Summary of HIBERNIA HOMESTEAD BANCORP, INC.

Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Overview
Hibernia Homestead Bancorp's profitability depends primarily on net interest income, which is the difference between interest income earned on interest-earning assets, principally loans, and interest expense paid on interest-bearing liabilities, principally deposits. Net interest income is dependent upon the level of interest rates and the extent to which such rates are changing. Hibernia Homestead Bank's profitability also depends, to a lesser extent, on interest-earning deposits in other institutions, non-interest income, borrowings from the Federal Home Loan Bank of Dallas, provision for loan losses, non-interest expenses and federal income taxes. For the year ended December 31, 2008, Hibernia Homestead Bank had a net loss of $466,000 compared to a net loss of $149,000 for the year ended December 31, 2007. Our net loss in recent periods primarily has been due to increases in non-interest expense. Hibernia Homestead Bank's high non-interest expense in recent periods was primarily a result of the implementation of our business strategy to become a full-service bank by hiring two senior loan officers, establishing online banking and debit cards, joining an ATM network in our market area and additional marketing expense. Historically, we have operated as a traditional thrift relying almost exclusively on long-term, fixed rate single-family residential mortgage loans to generate interest income. Typically, single-family loans involve a lower degree of risk and carry a lower yield than commercial real estate, construction, commercial business and consumer loans. Our loans are primarily funded by certificates of deposit, which typically have a higher interest rate than passbook accounts. At December 31, 2008, certificates of deposit amounted to 48.2% of total deposits compared to 63.9% of total deposits at December 31, 2007. The decrease in certificates of deposit and decrease in interest rates have resulted in higher interest rate spreads in fiscal 2008 compared to fiscal 2007. Although we will attempt to diversify into other deposit products in order to further improve our net interest margin, we anticipate that certificates of deposit will continue to be a primary source of funding for our assets in the near term.
Our results of operations are also significantly affected by general economic and competitive conditions, particularly with respect to changes in interest rates, government policies and actions of regulatory authorities. Future changes in applicable law, regulations or government policies may materially affect our financial condition and results of operations. Business Strategy
Our business strategy is focused on operating a growing and profitable community-oriented financial institution. Below are certain of the highlights of our business strategy:
• Growing Our Loan Portfolio by Adding Commercial Real Estate Loans. We plan to originate additional commercial real estate loans secured by owner-occupied commercial real estate and investment real estate with strong guarantor support and to develop full service banking relationships with small- and medium-sized businesses in our local market area. As a local community bank with a senior management team that has significant commercial banking experience in the New Orleans metropolitan area, Hibernia Homestead Bank is positioned to more effectively meet the commercial banking needs of local businesses that are currently underserved as the result of consolidation of their banking relationship into larger financial institutions that place more of an emphasis on developing large commercial banking relationships. Hibernia's ability to provide small- and medium-sized commercial banking customers with local decision-making and superior service will be a core marketing focus in competing for commercial real estate loans and deposits. The Board's and senior management's ties to the local business community and previous commercial banking relationships will also support implementation of the commercial banking strategy. We will continue to pursue residential lending which we expect will also be a potential source of core deposit growth, as we will emphasize developing a full service banking relationship with all of our loan customers.

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• Growing our Retail Core Deposits. We plan to grow our retail deposits by emphasizing transactional deposit accounts. Growth of retail core deposits will be pursued through offering products and services that meet the full service banking needs of all age groups and developing more of a sales culture in the branches. The ability to attract and retain core deposits should also be enhanced by our recent affiliation with Community Cash network in 2008. As part of the Community Cash network, customers of Hibernia Homestead Bank have access to over 150 ATMs in the area with no service fee. Advertising, promotions and offering attractive rates on certain transaction accounts may also be utilized as means to increase retail core deposits. We plan to grow our checking accounts by offering more competitive checking account products and services, such as PC banking for commercial accounts, as well as emphasizing cross-selling cash management services to a growing base of commercial loan customers.

• Maintaining High Asset Quality. Even with the lingering effects of Hurricane Katrina from 2005, we continue to maintain exceptional levels of asset quality. At December 31, 2008, we had three non-performing loans totaling $150,000, or 0.5% of our total loan portfolio. We attribute our high asset quality to our prudent and conservative underwriting practices, and we intend to maintain high asset quality after the offering even as we grow Hibernia Homestead Bank.

