The following discussion provides information to assist in understanding our financial condition and results of operations. This discussion should be read in conjunction with our consolidated financial statements and related notes appearing in Item 8 of this report.

Overview

We are a registered financial holding company whose principal asset is our wholly owned subsidiary bank. Since July 2000, when the Bank began banking operations, we have grown to $1.6 billion in consolidated assets as of December 31, 2007. We focus on two markets: small to mid-size businesses and their principals and affinity groups with their established membership, client or customer bases. We concentrate our lending activities in the Philadelphia-Wilmington area, while we draw our deposits from that area and from out of area, principally through our affinity divisions. To a lesser extent, we obtain deposits from the open market as required to meet our loan funding needs. Our lending activities emphasize commercial, industrial and construction loans secured by real estate and commercial real estate loans.

On November 30, 2007, we completed the acquisition of the Stored Value Solution (SVS) division of Marshall Bank First. The purchase price consisted of 722,233 shares of our common stock and $48.5 million in cash for a total purchase price of $60.6 million. In addition to its significant enhancement of our stored value card operations, the acquisition added an additional funding source for loans as the division had approximately $160 million in deposits at December 31, 2007.

Critical accounting policies and estimates

Our accounting and reporting policies conform with accounting principles generally accepted in the United States and general practices within the financial services industry. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from those estimates.

We believe that the determination of our allowance for loan and lease losses involves a higher degree of judgment and complexity than our other significant accounting policies. We determine our allowance for loan and lease losses with the objective of maintaining a reserve level we believe to be sufficient to absorb our estimated probable credit losses. We base our determination of the adequacy of the allowance on periodic evaluations of our loan portfolio and other relevant factors. However, this evaluation is inherently subjective as it requires material estimates, including, among others, expected default probabilities, the amount of loss we may incur on a defaulted loan, expected commitment usage, the amounts and timing of expected future cash flows on impaired loans, value of collateral, estimated losses on consumer loans and residential mortgages, and general amounts for historical loss experience. We also evaluate economic conditions and uncertainties in estimating losses and inherent risks in our loan portfolio. All of these factors may be susceptible to significant change. To the extent actual outcomes differ from our estimates, we may need additional provisions for loan losses. Any such additional provision for loan losses will be a direct charge to our earnings.

Beginning in January 2006, we adopted the provisions of Statement of Financial Accounting Standards, or SFAS, No 123R, Share-based Payment, which requires expense recognition for the fair value of share based compensation awards, such as stock options, restricted stock, performance based shares and the like. This standard allows management to establish modeling assumptions as to expected stock price volatility, option terms, forfeiture rates and dividend rates which directly impact estimated fair value. All of these estimates and assumptions may be susceptible to significant change that may impact earnings in future periods.

We account for income taxes under the liability method whereby we determine deferred tax assets and liabilities based on the difference between the carrying values on our financial statements and the tax basis of assets and liabilities as measured by the enacted tax rates which will be in effect when these differences reverse. Deferred tax expense (benefit) is the result of changes in deferred tax assets and liabilities.

We account for goodwill in accordance with SFAS No 142, Goodwill and Intangible Assets. SFAS No 142 includes requirements to test goodwill and indefinitive lived intangible assets for impairment rather than amortize them. We have tested goodwill as of December 31, 2007 and have determined that is not impaired.

Results of operations

Net Income: fiscal 2007 compared to fiscal 2006. Net income for fiscal 2007 was $14.3 million, compared to $12.5 million for fiscal 2006. Preferred stock dividends and income allocated to preferred shareholders for fiscal 2007 were $183,000 compared to $185,000 for fiscal 2006, which resulted in net income available to common stockholders of $14.2 million for fiscal 2007 as compared to net income of $12.3 million for fiscal 2006. Diluted earnings per share were $0.98 for fiscal 2007 as compared to $0.86 for fiscal 2006. Return on average assets was 1.04% and return on average equity was 9.15% for fiscal 2007.

Net Income: fiscal 2006 compared to fiscal 2005. Net income for fiscal 2006 was $12.5 million, compared to $7.4 million for fiscal 2005. Preferred stock dividends and income allocated to preferred shareholders for fiscal 2006 were $185,000, compared to $1.1 million for fiscal 2005, which resulted in net income available to common stock of $12.3 million for fiscal 2006 as compared to net income of $6.3 million for fiscal 2005. Diluted earnings per share were $0.86 for fiscal 2006 as compared to $0.48 for fiscal 2005. Return on average assets was 1.19% and return on average equity was 8.90% for fiscal 2006. The reduction in preferred stock dividends was the result of a solicitation in 2005 to have Series A preferred shareholders convert their Series A preferred stock to common stock.

