interest expense:
    Deposits                                    69              (581 )            (512 )
    Borrowings from the FHLB                   (90 )             (64 )            (154 )

    Total interest-bearing liabilities         (21 )            (645 )            (666 )
    Net change in net interest income    $     223       $      (129 )     $        94




       (1 )        Tax equivalent adjustments to interest on investment securities
                   were $198,000 and $166,000 for the quarters ended June 30, 2012
                   and 2011, respectively. Tax equivalent interest income is based
                   upon a marginal effective tax rate of 34%.

Total Interest Income. Total interest income, on a taxable equivalent basis, decreased by $572,000 or 7.1% to $7.5 million for the quarter ended June 30, 2012 compared with the second quarter of 2011. Interest income from loans receivable decreased by $464,000, the result of a decrease in the average yield on loans of 39 basis points. The decrease in the yield was caused by the combined effect of a large number of higher rate loans which prepaid, and new loans added to the portfolio with a lower yield than the existing portfolio loans that matured or refinanced. Interest income from mortgage-backed securities was lower in the 2012 quarter in comparison to the same period of 2011 mainly because the yield associated with repayments was higher than the yield on newly purchased mortgage-backed securities.

Total Interest Expense. Total interest expense decreased by $666,000 to $1.3 million during the three-month period ended June 30, 2012 as compared with the same period in 2011. The average interest rates paid on the Bank's deposits were 38 basis points lower in 2012 due to the maturity of certificates of deposit with higher interest rates than current market rates offered on the products into which the maturing CDs were renewed or reinvested, and a favorable change in the deposit mix and pricing. Interest expense associated with borrowings from the FHLB decreased $154,000 between the second quarter of 2012 and the same quarter of 2011. During the intervening period, the Bank reduced its average outstanding borrowings by $11.2 million, including the maturity of higher rate advances, thus the cost of funds of the remaining outstanding advances was 47 basis points lower.

Non-Interest Income. Total non-interest income was $739,000 for the second quarter of 2012 compared with $903,000 for the same period in 2011. Gain on the sale of investment securities was $210,000 in the second quarter of 2011 and there were no such sales in the same period in 2012. Fair value adjustments to mortgage servicing rights reduced loan servicing income between the second quarter of 2011 and the same quarter of 2012 by $88,000. Offsetting these decreases was an increase of $164,000 in gains on sale of loans during the second quarter of 2012 as a result of a higher level of residential loan sales activity in the quarter.

Non-Interest Expense. Total non-interest expense increased by $28,000 to $4.6 million for the three months ended June 30, 2012 compared to the same period in 2011. Foreclosed real estate expense increased $221,000 in the 2012 quarter as compared to the same period in 2011 mainly due to losses totaling $245,000 from the sale of foreclosed real estate with a carrying value of $3.6 million. Employee compensation increased by $75,000, mainly due to the increased costs associated with the defined benefit plans which increased $93,000 between the two quarters. In contrast, professional fees decreased $150,000 between the two periods as legal and professional costs were higher during 2011 due to increased costs associated with non-performing loans and foreclosures in addition to costs in 2011 related to the implementation of the Company's director's stock compensation plan.

Income Tax Expense. The Company's effective tax rate was 23.9% for the quarter ended June 30, 2012 compared to 14.9% for the quarter ended June 30, 2011. These effective tax rates are lower than the Company's marginal tax rate of 34% largely due to the tax-exempt income associated with the Company's investments in tax-exempt municipal bonds and bank owned life insurance.

RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2012 AND 2011

Net Income. The Company recorded net income of $2.4 million, or $0.88 per diluted share, for the six months ended June 30, 2012 as compared to net income of $1.3 million, or $0.49 per diluted share, for the six months ended June 30, 2011.

Average Balance Sheet

The following table sets forth information (dollars in thousands) relating to
the Company's average balance sheet and reflects the average yield on assets and
average cost of liabilities for the periods indicated. Yields and costs are
computed by dividing income or expense by the average daily balance of
interest-earning assets or interest-bearing liabilities, respectively, for the
six-month periods indicated.

                                                        Six Months Ended June 30,
. . .