• Continuing to Provide Exceptional Customer Service. As a community oriented savings bank, we take pride in providing exceptional customer service as a means to attract and retain customers. We deliver personalized service to our customers that distinguishes us from the large regional banks operating in our market area. Our management team has strong ties to, and deep roots in, the community. We believe that we know our customers' banking needs and can respond quickly to address them.

Critical Accounting Policies
In reviewing and understanding financial information for Hibernia Homestead Bank, you are encouraged to read and understand the significant accounting policies used in preparing our financial statements. These policies are described in Note 1 of the notes to our financial statements. The accounting and financial reporting policies of Hibernia Homestead Bank conform to accounting principles generally accepted in the United States of America and to general practices within the banking industry. Accordingly, the consolidated financial statements require certain estimates, judgments, and assumptions, which are believed to be reasonable, based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the periods presented. The following accounting policies comprise those that management believes are the most critical to aid in fully understanding and evaluating our reported financial results. These policies require numerous estimates or economic assumptions that may prove inaccurate or may be subject to variations which may significantly affect our reported results and financial condition for the period or in future periods.
Allowance for Loan Losses. The allowance for loan losses is maintained at a level to provide for probable credit losses related to specifically identified loans and for losses inherent in the loan portfolio that have been incurred as of the balance sheet date. The reserve is comprised of specific reserves and a general reserve. Specific reserves are assessed for each loan that is reviewed for impairment or for which a probable loss has been identified. The reserve related to loans that are identified as impaired is based on discounted expected future cash flows using the loan's initial effective interest rate, the observable market value of the loan, or the estimated fair value of the collateral for certain collateral dependent loans. Factors contributing to the determination of specific reserves include the financial condition of the borrower, changes in the value of pledged collateral and general economic conditions. General reserves are established based on historical charge-offs considering factors that include risk rating, concentrations and loan type. For the general reserve, management also considers trends in delinquencies and non-accrual loans, concentrations, volatility of risk ratings and the evolving mix in terms of collateral, relative loan size and the degree of seasoning within the various loan products.

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Changes in underwriting standards, credit administration and collection policies, regulation and other factors which affect the credit quality and collectability of the loan portfolio also impact the reserve levels. The reserve for loan losses is based on management's estimate of probable credit losses inherent in the loan portfolio; actual credit losses may vary from the current estimate. The reserve for loan losses is reviewed periodically, taking into consideration the risk characteristics of the loan portfolio, past charge-off experience, general economic conditions and other factors that warrant current recognition. As adjustments to the reserve for loan losses become necessary, they are reflected as a provision for loan losses in current-period earnings. Actual loan charge-offs are deducted from and subsequent recoveries of previously charged-off loans are added to the reserve.
Income Taxes. Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax bases of the various assets and liabilities and gives current recognition to changes in tax rates and laws. Realizing our deferred tax assets principally depends upon our achieving projected future taxable income. We may change our judgments regarding future profitability due to future market conditions and other factors. We may adjust our deferred tax asset balances if our judgments change.
Comparison of Financial Condition at December 31, 2008 and December 31, 2007 Hibernia Homestead Bank's total assets increased $8.0 million, or 16.0% to $58.2 million at December 31, 2008 compared to $50.2 million at December 31, 2007. This increase was primarily due to increases in cash and cash equivalents and to a lesser extent, increases in loans receivable, which was partially offset by a decrease in investment securities available for sale. Loans receivable, net, increased $2.8 million, or 9.6%, at December 31, 2008 compared to December 31, 2007. The increase in loans receivable, net was due primarily to an increase in one-to four-family residential loans of $2.1 million from fiscal 2007 and a $617,000 increase in residential construction and land loans.
Investment securities available for sale decreased $3.1 million, or 20.4%, at December 31, 2008 from $15.0 million at December 31, 2007. The decrease in investment securities was due to maturities, scheduled payments and pre-payments of mortgage-backed securities during fiscal 2008.
Cash and cash equivalents increased to $6.8 million at December 31, 2008 compared to $83,000 at December 31, 2007 primarily due to receipt of offering subscriptions in connection with our mutual to stock conversion which was invested in federal funds sold.
Total liabilities increased $8.2 million, or 22.8%, to $44.0 million at December 31, 2008 compared to $35.9 million at December 31, 2007, due primarily to an increase in interest-bearing deposits of $8.7 million and a decrease of $600,000 in FHLB advances. Hibernia Homestead Bank had no FHLB advances at December 31, 2008.
Total equity decreased $134,000 to $14.2 million at December 31, 2008 compared to $14.3 million at December 31, 2007, due to a net loss of $466,000 partially offset by an increase in other comprehensive income of $332,000 for the year ended December 31, 2008.
Summary of Material Changes in Financial Condition at December 31, 2008 and December 31, 2007.Management utilized a portion of its federal funds sold to repay borrowings of $600,000 from the Federal Home Loan Bank of Dallas during fiscal 2008. The increase in loans receivable, net, at December 31, 2008 compared to December 31, 2007 was primarily funded by proceeds from the sale of investment securities.
The increase in interest-bearing deposits of $8.7 million, or 25.6%, from December 31, 2007 to December 31, 2008 was due primarily to increases in savings accounts and, to a lesser extent, money market accounts, partially offset by a decrease in certificate accounts. Savings accounts increased by $8.1 million at December 31, 2008 compared to December 31, 2007. Money market accounts increased by $1.7 million and interest-bearing checking accounts increased $166,000. Certificate accounts decreased $1.4 million, or 6.2%, at December 31, 2008 compared to December 31, 2007. Management attributes the decrease in certificates of deposit accounts during fiscal 2008 to our strategy to manage interest rate risk by not aggressively competing for deposits.