Net Interest income: fiscal 2007 compared to fiscal 2006. Our interest income for fiscal 2007 increased to $106.5 million from $81.0 million for fiscal 2006, while our net interest income increased to $52.7 million from $44.3 million. Our average loans increased to $1.2 billion for fiscal 2007 from $849.6 million for fiscal 2006. The primary reason for the increase in our interest income as well as our net interest income was our ability to increase earning assets, in particular our loan portfolio, through organic growth.

Our net interest margin (calculated by dividing net interest income by average interest-earning assets) for fiscal 2007 decreased to 3.90% from 4.32% for 2006, a decrease of 42 basis points (.42%). For fiscal 2007 the average yield on our interest-earning assets decreased to 7.89% from 7.90% for fiscal 2006, a decrease of 1 basis point (.01%). The cost of interest-bearing deposits increased to 4.75% for fiscal 2007 from 4.47% for fiscal 2006, an increase of 28 basis points (.28%), while the cost of interest-bearing liabilities increased to 4.77% for fiscal 2007 from 4.49% for fiscal 2006, an increase of 28 basic points (.28%). The decrease in the net interest margin was the result of an increase in the cost of funds to 4.77% for fiscal 2007 from 4.49% for fiscal 2006. The increase in cost was driven by competition and greater demands for liquidity by banks. Average interest-bearing deposits increased to $1.04 billion from $773.9 million, an increase of $264.4 million or 34.2%.

Net Interest Income: fiscal 2006 compared to fiscal 2005. Our interest income for fiscal 2006 increased to $81.0 million from $47.1 million for fiscal 2005, while our net interest income increased to $44.3 million from $32.2 million. Our average loans increased to $849.6 for fiscal 2006 from $550.0 million for fiscal 2005. The primary reason for the increase in our interest income as well as our net interest income was our ability to increase earning assets, in particular our loan portfolio, through organic growth.

Our net interest margin for fiscal 2006 decreased to 4.32% from 4.57% for fiscal 2005, a decrease of 25 basis points (.25%). For fiscal 2006 the average yield on our interest-earning assets increased to 7.90% from 6.70% for fiscal 2005, an increase of 120 basis points (1.20%). The increase in yield was the result of increases in the overall interest rate environment. The cost of interest-bearing deposits increased to 4.47% for fiscal 2006 from 2.93% for fiscal 2005, an increase of 154 basis points (1.54%), while the cost of interest bearing liabilities increased to 4.49% for fiscal 2006 from 2.97% for fiscal 2005, an increase of 152 basis points (1.52%). The decrease in the net interest margin was due to a flattening of the yield curve in 2006 as well as deposit rates increasing disproportionately higher than loan rates during the year. Average interest-bearing deposits increased to $773.9 million from $460.1 million, an increase of $313.9 million or 68.2%.

Average Daily Balances. The following table presents the average daily balances of assets, liabilities and shareholders' equity and the respective interest earned or paid on interest-earning assets and interest-bearing liabilities, as well as average rates for the periods indicated:

                                                             Year ended December 31,
                                                  2007                                    2006
                                     Average                   Average       Average                   Average
                                     Balance       Interest     Rate         Balance       Interest     Rate
                                                             (dollars in thousands)
Assets:
Interest-earning assets:
Loans net of unearned discount     $ 1,172,479     $  96,690      8.25 %   $   849,640     $  71,270      8.39 %
Investment securities                  115,078         6,699      5.82 %       112,843         6,542      5.80 %
Interest bearing deposits                3,319            76      2.29 %         1,668            71      4.26 %
Federal funds sold                      59,686         3,072      5.15 %        60,939         3,085      5.06 %

Net interest-earning assets          1,350,562       106,537      7.89 %     1,025,090        80,968      7.90 %
Allowance for loan and lease
losses                                  (9,398 )                                (6,774 )
Other assets                            41,632                                  34,151

