Management's discussion and analysis is intended to assist readers in understanding and evaluating our consolidated financial condition and results of operations. This discussion should be read in conjunction with our consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2011.

We are a commercial bank holding company, incorporated in 2007. The accompanying consolidated financial statements include the accounts and transactions of the Company and its wholly-owned subsidiary, the Bank. All significant intercompany transactions and balances are eliminated in consolidation.

The Bank was incorporated and began banking operations in 2000. The Bank is engaged in commercial banking predominantly in Guilford and Forsyth Counties, North Carolina. The Bank is operating under the banking laws of North Carolina and the rules and regulations of the Federal Deposit Insurance Corporation ("FDIC") and the North Carolina Commissioner of Banks. The Bank's primary source of revenue is derived from loans to customers, who are predominantly individuals and small to medium size businesses in Guilford County.

Executive Overview

Executive Summary

For the first three months of 2012, with the continuing impact of a sluggish economy, management has continued to focus on managing credit quality, building liquidity sources and managing capital. As always, we continue our on-going efforts of meeting the financial services needs of our customers and communities, especially in this challenging economic environment.

Managing Credit Quality

Senior management continues to work closely with credit administration and our lending staff to insure that adequate resources are in place to proactively manage through the current slowdown in the real estate markets and overall economy. When problems are identified, management remains diligent in assessing the situation, moving quickly to minimize losses, while being sensitive to the borrower's effectiveness as an operator, the long-term viability of the business or project, and the borrower's commitment to working with the Bank to achieve an acceptable resolution of the credit. As the economic slowdown has continued, we have experienced a rise in non-performing assets, and we address each situation on a case-by-case basis. When faced with possible loss situations, management may determine it is in the shareholders' best long-term interest to work with the borrower or oversee a viable project through to completion.

We anticipate that a prolonged economic slowdown will place significant pressure on the consumers and businesses in North Carolina. We have attempted to proactively address the needs of the Bank, our borrowers, and the community through our Community Loan Investment Program, which has been in place since February 2009, and offers incentives to buyers of our builder's homes financed by the Bank. Through our Community Loan Investment Program, which is being utilized by the majority of our builders', as of March 31, 2012 we have been able to move 17 out of 19 jumbo homes and 16 out of 19 conventional homes out of our builder construction portfolio-either to permanent mortgages placed with other lenders or permanent mortgages financed by the Bank to qualified borrowers. The program has resulted in the reduction of our exposure to jumbo homes from $10.5 million to $1.2 million, and the reduction of our exposure to conventional homes from $4.9 million to $704 thousand. This program can be accessed through our website at www.bankofoakridge.com.

We have also extended the Community Loan Investment Program to cover the residential lot inventory of our development borrowers, and rolled out an incentive program targeted specifically at our financed lots in April of 2011.

Building Liquidity Sources

Management has continued to focus on providing additional liquidity sources, both on-balance sheet and off. During the three months ended March 31, 2012, we had a continued shift in our deposit mix as noninterest-bearing and interest-bearing checking accounts increased $1.2 million and $3.4 million, respectively, from year end 2011 to March 31, 2012, driven by what we believe was a move away from large financial institutions to smaller community banks like ours.

Managing Capital

The Company was able to bolster its capital levels through its $7.7 million participation in the Capital Purchase Program ("CPP") on January 30, 2009. Of the total $7.7 million CPP funds received, to date $4.6 million of the CPP funds have been contributed to the Bank as additional equity capital. Approximately $3.4 million in unused capital, which includes approximately $115,000 in earnings since the Company received the CPP funds, are retained by the Company but could be pushed down to the Bank if needed. With total risk-based capital levels at the Bank of 13.5% at March 31, 2012, the Bank is above the minimum 10% requirement to be classified as well-capitalized. If the remaining $3.4 million of available capital at the Company were contributed to the Bank as additional equity capital, the Bank's total risk-based capital ratio would be 14.8% at March 31, 2012 and would place it well above the minimum well-capitalized requirement of 10%. Despite healthy capital levels, due to significant uncertainty surrounding the depth or the length of the current economic slowdown, management continues to be diligent in its efforts to maintain healthy levels of excess capital above minimum requirements. In early 2012, the Company's Board of Directors and senior executives had two separate presentations with investment firms to look at the feasibility of raising common equity to allow the Company to repay the U.S. Treasury for its $7.7 million

