Management's discussion and analysis is intended to assist readers in understanding and evaluating the financial condition and consolidated results of operations of the Company. The analysis includes detailed discussions for each of the factors affecting the Company's operating results and financial condition for the years ended December 31, 2008 and 2007. It should be read in conjunction with the audited consolidated financial statements and accompanying notes included in this report and the supplemental financial data appearing throughout this discussion and analysis.

The following discussion and analysis contains the consolidated financial results for the Company and the Bank for the years ended December 31, 2008 and 2007. The financial statements presented contain the consolidation of the Company and the Bank only. The Company and its consolidated subsidiary are collectively referred to herein as the Company unless otherwise noted.

Executive Overview

Significant accomplishments

In the opinion of the Company's management, the Company's most significant accomplishments during 2008 were as follows:

• Total assets increased 22 percent;

• Total loans increased 15 percent;

• Total deposits increased 24 percent;

• Total noninterest-bearing deposits increased 23 percent;

• Total noninterest income increased 29 percent;

• The Company maintained its emphasis on sound asset quality;

• The Company began construction on its new headquarters facility;

• Our third Greensboro banking office opened in January of 2008; and

• The Company's independent wealth management division, Oak Ridge Wealth Management, moved into their new offices in December of 2008.

Challenges

The Company has grown steadily since the opening of the Bank in April of 2000, and its business has become more dynamic and complex in recent years as the Bank has enhanced or added delivery channels, products and services, and lines of businesses. While the achievement of the Company's 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 its strong asset quality, especially in an uncertain and weak economic environment;

• Addressing the challenges associated with a weakening economic environment in its geographic market;

• Improving efficiency and controlling noninterest expenses;

• Maintaining its 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.

The following presents management's discussion and analysis of the Company's consolidated financial condition and consolidated results of operations. You should read the discussion in conjunction with the Company's consolidated financial statements and the notes thereto. This discussion contains forward-looking statements that involve risks and uncertainties. The Company's actual results could differ significantly from those described in the forward-looking statements as a result of various factors. This discussion is intended to assist in understanding its financial condition and results of operations.

On March 30, 2009, a Form 8-K filed under Item 4.02 by the Company announced that it had concluded that its adoption of SFAS 159 was non-substantive. In connection with the foregoing, management concluded that the annual audited financial statements for the year ended December 31, 2007, as well as the previously filed interim unaudited financial statements for the quarters ended March 31, 2007, June 30, 2007, and September 30, 2007, should no longer be relied upon and that the Company needed to restate these previously issued financial statements. In lieu of refilling these Quarterly and Annual reports, we have included in this report substantially all of the information required to be included in such Quarterly and Annual Reports. For a detailed description of the cause and financial impact of the restatement, see Note 17 to the consolidated financial statements, included herein in Part III, Item 8.

Comparison of Results of Operations for the Years Ended December 31, 2008, 2007 and 2006

Net Income

For the year ended December 31, 2008, the Company reported an increase in net income of 70 percent to $1.04 million compared to $612,000 for the year ended December 31, 2007. Net income per diluted share increased 76 percent to $0.58 compared to $0.33 for the prior year period. Returns on average assets and average equity were 0.35 percent and 5.83 percent, respectively, for the year ended December 31, 2008, compared to 0.27 percent and 3.62 percent for the prior year period.

Net Interest Income

Net interest income was $8.8 million for the year ended December 31, 2008 compared to $7.6 million for the prior year. The 16 percent increase in net interest income was due primarily to growth in average earning assets.

Net interest margin is interest income earned on loans, securities, and other earning assets, less interest expense paid on deposits and borrowings, expressed as a percentage of total average earning assets. The net interest margin for the year ended December 31, 2008 was 3.67 percent compared to 3.67 percent for the prior year. The average yield on earning assets for the current period was 6.54 percent compared to 7.74 percent for the year ended December 31, 2007, and the average cost of interest-bearing liabilities was 3.59 percent for the current period compared to 4.62 percent for the year ended December 31, 2007. The decline in interest rate spread from 3.12 percent to 2.95 percent was further impacted by a decline in the ratio of average interest-earning assets to average interest-bearing liabilities, which decreased from 110.8 percent at December 31, 2007 to 107.16 percent at December 31, 2008.