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The increase in loans receivable, net, was primarily due to an increase in one-to-four-family residential loans of $2.1 million, or 7.5%, from December 31, 2007 to December 31, 2008, and an increase in residential construction loans of $617,000, or 72.5%, from December 31, 2007 to December 31, 2008. Home equity lines of credit increased $101,000, or 194.2%, from December 31, 2007 to December 31, 2008. Our portfolio of residential construction loans increased in fiscal 2008 in connection with the deployment of funds for rebuilding after Hurricane Katrina.
Comparison of Operating Results for the Years Ended December 31, 2008 and 2007 General. Hibernia Homestead Bank's net loss amounted to $466,000 for the year ended December 31, 2008, an increase of $317,000, or 212.8%, compared to net loss of $149,000 for the year ended December 31, 2007. This increase was primarily due to an increase in non-interest expense of $515,000, partially offset by a decrease in interest expense of $287,000.
Net Interest Income. Net interest income amounted to $1.4 million for the year ended December 31, 2008 compared to $1.3 million for the year ended December 31, 2007. The $154,000, or 12.1%, increase was primarily due to a decrease in interest expense on deposits and an increase in interest income on residential mortgage loans.
The average interest rate spread increased from 2.05% for the year ended December 31, 2007 to 2.74% for the year ended December 31, 2008 while average net interest-earning assets declined from $9.5 million to $8.5 million during the same respective periods. Average interest-earning assets to average interest-bearing liabilities decreased from 126.02% for the year ended December 31, 2007 to 124.39% for the year ended December 31, 2008. The increase in the average interest rate spread reflects the decrease in average rate paid on interest-bearing liabilities from 3.43% in fiscal 2007 to 2.78% in fiscal 2008, primarily as a result of the decrease in average rate on certificate of deposit accounts. Net interest margin increased 52 basis points from 2.76% to 3.28% at December 31, 2007 and 2008, respectively, primarily due to a decrease of 65 basis points in the average rate paid on interest-bearing liabilities and an increase of 4 basis points in the average yield on interest-earning assets for the periods.
Interest income decreased by $133,000, or 5.3%, to $2.4 million for the year ended December 31, 2008 compared to $2.5 million for the year ended December 31, 2007. Such decrease was primarily due to a decrease in the average balance of securities available for sale of $3.5 million, or 21.0%, partially offset by an increase in the average balance of loans receivable from $29.0 million for the year ended December 31, 2007 to $30.0 million for the year ended December 31, 2008. The increase in the average yield on loans from 6.10% in fiscal 2007 to 6.11% in fiscal 2008 reflects changes in the market rates of interest during fiscal 2008.
Interest expense decreased by $287,000, or 22.8%, to $971,000 for the year ended December 31, 2008 compared to $1.3 million for the year ended December 31, 2007 primarily as a result of a decrease in the average rate on certificate of deposit accounts. Such decrease in average balance is due to rate sensitive consumers seeking higher rates on certificates of deposit.
Non-Interest Income. Non-interest income, which consists of rental income, fees and service charges, and realized gains and losses on investments, amounted to $127,000 for the year ended December 31, 2008, a decrease of $59,000, or 31.7%, compared to non-interest income of $186,000 for the year ended December 31, 2007.
Non-Interest Expense. Non-interest expense increased by $515,000, or 29.5%. to $2.3 million for the year ended December 31, 2008, compared to $1.7 million for the year ended December 31, 2007. The increase was primarily the result of a $264,000 increase in salaries and employee benefits expense, as well as an $86,000 increase in advertising expense in fiscal 2008 compared to 2007. Advertising expense of $136,000 was incurred in fiscal 2008 in connection with the advertisement of loan products for one- to four-family residential mortgage loans during the fiscal year.