investment in the Company through the CPP. The Company has concluded that at the current time it is not feasible, due to weak equity market conditions, or preferable, due to the potential dilution of current shareholders, to raise equity in the open markets. However, the Company established an Employee Stock Ownership Plan ("ESOP") in the second quarter of 2010 as one possible vehicle to generate equity. During the year ended December 31, 2010, the Company, at the request of the Board of Directors, made a $900,000 pre-tax ESOP accrual that may be converted to common equity of the Company at a later date. The Company believes that there are many advantages to an ESOP as a vehicle to raise capital, with the principal ones being favorable tax treatment of ESOP contributions, possible lower dilution to existing shareholders' compared to an equity offering, and the promotion in our marketplace of every employee as a participant in the ESOP owning a part of the Company.

Our core strategies continue to be (1) grow the loan portfolio while maintaining high asset quality; (2) increase noninterest income; (3) grow core deposits;
(4) manage expenses; and (5) make strategic investments in personnel and technology to increase revenue and increase efficiency.

Challenges

We have grown steadily since the opening of the Bank in April of 2000, and our business has become more dynamic and complex in recent years as we have enhanced or added delivery channels, products and services, and lines of businesses. While the achievement of our strategic initiatives and established long-term financial goals is subject to many uncertainties and challenges, management has identified the challenges that are most relevant and most likely to have a near-term effect on operations, which are presented below:

• Continuing to maintain our asset quality, especially in an uncertain and weak economic environment;

• Addressing the challenges associated with a weak economic environment in our geographic market;

• Improving efficiency and controlling noninterest expenses;

• Maintaining our net interest margin in the current interest rate environment;

• Increasing core deposits;

• Increasing interest and noninterest revenue;

• Controlling costs associated with the current heightened regulatory environment;

• Volatility in the mortgage banking business;

• Competition from bank and nonbank financial service providers; and

• Intense price competition.

Comparison of Results of Operations for the Three Month Period Ending March 31, 2012

Net Income

The following table summarizes components of income and expense and the changes in those components for the three-month period ended March 31, 2012 as compared to the same period in 2011.

Condensed Consolidated Statements of Income (Dollars in thousands)



                                                         For the
                                                          Three
                                                         Months
                                                          Ended             Changes from the
                                                        March 31,              Prior Year
                                                          2012            Amount          %

Total interest income                                  $     4,156       $   (284 )        (6.4 )
Total interest expense                                         720           (221 )       (23.5 )


Net interest income                                          3,436            (63 )        (1.8 )
Provision for loan losses                                      564            (41 )        (6.8 )

Net interest income after provision for loan losses          2,872            (22 )         (.8 )
Noninterest income                                             925            105          12.8
Noninterest expense                                          3,611            161           4.7

Income before income taxes                                     186            (78 )       (29.5 )
Income tax expense                                              33            (38 )       (53.5 )

Net income                                                     153            (40 )       (20.7 )
Preferred stock dividend and accretion of discount             169              6           3.7

Net income (loss) available to common shareholders     $       (16 )     $    (46 )      (153.3 )

Net Interest Income

Net interest income (the difference between the interest earned on assets, such as loans and investment securities and the interest paid on liabilities, such as deposits and other borrowings) is our primary source of operating income. Net interest income for the three months ended March 31, 2012 was $3.4 million, a decrease of $63 thousand or 1.8% when compared to net interest income of $3.5 million for the three months ended March 31, 2011.