As the economy weakened in the latter part of 2007 the Federal Reserve Board decreased short-term rates and the yield curve began to take on an upward sloping shape, as short-term interest rates fell below interest rates for longer maturity investment instruments. Between September 18, 2007 and December 16, 2008, the Federal Reserve Board decreased short-term interest rates ten times for a total of 475 basis points. The rapid decline in short-term interest rates immediately impacts the Company's yield on variable rate loans, which represent approximately 49 percent of the Company's total interest-earning assets. However, the impact on interest-bearing liabilities, particularly certificates of deposit, occur as the fixed rate liabilities mature and reprice at market interest rates. Therefore, when the Federal Reserve Board decreases short-term interest rates rapidly it has a short-term negative impact on the Company's net interest margin. Generally, once the fixed rate liabilities reprice at market rates the net interest margin returns to previous levels. The Company is beginning to see fixed rate liabilities, primarily certificates of deposit, reprice at lower levels, but intense local competition for deposits could negatively impact the Company's net interest margin in the future. The Company is attempting to negate the potential negative impact to its net interest margin by focusing on attracting lower-cost deposits, particularly business demand deposit accounts.

Total average interest-earning assets were $275 million for the year ended December 31, 2008, increasing by $63.6 million or 30% when compared to an average of $211.4 million for the year ended December 31, 2007. Increases in average balances by earning asset category were as follows: average loans increased by $50.2 million or 28% from $182.2 million in 2007 to $232.4 million in 2008, taxable investments, trading securities and restricted equity securities increased by $12.2 million or 57% from $21.7 million in 2007 to $33.9 million in 2008, and Federal Funds sold and interest-bearing bank deposits increased by $1.1 million or 15% from $7.6 million in 2007 to $8.7 million in 2008. Total average interest-bearing liabilities increased by $65.7 million with interest-bearing deposit accounts increasing $58.3 million or 35% and borrowings increasing $7.5 million or 35%.

Total interest income for 2008 increased by $1.7 million to $18 million compared $16.4 million for the prior year. The increase was a result of $4.5 million from increased earning asset levels and was offset by a decrease of $2.8 million due to the rate environment. Total interest expense grew by $429,000 with $2.7 million due to increased interest-bearing liabilities and was offset by a decrease of $2.2 million due to the rate environment.

The following table sets forth, for the periods indicated, information with regard to average balances of assets and liabilities, as well as the total dollar amounts of interest income from interest-earning assets and interest expense on interest-bearing liabilities, resultant yields or costs, net interest income, net interest spread, net interest margin and ratio of average interest-earning assets to average interest-bearing liabilities. Nonaccrual loans have been included in determining average loans.

Table 1. Net Interest Income and Average Balances (dollars in thousands)



                                                                              Years Ended December 31,
                                                 2008                                   2007                                   2006
                                                             Average                                Average                                Average
                                    Average                  Yield/        Average                  Yield/        Average                  Yield/
                                    Balance     Interest     Rate(1)       Balance     Interest     Rate(1)       Balance     Interest     Rate(1)
Interest-earning assets:

Federal funds sold and interest
bearing bank deposits              $   8,738    $     274       3.13 %    $   7,601    $     389       5.12 %    $   5,471    $     275       4.96 %
Taxable investment, trading
securities and restricted
equity securities                     33,867        2,029       5.97         21,689        1,090       5.03         28,994        1,261       4.29
Loans receivable                     232,351       15,738       6.75        182,152       14,895       8.18        139,324       11,345       8.03


Total interest-earning assets        274,956       18,041       6.54        211,442       16,374       7.74        173,789       12,881       7.31