                                   $ 1,382,796                             $ 1,052,467


Liabilities and Shareholders'
Equity:
Deposits:
Demand (non-interest bearing)      $    88,889                             $    90,144
Interest bearing deposits
Interest checking                       93,491     $   2,841      3.04 %        60,990     $   1,459      2.39 %
Savings and money market               520,365        23,352      4.49 %       321,220        14,126      4.40 %
Time                                   424,448        23,120      5.45 %       391,716        19,005      4.85 %

Total interest bearing deposits      1,038,304        49,313      4.75 %       773,926        34,590      4.47 %
Short-term borrowings                   86,049         4,419      5.14 %        38,862         2,043      5.26 %
Repurchase agreements                    3,006            52      1.73 %         4,140            62      1.50 %
Subordinated debt                        1,033            84      8.13 %            -             -

Net interest bearing liabilities     1,128,392        53,868      4.77 %       816,928        36,695      4.49 %
Other liabilities                        6,955                                   5,005

Total liabilities                    1,224,236                                 912,077
Shareholders' equity                   158,560                                 140,390

                                   $ 1,382,796                             $ 1,052,467

Net yield on average interest
earning assets                                     $  52,669      3.90 %                   $  44,273      4.32 %

                                                     Year ended December 31, 2005
                                                                 2005
                                                   Average                    Average
                                                   Balance        Interest     Rate
                                                        (dollars in thousands)
  Assets:
  Interest-earning assets:
  Loans net of unearned discount                 $   549,993      $  40,534      7.37 %
  Investment securities                              106,371          5,018      4.72 %
  Interest bearing deposits                            1,029              3      0.29 %
  Federal funds sold                                  45,698          1,579      3.46 %

  Net interest-earning assets                        703,091         47,134      6.70 %

  Allowance for loan and lease losses                 (4,510 )
  Other assets                                        34,332

                                                 $   732,913


  Liabilities and Shareholders' Equity:
  Deposits:
  Demand (non-interest bearing)                  $    94,385
  Interest bearing deposits
  Interest checking                                   28,624      $     343      1.20 %
  Savings and money market                           205,146          5,825      2.84 %
  Time                                               226,290          7,302      3.23 %

  Total interest bearing deposits                    460,060         13,470      2.93 %
  Short-term borrowings                               39,356          1,292      3.28 %
  Repurchase agreements                                4,168             75      1.80 %
  Subordinated debt                                    1,314            138     10.50 %

  Net interest bearing liabilities                   504,898         14,975      2.97 %
  Other liabilities                                    2,710

  Total liabilities                                  601,993
  Shareholders' equity                               130,920

                                                 $   732,913

  Net yield on average interest earning assets                    $  32,159      4.57 %

In fiscal 2007, average interest-earning assets increased to $1.35 billion, an increase of $325.5 million, or 31.8% from fiscal 2006. During the same period, average loan balances increased $322.8 million or 38.0%. In fiscal 2006, average interest-earning assets increased to $1.03 billion, an increase of $322.0 million, or 45.8%, from fiscal 2005. During the same period, average loan balances increased $299.6 million, or 54.4%.

Volume and Rate Analysis. The following table sets forth the changes in net interest income attributable to either changes in volume (average balances) or to changes in average rates from 2005 through 2007. The changes attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate.

                                               2007 versus 2006                        2006 versus 2005
                                        Due to change in:                       Due to change in:
                                       Volume         Rate        Total        Volume         Rate        Total
Interest income:
Loans net of unearned discount        $  26,602     $ (1,182 )   $ 25,420     $  24,518     $  6,218     $ 30,736
Investment Securities                       130           27          157           320        1,204        1,524
Interest bearing deposits                     9           (4 )          5             3           65           68
Federal funds sold                          (69 )         56          (13 )         629          877        1,506

Total interest earning assets            26,672       (1,103 )     25,569        25,470        8,364       33,834

Interest expense:
Interest checking                     $     917     $    465     $  1,382     $     593     $    523     $  1,116
Savings and money market                  8,931          295        9,226         4,214        4,087        8,301
Time                                      1,667        2,448        4,115         6,929        4,774       11,703

Total deposit interest expense           11,515        3,208       14,723        11,736        9,384       21,120
Subordinated debt                            84           -            84           (69 )        (69 )       (138 )
FHLB advances                             1,869          (46 )      1,823           (16 )        767          751
Other borrowed funds                        297          246          543            (1 )        (12 )        (13 )