The level of net interest income is determined primarily by the average balances (volume) of interest-earning assets and interest-bearing liabilities and the various rate spreads between our interest-earning assets and our interest-bearing liabilities. Changes in net interest income from period to period result from increases or decreases in the volume of interest-earning assets and interest-bearing liabilities, increases or decreases in the average interest rates earned and paid on such assets and liabilities, the ability to manage the interest-earning asset portfolio (which includes loans), and the availability of particular sources of funds, such as non interest bearing deposits.

Interest income decreased $284 thousand or 6.4% for the three months ended March 31, 2012 compared to the same three months of 2011. The decrease for the three months ended March 31, 2012 is primarily due to decreases on rates earned on these assets. The yield on average earning assets decreased 32 basis points for the three months ending March 31, 2012 to 5.04% from the same period in 2011. Management attributes the decrease in the yield on our earning assets to the decline in offering rates on new and renewed loans, offset by a small increase in the yield on investment securities.

Our average cost of funds during the three months ended March 31, 2012 was 0.98%, a decrease of 32 basis points when compared to 1.30% for the three months ended March 31, 2011. Average rates paid on deposits decreased 36 basis points from 1.31% for the three months ended March 31, 2011 to 0.95% for the three months ended March 31, 2012, while our average cost of borrowed funds increased 110 basis points during the three months ended March 31, 2012 compared to the same period in 2011. Total interest expense decreased $221 thousand or 23.5% during the three months ended March 31, 2012 compared to the same period in 2011, primarily the result of decreased market rates paid on these liabilities.

The banking industry uses two key ratios to measure profitability of net interest income: net interest rate spread and net interest margin. The net interest rate spread measures the difference between the average yield on earning assets and the average rate paid on interest-bearing liabilities. The net interest rate spread does not consider the impact of non-interest-bearing deposits and gives a direct perspective on the effect of market interest rate movements. The net interest margin is defined as net interest income as a percentage of total average earning assets and takes into account the positive effects of investing non-interest bearing deposits in earning assets.

Our annualized net interest margin for the three months ended March 31, 2012 was 4.22% compared to 4.28% for the same period in 2011, while our net interest spread was 4.06% for both of the three month periods ending March 31, 2012 and 2011.

Management plans to continue to improve net interest income by growing our balance sheet while maintaining a constant or improving interest margin, however, it will be difficult to improve net interest income in the future if the growth in earning assets does not occur and we are unable to maintain or increase the yield on average earning assets while maintaining or decreasing the cost of funds on borrowings.

Noninterest Income

Noninterest income increased 12.8% for the three months ended March 31, 2012 compared to the same period in 2011.

Sources of Noninterest Income (Dollars in thousands)




                                                    For the Three
                                                       Months               Changes from the
                                                        Ended                  Prior Year
                                                      March 31,
                                                        2012             Amount            %

Service charges on deposit accounts                $           103       $   (54 )        (34.4 )
Mortgage loan origination fees                                 113            47           71.2
Investment and insurance commissions                           262            60           29.7
Fee income from accounts receivable financing                  164           (44 )        (21.2 )
Debit card interchange income                                  182            50           37.9
Income earned on bank owned life insurance                      35            (2 )         (5.4 )
Other service charges and fees                                  66            48          266.7

Total noninterest income                           $           925       $   105           12.8