Non-interest-earning assets           18,201                                 15,790                                 11,537

Total assets                       $ 293,157                              $ 227,232                              $ 185,326


Interest-bearing liabilities:
Deposit accounts                   $ 227,607    $   8,199       3.59 %    $ 169,324    $   7,578       4.48 %    $ 138,134    $   5,470       3.96 %
Borrowings                            28,969        1,043       3.59         21,516        1,235       5.74         17,083          887       5.12

Total interest-bearing
liabilities                          256,576        9,242       3.59        190,840        8,813       4.62        155,217        6,357       4.10


Non-interest-bearing
liabilities                           18,766                                 19,464                                 14,208

Stockholders' equity                  17,815                                 16,928                                 15,901

Total liabilities and
stockholders' equity               $ 293,157                              $ 227,232                              $ 185,326

Net interest income and
interest rate spread                            $   8,799       2.95 %                 $   7,561       3.12 %                 $   6,524       3.21 %

Net interest-earning assets and
net interest margin                $  18,380                    3.67 %    $  20,602                    3.67 %    $  18,572                    3.75 %


Ratio of interest-earning
assets to interest-bearing
liabilities                                                   107.16 %                               110.80 %                               111.97 %

(1) Average loan balances include nonaccrual loans.

(2) Deferred loan fees are included in interest income.

(3) Net interest margin is net interest income divided by average interest earning assets.

The following table analyzes the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities. The table distinguishes between (1) changes attributable to volume (changes in volume multiplied by the prior period's rate), (2) changes attributable to rate (changes in rate multiplied by the prior period's volume), and (3) net change (the sum of the previous columns). The change attributable to both rate and volume (changes in rate multiplied by changes in volume) has been allocated proportionately to both the changes attributable to volume and the changes attributable to rate.

Table 2. Rate/Volume Variance Analysis



                                                         Year Ended                            Year Ended
                                                 December 31, 2008 vs. 2007            December 31, 2007 vs. 2006
                                                 Increase (Decrease) Due to            Increase (Decrease) Due to
                                               Total          Rate       Volume      Total           Rate      Volume
                                                                      (dollars in thousands)
Interest income:
Federal funds sold and interest-bearing
bank deposits                                $    (115 )    $   (167 )   $    52   $      114       $    5     $   109
Taxable investment and restricted equity
securities                                         939           234         705         (171 )        174        (345 )
Loans receivable                                   843        (2,860 )     3,703        3,550           57       3,493

Total interest income                            1,667        (2,793 )     4,460        3,493          236       3,257


Interest expense:
Deposit accounts                                   621        (1,684 )     2,305        2,108          775       1,333
Borrowings                                        (192 )        (544 )       352          348          101         247

Total interest expense                             429        (2,228 )     2,657        2,456          876       1,580

Net interest income increase (decrease)      $   1,238      $   (565 )   $ 1,803   $    1,037       $ (640 )   $ 1,677

Provision for Loan Losses

The Company's provision for loan losses for 2008 was $603,000 compared to $448,000 recorded in the prior year. Provisions for loan losses are charged to income to bring the allowance for loan losses to a level we deem appropriate. In evaluating the allowance for loan losses, we consider factors that include growth and composition of the loan portfolio, historical loan loss experience, individual loans that may have estimated losses, and other relevant factors. The primary reason for the increased provision from 2007 to 2008 was an increase in loans and loan net charge-offs from 2007 to 2008. The increase in the provision was based on the Bank's assessment of the strong credit quality of the Company's current loan portfolio as well as a low level of charge offs in the last three fiscal years. The allowance for loan losses to total loans was 1.00 percent, 1.00 percent, and 1.07 percent as of December 31, 2008, 2007 and 2006, respectively.

Noninterest Income

The major components of noninterest income are shown in Table 3. Noninterest income for the Company consists of revenues generated principally from service charges on deposit accounts, loan origination fees on sold mortgage loans, investment and insurance commissions, bank owned life insurance income, and other service charges and fees.