Total interest expense                   13,765        3,408       17,173        11,650       10,070       21,720

Net interest income:                  $  12,907     $ (4,511 )   $  8,396     $  13,820     $ (1,706 )   $ 12,114

Provision for Loan and Lease Losses. Our provision for loan and lease losses was $5.4 million for fiscal 2007, $3.0 million for fiscal 2006 and $2.1 million for 2005. The increase in the provision is based on our review of the adequacy of our allowance for loan and lease losses. At December 31, 2007, our allowance for loan and lease losses amounted to $10.2 million or 0.80% of total loans. We believe that our allowance is adequate to cover expected losses. For more information about our provision and allowance for loan and lease losses and our loss experience see "-Allowance for Loan and Lease Losses" and "-Summary of Loan and Lease Loss Experience," below.

Non-Interest Income. Non-interest income was $7.6 million for fiscal 2007 as compared to $5.0 million for fiscal 2006, an increase of $2.6 million or 51.1%. There were $2,000 in gains on sales of investment securities in fiscal 2007 as compared to no gains on sales of investment securities for fiscal 2006. Gains (or losses) on sales of investment securities vary from transaction to transaction, and the timing of these transactions also may vary. As a result, there may be significant variation in the amount of our gains (or losses) from period to period. The principal reasons for the increase of non-interest income, exclusive of gains on sales of investment securities, were an increase in leasing income and an increase in other income. Leasing income increased to $2.1 million in fiscal 2007 from $1.4 million in fiscal 2006, and increase of $672,000. The increase in leasing income resulted from a gain on sale of lease assets at the end of a lease with a large leasing relationship. Other income increased to $3.3 million in fiscal 2007 from $1.0 million in fiscal 2006, an increase of $2.3 million. Approximately $1.4 million of the increase was income received from a MasterCard stock conversion. The acquisition of SVS had a limited impact on the 2007 non-interest income as a result of the acquisition we expect to see an increase in non-interest income related prepaid cards in future periods.

Non-interest income was $5.0 million for fiscal 2006 as compared to $4.3 million for fiscal 2005, an increase of $715,000 or 16.5%. There were no gains on sales of investment securities in fiscal 2006 as compared to a $56,000 gain on sale investment securities for fiscal 2005. Gains (or losses) on sales of investment securities

vary from transaction to transaction, and the timing of these transactions also may vary. As a result, there may be significant variation in the amount of our gains (or losses) from period to period. The principal reasons for the increase of non-interest income, exclusive of gains on sales of investment securities, were an increase in Automated Clearing House, or ACH, processing fees, service fees on deposit accounts and other income. Service fees on deposit accounts increased to $849,000 in fiscal 2006 from $710,000 in fiscal 2005, an increase of $139,000. The primary reason for the increase was the growth in our health savings accounts, or HSA, deposit accounts. Other income increased to $1.0 million in fiscal 2006 from $730,000 in fiscal 2005, an increase of $290,000. Approximately $165,000 of the increase was a fee we received from MasterCard after its initial public offering. ACH processing fees increased to $657,000 in fiscal 2006 from $294,000 in fiscal 2005, an increase of $363,000. The increase was the result of new agreements in which we process ACH transactions as the Originating Depository Financial Institution, or ODFI, for third party processors as well as increased volume from existing relationships.

Non-Interest Expense. Total non-interest expense was $31.2 million for fiscal 2007, as compared to $25.5 million for fiscal 2006, an increase of $5.7 million or 22.3%. Salaries and employee benefits amounted to $14.9 million for fiscal 2007 as compared to $12.4 million for fiscal 2006. The increase reflects the addition of the employees from the SVS acquisition as well as additional staff required for expanding our commercial lending and affinity division operations. It also reflects annual salary increases of 3% to 5% to our employees. We expect our salaries and employee benefits expense to increase in future periods as we increase our staff to accommodate our expected growth in assets as well as the impact of SVS salaries and benefits for a full year. Computer expense increased to $2.9 million for fiscal 2007, an increase of $485,000 or 20%. Professional fees increased to $2.1 million for fiscal 2007, an increase of $231,000 or 12.6%. The increase reflects increases in outsourced internal audit expense due to our growth. Other expense increased to $7.7 million for fiscal 2007, an increase of $2.1 million or 36.7%. The increase is the result of increases in a variety of expense categories all of which were associated with the growth of our company.