Noninterest income increased $105 thousand or 12.8% to $925 thousand for the three months ended March 31, 2012 compared to $820 thousand for the same period in 2011. The increase in noninterest income in the three months ended March 31, 2012 is primarily due to increases in mortgage loan origination fees, investment and insurance commissions, debit card interchange income, and other service charges and fees, offset by decreases in service charges on deposit accounts, fee income from accounts receivable financing, and income earned on bank owned life insurance. Service charges on deposit accounts decreased $54 thousand for the three months ended March 31, 2012 as compared to the same period in 2011. The primary reason for this decline were decreases in non sufficient funds fees due to a greater customer awareness of such fees and regulations regarding such fees that affect the entire banking industry. Mortgage loan origination fees increased $47 thousand for the three months ended March 31, 2012 as compared to the same period in 2011. The primary reason for this increase were new mortgage loan officers hired near the end of 2011 that were more productive than those employed by the Bank during the three months ended March 31, 2011. Investment and insurance commissions increased $60 thousand for the three months ended March 31, 2012 as compared to the same periods in 2011, largely due to the continued growth in 2012 of recurring investment commission income as compared to 2011. Fee income from accounts receivable financing decreased $44 thousand for the three months ended March 31, 2012 as compared to the same period in 2011. The primary reason for the decrease was lower receivables of existing clients and fewer clients in 2012 as compared to 2011. Debit card interchange income increased $50 thousand for the three months ended March 31, 2012 as compared to the same period in 2011. The primary reason for the increase was the continued growth of consumer checking accounts with debit cards at the Bank during 2011 and the first three months of 2012. Other service charges and fees increased $18 thousand for the three months ended March 31, 2012 as compared to the same period in 2011.

Noninterest Expense

Noninterest expense increased 4.7% for the three months ended March 31, 2012 compared to the same period in 2011.

Sources of Noninterest Expense (Dollars in thousands)




                                               For the  Three
                                                   Months            Changes from the
                                                   Ended                Prior Year
                                                 March 31,
                                                    2012           Amount           %

 Salaries                                     $          1,688     $   223          15.2
 Employee benefits                                         215          26          13.8
 Occupancy expense                                         214           3           1.4
 Equipment expense                                         210           0           N/A
 Data and items processing                                 280          68          32.1
 Professional and advertising                              175         (50 )       (22.2 )
 Stationary and supplies                                    77         (45 )       (36.9 )
 Net cost of foreclosed assets                             194         (80 )       (29.2 )
 Telecommunications expense                                 69          16          30.2

 FDIC assessment                                            77         (55 )       (41.7 )
 Accounts receivable financing expense                      49         (17 )       (25.8 )
 Total other-than-temporary impairment loss                 -           -            N/A

 Other expense                                             363          72          24.7

 Total noninterest expense                    $          3,611     $   161           4.7

Salary expense for the three months ended March 31, 2012 increased $223 thousand as compared to the same prior year period. The increases were due to regular salary increases and market adjustments that went into effect for all employees on January 1, 2012, as well as new positions that were added throughout 2011.

Employee benefits for the three months ended March 31, 2012 increased $26 thousand over the same prior year period. The principal reason for this increase were increases in health care premiums for the Bank and its employees that went into effect on June 1, 2011, as well as a higher number of employees during the first three months of 2012 as compared to the same period in 2011.

Occupancy and Equipment expenses for the three months ended March 31, 2012 were relatively unchanged compared to the same prior year period.

Data and other processing expenses increased $68 thousand over the same prior year period, primarily due to enhancements to the Bank's internet banking bill payment systems as well as the purchase of other internet based products in the second half of 2011.

Professional and advertising expenses for the three months ended March 31, 2012 decreased $50 thousand over the same prior year period. The majority of the decrease was due to declines in marketing and advertising expenses in 2012 as compared to 2011.

Stationary and supplies expenses for the three months ended March 31, 2012 decreased $45 thousand over the same prior year period. The decline was caused by decreases in mailings to customers.

Net cost of foreclosed assets for the three months ended March 31, 2012 decreased $80 thousand over the same prior year period. The primary reason for the decline were lower losses and writedowns on foreclosed assets in 2012 compared to 2011, offset by higher expenses in 2012 as compared to 2011.

Telecommunications expense for the three months ended March 31, 2012 increased $16 thousand over the same prior year period. The increase was caused by an upgrade of the Bank's telecommunication capacity in 2012.