Noninterest income totaled $3.3 million for 2008, up $1.31 million, or 66 percent, from $1.99 million for 2007. Service fees and charges, which represent a relatively stable and predictable source of noninterest income, totaled $805,000 for the current year, a 37 percent increase over the $586,000 of service fees and charges earned for 2007. Mortgage loan fee income was negatively impacted by more by the poor economic environment in 2008 compared to 2007, and totaled $424,000 for the current year, a 1 percent decrease over the $428,000 of mortgage loan fee income earned for 2007. The Bank's Investment Services Group, which services its banking offices, and the Oak Ridge Wealth Management division, which was formed in 2005 and operates independently of the Bank, comprise all of the investment and insurance commissions noninterest category. Investment and insurance commissions totaled $814,000 for the current year, a 12 percent decrease over the $925,000 earned in 2007, largely

Noninterest income totaled $2.6 million for 2007, up $495,000, or 24 percent, from $2.1 million for 2006. Service fees and charges, totaled $586,000 for 2007, a 35 percent increase over the $434,000 of service fees and charges earned for 2006. Mortgage loan fee income totaled $427,000 for 2007, a 29 percent increase over the $332,000 of mortgage loan fee income earned for 2006. The Bank's Investment Services Group, which services its banking offices, were joined in 2005 by two additional financial advisors which generally operate independently of the Company and do business as Oak Ridge Wealth Management. Investment and insurance commissions totaled $925,000 for 2007, a 12 percent increase over the $827,000 earned in 2006. This increase was largely due to the addition of Oak Ridge Wealth Management revenue in addition to increased revenue from its Investment Services Group. Income earned on bank owned life insurance totaled $161,000 for 2007, a 4 percent decline over the $156,000 earned in 2006. The small increase from 2006 to 2007 was largely due to slightly lower interest rates on the underlying insurance policies in 2007 compared to 2006. Fee income from accounts receivable financing totaled $342,000 for 2007, a 103 percent increase over the $169,000 earned in 2006. This increase is largely due to the addition of new customers in 2007. Other service charges and fees benefited from its increased number of product offerings and deposit accounts, and totaled $252,000 in 2007, a 67 percent increase over the $151,000 earned in 2006.

In February 2007, the Financial Accounting Standards Board ("FASB") issued Statement No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities." This Statement allows an irrevocable election to measure certain financial assets and financial liabilities at fair value on an instrument-by-instrument basis, with unrealized gains and losses recognized currently in earnings. Under this Statement, the fair value option may only be elected at the time of initial recognition of a financial asset or financial liability or upon the occurrence of certain specified events. The Statement is effective for fiscal years beginning after November 15, 2007, with early adoption permitted if FASB Statement No. 157, "Fair Value Measurements," is adopted concurrently, and if the adoption is made within 120 days of the beginning of the fiscal year and before any periodic financial statements are issued. The Company elected early adoption of FASB Statement No. 159 and adopted FASB Statement No. 157, effective January 1, 2007, but in March of 2009 judged the early adoption to be non-substantive. As a result of the impairment and resulting sale of the Company's security portfolio, the Company recorded a $495,000 impairment loss on securities and a $228,000 loss on sale of securities. See Note 17 to the consolidated financial statements for more information about this restatement, included herein in Part II, Item 8.

Table 3. Sources of Noninterest Income



                                                         Years ended December 31,
                                                       2008        2007        2006
                                                          (dollars in thousands)
     Service charges on deposit accounts             $     805    $   586     $   434
     Impairment loss on securities                          -        (495 )        -
     Loss on sale of securities                             -        (228 )        -
     Mortgage loan origination fees                        424        428         332
     Investment and insurance commissions                  814        925         827
     Income earned on bank owned life insurance            162        161         156
     Fee income from accounts receivable financing         743        351         169
     Other service charges and fees                        368        259         151

     Total noninterest income                        $   3,316    $ 1,987     $ 2,069

Non-interest expenses were $9.9 million for the year ended December 31, 2008 compared to $8.1 million for the prior year period. The $1.7 million or 21 percent increase reflects the continuing efforts to expand the Company's infrastructure and branch network. Of the $1.7 million total increase, $1.1 million was in salaries and employee benefits and other expenses, which are the areas most impacted by the branch network and infrastructure improvements. The major components of noninterest expense are shown in Table 4.