Non-interest expense was $25.5 million for fiscal 2006, as compared to $22.8 million for fiscal 2005, an increase of $2.8 million or 12.1%. Salaries and employee benefits amounted to $12.4 million for fiscal 2006 as compared to $10.7 million for fiscal 2005. The increase reflects the additional production staff required for our commercial lending and affinity divisions as a result of the growth in our total assets and total loans. It also reflects annual salary increases of 3% to 5% to our employees. Computer expense increased to $2.4 million for fiscal 2006 an increase of $931,000 or 62.1%. The increase reflects the growth in both the number of loans and deposit accounts and in particular the growth of our HSA accounts as well as a full year of expense associated with the upgrade of our internet banking platform completed in 2005. Professional fees increased to $1.8 million for fiscal 2006 an increase of $426,000 or 30.3%. The increase reflects the increasing compliance costs that are associated with being a public company, as well as increases in outsourced internal audit expense due to our growth. Other expense increased to $5.6 million for fiscal 2006 an increase of $710,000 or 14.4%. The increase is the result of increases in a variety of expense categories all of which were associated with the growth of our company.

Income Tax Expense and Benefit

Our income tax expense for fiscal 2007 was $9.3 million as compared to $8.3 million in fiscal 2006. Our effective rate for 2007 was 39.44% as compared to our effective tax rate for 2006 of 39.99%.

Liquidity and Capital Resources

Liquidity defines our ability to generate funds to support asset growth, meet deposit withdrawals, satisfy borrowing needs and otherwise operate on an ongoing basis. We invest the funds we do not need for operation primarily in overnight federal funds.

Our primary source of funds for our financing activities has been cash inflows from net increases in deposits, which were $209.1 million in fiscal 2007, $336.7 million in fiscal 2006 and $344.5 million in fiscal

2005. While we do not have a traditional branch system, we feel that our core deposits, which include our demand, interest checking, savings and money market accounts, have similar characteristics to those of a bank with a branch system. We seek to set rates on our deposits at levels competitive with the rates offered in our market; however we do not seek to compete principally on rate. The focus of our business model is to identify affinity groups that control significant amounts of deposits as part of their business. A key component to the model is that the deposits are both stable and "sticky," in the sense of they do not react to fluctuations in the market. Because of the model, we have not experienced significant swings in liquidity and would expect that to continue in the future.

In fiscal 2007, we received $13.0 million in proceeds from our offering of subordinated debt. The proceeds were used to fund the acquisition of the Stored Value Solutions division of Marshall Bankfirst. As a result of netting the cash paid as part of the purchase price against deposits received, the acquisition of SVS resulted in a net inflow of cash to us on November 30, 2007

We have also used sources outside of our core deposit products to fund our loan growth, in particular the Federal Home Loan Bank and repurchase agreements. As of December 31, 2007, we had $90.0 million of outstanding Federal Home Loan Bank advances and $3.8 million in repurchase agreements. We also have a $5 million line of credit with Atlantic Central Bankers Bank and a $100.0 million line of credit with M & I Bank. No amounts were outstanding on these lines as of December 31, 2007. We expect to continue to use our facility with the Federal Home Loan Bank, as well as repurchase agreements, as a supplemental funding source. We also use the broker certificate of deposit market as a significant funding source. Brokered funds amounted to $390.7 million, $435.8 million and $247.9 million, at December 31, 2007, 2006 and 2005, respectively. As part of our asset and liability management process, we review the maturities of our broker certificates of deposit in light of our expected deposit inflows and the amount of funding we anticipate will be necessary for lending purposes. The use of broker certificates of deposit as a funding source is a strategy we employ to match funds against fixed rate loans as well as to manage the inherent lags between loan funding and deposit gathering. While broker certificates of deposit can be a volatile source of funding, we believe that the principal factor in attracting such deposits, as with other time deposits, is the interest rate offered. As a result, in a rising interest rate environment our cost of funds will also rise to the extent we seek to replace maturing broker certificates of deposit with similar funds rather than with increased core deposits or borrowings under our Federal Home Loan Bank, Atlantic Central Bankers Bank or M&I Bank facilities.

Funding was directed primarily at cash outflows required for loans, which were $225.2 million in fiscal 2007, $383.3 million in fiscal 2006 and $248.7 million in fiscal 2005. At December 31, 2007, we had outstanding commitments to fund . . .