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

OVERVIEW

The Company operates as a community-oriented financial institution that accepts deposits from the general public in the communities surrounding its 8 full-service banking offices. 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 March 31, 2012, the Company had net income of $601,000, or $0.21 per basic and diluted share, compared to $161,000, or $0.06 per basic and diluted share, for the year earlier period, an increase of $440,000. Pre-tax loss for the three months ended March 31 2012 was $286,000. The Company credited $866,000 of the valuation allowance on its deferred tax assets to income tax expense during the quarter. See further discussion below in Income Taxes section.

Total assets decreased by $914,000, or 0.4%, from $217.0 million as of December 31, 2011 to $216.1 million as of March 31, 2012. Investment securities available for sale decreased by $198,000 and net loans receivable decreased $1.7 million during this time . Total deposits increased $457,000 from December 31, 2011 to March 31, 2012 while Federal Home Loan Bank advances decreased by $1.8 million and stockholders' equity increased by $557,000.

CRITICAL ACCOUNTING POLICIES

As of March 31, 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 MARCH 31, 2012 AND DECEMBER 31, 2011

ASSETS: Total assets decreased $914,000, or 0.4%, to $216.1 million at March 31, 2012 from $217.0 million at December 31, 2011. Net loans receivable decreased $1.7 million, or 1.2%, to $139.2 million at March 31, 2012 from $140.9 million at December 31, 2011, resulting primarily from a decrease in our commercial loan portfolio. Our residential mortgage portfolio remained relatively unchanged as a result of our selective placing in our portfolio certain high-quality 10- and 15-year fixed rate residential mortgage loans. Investment securities AFS decreased $198,000 from $53.0 million at December 31, 2011 to $52.8 million at March 31, 2012, due primarily to ordinary principal payments received on our mortgage back securities.

LIABILITIES:Deposits increased $457,000 to $151.1 million at March 31, 2012 from $150.7 million at December 31, 2011. During this time period, we experienced an increase of $2.9 million in our savings, money market and checking accounts, which was largely offset by a decrease of $2.4 million in our certificates of deposit. FHLB advances decreased $1.8 million, or 5.1%, from $34.5 million at December 31, 2011 to $32.7 million at March 31, 2012 as proceeds from loan payments and payoffs, as well as cash on hand, were used to pay off maturing advances.

EQUITY: Stockholders' equity was $25.1 million at March 31, 2012 compared to $24.6 million at December 31, 2011. The increase was due primarily to net earnings for the three-month period of $601,000 partially offset by a decrease of $44,000 in the unrealized gain on available-for-sale investment securities

RESULTS OF OPERATIONS

Three Months Ended March 31, 2012 Compared to Three Months Ended March 31, 2011

General:Net income increased by $440,00 to $601,000 for the three months ended March 31, 2012 from $161,000 for the same period ended March 31, 2011.

Interest Income: Interest income decreased to $2.4 million for the three months ended March 31, 2012 from $2.6 million for the comparable period in 2011. The average balance of interest earning assets decreased by $1.0 million from $201.9 million for the three months ended March 31, 2011 to $200.9 million for the three months ended March 31, 2012 and the average yield on interest earning assets decreased 37 basis points over that same time period from 5.17% to 4.80%. The yield on our mortgage loan portfolio decreased by 21 basis points to 5.73% from 5.94% for the three month period ended March 31, 2012 from the year-earlier period, while the average balance of that portfolio decreased by $4.0 million to $66.7 million period over period. The average balance of our non-mortgage loan portfolio decreased $13.0 million to $74.9 million for the three months ended March 31, 2012 from the year-earlier period, while the yield on this portfolio increased 17 basis points to 5.81% from 5.64% period over period. The average balance of our investment portfolio increased $17.0 million from the three months ended March 31, 2011 to the same period in 2012 as we purchased investment securities with the proceeds of loan pay-offs and paydowns over the time period. The yield on our investments decreased by 61 basis points period over period as many of our agency securities were called and replaced with securities with lower yields due to market interest rates.