Salaries and employee benefits for the year ended December 31, 2008 were $5.2 million reflecting an increase of $722,000 compared to $4.5 million for the year ended December 31, 2007. Increases in salaries and employee benefits were due to an increase in support positions to service the Company's continued growth, as well as the opening of the Bank's fifth banking office in January of 2008.

Occupancy expense for the year ended December 31, 2008 was $605,000 reflecting an increase of $112,000 compared to $493,000 for the year ended December 31, 2007. Equipment expense for the year ended December 31, 2008 was $600,000 reflecting a $45,000 increase when compared to $555,000 for the year ended December 31, 2007. Both increases in occupancy expense and equipment expense were due to the fifth banking office which opened in January 2008.

Data processing expense for the year ended December 31, 2008 was $480,000 reflecting an increase of $171,000 compared to $309,000 for the year ended December 31, 2007. The increase in data processing expense was due to the renewal of the contract with our core system vendor in March 2008 as well as continued growth.

Professional and advertising expenses for the year ended December 31, 2008 were $1.1 million reflecting an increase of $202,000 compared to $907,000 for the year ended December 31, 2007. Increases in professional and advertising expenses were due to increased advertising, marketing, legal, audit and accounting expenses in 2008 over 2007.

Stationary and supplies for the year ended December 31, 2008 was $247,000 reflecting an increase of $48,000 compared to $199,000 for the year ended December 31, 2007. The increase in stationary and supplies was due to growth and the fifth banking office.

Telecommunications expense for the year ended December 31, 2008 were $254,000 reflecting an increase of $42,000 compared to $212,000 for the year ended December 31, 2007. A continuing investment in increased bandwidth as well as the Bank's fifth office which opened in January 2008 to support the Company's growth caused most of the increase between the two years.

Other noninterest expenses for the year ended December 31, 2008 were $1,380,000 reflecting an increase of $405,000 compared to $975,000 for the year ended December 31, 2007. The increase in other noninterest expense was due to growth and the fifth banking office.

Non-interest expenses were $8.1 million for the year ended December 31, 2007 compared to $6.8 million for the year ended December 31, 2006. The $1.3 million, or 20 percent, increase was mostly due to new banking offices that were opened in August 2005 and June 2006, as well as an increase in positions to support the Company's continued growth and to service the Company's new extended business hours that were implemented in October of 2006. The increases in occupancy and equipment expenses were due to the opening of two new offices in 2005 and 2006.

Table 4. Sources of Noninterest Expense



                                                Years ended December 31,
                                               2008         2007      2006
                                                     (in thousands)

            Salaries and employee benefits   $   5,213    $  4,491   $ 3,721
            Occupancy expense                      605         493       494
            Equipment expense                      600         555       513
            Data processing                        480         309       271
            Professional and advertising          1109         907       885
            Stationary and supplies                247         199       173
            Telecommunications                     254         212       155
            Other expense                         1380         975       591

            Total noninterest expense        $   9,888    $  8,141   $ 6,803

Income Taxes

Income tax expense is based on amounts reported in the statement of income (after adjustments for non-taxable income and non-deductible expenses) and consists of taxes currently due plus deferred taxes on temporary differences in the recognition of income and expense for tax and financial statement purposes. The deferred tax assets and liabilities represent the future Federal and state income tax consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled.

Income tax expense was $586,000 for 2008 and $347,000 for 2007, respectively. . . .