FDIC assessment for the three months ended March 31, 2012 decreased $55 thousand over the same prior year period. The FDIC assessment expense is primarily due to the expensing of a prepaid asset that was established in 2009 when FDIC insured banks were required to pay an estimated three years of FDIC assessments in order to replenish the FDIC insurance fund. The Bank's assessment was based on an annualized average rate of growth of 5% in the Bank's deposits during that time. The Bank's actual rate of growth has been less than 5% which has resulted in a smaller expense than originally projected. Some of the decrease was also related to the adoption of a new assessment formula by the FDIC, effective in the second quarter of 2011.

Accounts receivable financing expense for the three months ended March 31, 2012 decreased $17 thousand over the same prior year period. Most of the decline is attributable to the decline in fee income from accounts receivable financing from 2011 to 2012.

Other expense for the three months ended March 31, 2012 increased $72 thousand over the same prior year period. The primary reason for the increase was higher appraisal fees on new and renewed loans.

Income Taxes

Income tax expense for the three months ended March 31, 2012 decreased $38 thousand over the same period in 2011. The primary reason was a decline in net income before income tax expense from 2011 to 2012, as well as the deductibility of interest for tax purposes of municipal securities that were purchased between August and December 2011. The tax benefit of the interest on municipal bonds had the effect of lowering the Company's effective tax rate from 26.9% for the three months ended March 31, 2011 to 17.7% for the same period in 2012.

Analysis of Financial Condition at March 31, 2012 and December 31, 2011

Loans Receivable

As of March 31, 2012, loans, net of allowance for loan losses, increased to $252.5 million, up 0.7% from $252.5 million at December 31, 2011. The increase is due to increased calling efforts of the Bank's commercial loan officers and branch managers.

Allowance for Loan Losses

We consider the allowance for loan losses adequate to cover estimated probable loan losses relating to the loans outstanding as of each reporting period. The procedures and methods used in the determination of the allowance necessarily rely upon various judgments and assumptions about economic conditions and other factors affecting our loans. In addition, various regulatory agencies, as an integral part of their examination process, periodically review our allowance for loan losses. Those agencies may require us to recognize adjustments to the allowance for loan losses based on their judgments about the information available to them at the time of their examinations. No assurance can be given that we will not in any particular period sustain loan losses that are sizable in relation to the amount reserved or that subsequent evaluations of the loan portfolio, in light of conditions and factors then prevailing, will not require significant changes in the allowance for loan losses or future charges to earnings.

The following table summarizes the balances of loans outstanding, average loans outstanding, changes in the allowance arising from charge-offs and recoveries by category and additions to the allowance that have been charged to expense.

Analysis of the Allowance for Loan Losses (Dollars in thousands)



                                                                     At March 31,
                                                                2012              2011

Allowance for loan losses at beginning of period              $   4,446         $   4,375
Loans charged off:
Real estate - Construction & Development                           (273 )            (453 )
Residential 1-4 Families                                           (259 )            (142 )
Residential 5 or More Families                                       -                 -
Other Commercial Real Estate                                        (56 )              -
Commercial                                                           -                (37 )
Consumer                                                             (4 )             (10 )


Total charge-offs                                                  (592 )            (642 )


Recoveries:
Real estate - Construction & Development                             -                 -
Residential 1-4 Families                                             -                 -
Residential 5 or More Families                                       -                 -
Other Commercial Real Estate                                         -                 -
Commercial                                                           -                123
Consumer                                                              1                 4


Total recoveries                                                      1               127


Net charge-offs                                                    (591 )            (515 )
Provision for loan losses                                           564               605


Allowance for loan losses at end of period                    $   4,419         $   4,465


Total loans outstanding at end of period                      $ 256,900         $ 255,879


Average loans outstanding                                     $ 254,091         $ 255,752


Ratios:
Ratio of annualized net loan charge-offs to average
loans outstanding                                                  0.93 %            0.81 %
. . .