Interest Expense:Interest expense decreased to $464,000 for the three months ended March 31, 2012 from $605,000 for the three months ended March 31, 2011. The decrease was due in part to a $1.9 million decrease in the average balance of our interest-bearing liabilities and a decrease in our overall cost of funds of 32 basis points period over period. Most notably, the average balance of our certificates of deposit decreased $6.6 million from the three-month period ended March 31, 2011 to the same period in 2012. The cost of these deposits decreased 54 basis points period over period. In addition, our average balance in money market and NOW accounts decreased $2.6 million and the cost of those deposits decreased 24 basis points from the three months ended March 31, 2011 to the same period in 2012. The average balance of our Federal Home Loan Bank advances increased $6.6 million from the three-month period ended March 31, 2011 to the same period in 2012, while the cost of those advances decreased 24 basis points 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.

                                              Three Months Ended March 31, 2012
                                                         Compared to
                                              Three Months Ended March 31, 2011
                                                 Increase (Decrease) Due to:
                                           Volume            Rate            Total
                                                        (In thousands)
    Interest-earning assets:
    Loans receivable                     $     (226 )     $       (7 )     $     (233 )
    Investment securities                        86              (37 )     $       49
    Other investments                            (8 )              9       $        1

    Total interest-earning assets              (148 )            (35 )           (183 )

    Interest-bearing liabilities:
    Savings Deposits                              -                -                -
    Money Market/NOW accounts                    (3 )            (24 )            (27 )
    Certificates of Deposit                     (37 )            (93 )           (130 )
    Deposits                                    (40 )           (117 )           (157 )
    Borrowed funds                               37              (21 )             16

    Total interest-bearing liabilities           (3 )           (138 )           (141 )

    Change in net interest income        $     (145 )     $      103       $      (42 )

Net Interest Income: Net interest income decreased by $42,000, to $1.9 million for the three months ended March 31, 2012 from $2.0 million for the prior year period. For the three months ended March 31, 2012, average interest-earning assets decreased $1.6 million, or 0.5%, to $200.9 million when compared to the same period in 2011. Average interest-bearing liabilities decreased $1.9 million, or 1.1%, to $177.4 million for the quarter ended March 31, 2012 from $179.3 million for the quarter ended March 31, 2011. The yield on average interest-earning assets decreased to 4.80% for the three month period ended March 31, 2012 from 5.17% for the same period ended in 2011. In addition, the cost of average interest-bearing liabilities decreased to 1.05% from 1.37% for the three month periods ended March 31, 2012 and 2011, respectively. Our interest rate spread decreased by 5 basis points to 3.75% while our net interest margin decreased by 8 basis points to 3.87% for the three month period ended March 31, 2012 from 3.95% 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 uncollectibility 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 March 31, 2012 was $376,000, as compared to $67,000 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. Beginning with the quarter ended March 31, 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 March 31, 2011, we moved a large commercial loan out of construction status into our general pool of commercial loans, which allowed us to reduce the amount of general reserves we needed to record. Construction loans carry a higher degree of risk and therefore a higher level of reserve. This resulted in a lower than anticipated provision during the quarter ended March 31, 2011. During the quarter ended March 31, 2012, we added specific reserves of approximately $200,000 on two commercial credit relationships which were reclassified as Troubled Debt Restructurings. In addition, we recorded specific reserves of approximately $200,000 on several residential mortgage loans which had progressed in the foreclosure process during the quarter. 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 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 March 31, 2012
Real estate loans:
Construction                                              1,065                 -               173
One - to four - family                                   65,906               175             1,966
Commercial Mortgages                                     53,140                30               435
Home equity lines of credit/ Junior liens                12,485                62               145
Commercial loans                                          7,191                 -                 -
Consumer loans                                            1,359                 1                14

Total gross loans                                    $  141,146     $         268     $       2,733
Less:
Net deferred loan fees                                     (280 )              (1 )              (8 )
Allowance for loan losses                                (1,663 )               -              (316 )
Total loans, net                                     $  139,203     $         267     $       2,409

At December 31, 2011
Real estate loans:
Construction                                                762                 -             1,772
One - to four - family                                   66,101               282             3,114
Commercial Mortgages                                     53,938                82             1,148
Home equity lines of credit/Junior liens                 13,395                 -               206
Commercial loans                                          7,002                 -                 -
Consumer loans                                            1,477                 2                 -

Total gross loans                                    $  142,675     $         366     $       6,240
Less:
Net deferred loan fees                                     (273 )              (1 )             (11 )
Allowance for loan losses                                (1,518 )               -              (261 )
Total loans, net                                     $  140,884     $         365     $       5,968

Non Interest Income: Non-interest income was relatively unchanged for the quarters ended March 31, 2011 and 2012. Due to continued historically low mortgage rates, mortgage banking activities income has remained strong year over year.

Non Interest Expense:Non interest expense increased by $93,000 from $2.2 million for the three months ended March 31, 2011 to $2.3 million for the 2012 period. Most notably, compensation and employee benefits increased by $103,000 period over period as we added a commercial lender and Treasury Management professional and due to the reinstatement of the elective contribution to the Company's 401(k) plan, for which the Company has begun accruing.

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 Generally Accepted Accounting Principles, Management concluded that the utilization of a portion of this asset was "more likely than not." As of 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.

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

· Despite the Company's loss for the quarter ended March 31, 2012, we fully expect that trend to reverse for the remaining quarters in 2012.

· The quarter ended March 31, 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 $10.0 million at March 31, 2011 to $6.7 million at March 31, 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.

A valuation allowance of $2.2 million remains on $3.8 million of the current deferred tax asset at March 31, 2012.

As of March 31, 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 March 31, 2012 was $45.7 million, or 39.3% 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. As of March 31, 2012, the Bank had unused borrowing capacity totaling $16.1 million at the FHLB 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, including real estate development loans. During the three month period ended March 31, 2012, the Company originated $11.7 million in residential mortgage loans, of which $4.0 million were retained in portfolio while the remainder were sold in the secondary market or are being held for sale. This compares to $7.2 million in originations during the first three months of 2011 of which $287,000 were retained in portfolio. The Company also originated $3.0 million of commercial loans and $179,000 of consumer loans in the first three months of 2012 compared to $4.5 million of commercial loans and $319,000 of consumer loans for the same period in 2011. Of total loans receivable, excluding loans held for sale, mortgage loans comprised 47.3% and 44.5%, commercial loans 42.9% and 44.0% and consumer loans 9.8% and 11.5% at March 31, 2012 and March 31, 2011, respectively.

Deposits are a primary source of funds for use in lending and for other general business purposes. At March 31, 2012 deposits funded 69.9% of the Company's total assets compared to 69.4% at December 31, 2011. Certificates of deposit scheduled to mature in less than one year at March 31, 2012 totaled $40.6 million. Management believes that a significant portion of such deposits will remain with the Bank. The Bank monitors the deposit rates offered by competition in the area and sets rates that take into account the prevailing market conditions along with the Bank's liquidity position. Future liquidity needs are expected to be satisfied through the use of FHLB borrowings, as necessary, and through growth in deposits. Management does not generally plan on paying above-market rates on deposit products, although from time-to-time we may do so as liquidity needs dictate.

Borrowings may be used to compensate for seasonal or other reductions in normal sources of funds or for deposit outflows at more than projected levels. Borrowings may also be used on a longer-term basis to support increased lending or investment activities. At March 31, 2012 the Company had $32.7 million in FHLB advances. FHLB borrowings as a percentage of total assets were 15.1% at March 31, 2012 as compared to 15.9% at December 31, 2011. The Company has sufficient available collateral to obtain additional advances of $16.1 million.

CAPITAL RESOURCES

Stockholders' equity at March 31, 2012 was $25.1 million, or 11.6% of total assets, compared to $24.6 million, or 11.3% of total assets, at December 31, 2011 (See "Consolidated Statement of Changes in Stockholders' Equity"). The Bank is subject to certain capital-to-assets levels in accordance with OCC regulations. The Bank exceeded all regulatory capital requirements at March 31, 2012. The following table summarizes the Bank's actual capital with the regulatory capital requirements and with requirements to be "Well Capitalized" under prompt corrective action provisions, as of March 31, 2012:

                                                          Regulatory                 Minimum to be
                                Actual                      Minimum                 Well Capitalized
                         Amount         Ratio        Amount         Ratio         Amount         Ratio
                                                      Dollars in Thousands

Tier 1 (Core) capital
( to adjusted assets)   $  22,266         10.38 %   $   8,577          4.00 %   $   10,721          5.00 %
Total risk-based
capital ( to risk-
weighted assets)        $  23,931         17.75 %   $  10,785          8.00 %   $   13,482         10.00 %
Tier 1 risk-based
capital ( to risk
weighted assets)        $  22,266         16.52 %   $   5,393          4.00 %   $    8,089          6.00 %
Tangible Capital ( to
tangible assets)        $  22,266         10.38 %   $   3,216          1.50 %   $    4,288          2.00 %