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Income Tax Benefit. The income tax benefit amounted to $242,000 and $139,000 for the fiscal years ended December 31, 2008 and 2007, respectively. Average Balances, Net Interest Income, and Yields Earned and Rates Paid. The following table shows for the periods indicated the total dollar amount of interest from average interest-earning assets and the resulting yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates, and the net interest margin. As Hibernia Homestead Bank owned no tax-exempt securities during the periods presented, no yield adjustments were made. All average balances are based on daily averages.

                                                       Year Ended December 31,
                                           2008                                        2007
                                                        Average                                     Average
                          Average                        Yield/       Average                        Yield/
                          Balance        Interest       Rate(1)       Balance        Interest         Rate
                                                        (Dollars in thousands)
Interest-earning
assets:
Loans receivable(1)       $ 29,758      $    1,819          6.11 %    $ 28,988      $    1,768          6.10 %
Investment securities       13,162             570          4.33        16,662             738          4.43
Other interest-earning
assets                         520               9          1.70           511              25          4.95

Total interest-earning
assets                      43,440           2,398          5.52 %      46,161           2,531          5.48 %

Non-interest-earning
assets                       6,930                                       5,921

Total assets              $ 50,370                                    $ 52,082

Interest-bearing
liabilities:
Savings, NOW and money
market accounts           $ 12,609             137          1.08 %    $ 12,701             134          1.06 %
Certificates of
deposit                     22,023             827          3.76        23,369           1,095          4.68

Total deposits              34,632             964          2.78        36,070           1,229          3.41
FHLB advances                  290               7          2.52           559              29          5.17

Total interest-bearing
liabilities                 34,922             971          2.78 %      36,629           1,258          3.43 %

Non-interest-bearing
liabilities                  1,267                                       1,224

Total liabilities           36,189                                      37,853
Retained earnings           14,181                                      14,229

Total liabilities and
retained earnings         $ 50,370                                    $ 52,082

Net interest-earning
assets                    $  8,518                                    $  9,532

Net interest income;
average interest rate
spread                                  $    1,427          2.74 %                  $    1,273          2.05 %

Net interest margin(2)                                      3.28 %                                      2.76 %

Average
interest-earning
assets to average
interest-bearing
liabilities                                               124.39 %                                    126.02 %

(1) Includes non-accrual loans for the year ended December 31, 2008. Calculated net of deferred fees and discounts, loans in process and allowance for loan losses.

(2) Equals net interest income divided by average interest-earning assets.

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Rate/Volume Analysis. The following table shows the extent to which changes in interest rates and changes in volume of interest-earning assets and interest-bearing liabilities affected our interest income and expense during the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to
(1) changes in rate, which is the change in rate multiplied by prior year volume, and (2) changes in volume, which is the change in volume multiplied by prior year rate. The combined effect of changes in both rate and volume has been allocated proportionately to the change due to rate and the change due to volume.

                                     Year Ended December 31,                          Year Ended December 31,
                                      2008 compared to 2007                            2007 compared to 2006
                                   Increase (Decrease) Due to                       Increase (Decrease) Due to
                                                              Total                                            Total
                                                            Increase                                         Increase
                              Rate            Volume       (Decrease)          Rate            Volume       (Decrease)
                                         (In thousands)
Interest income:
Loans receivable           $        3        $     47      $        50      $       42        $    333      $       375
Investment securities             (13 )          (155 )           (168 )           (12 )          (229 )           (242 )
Other interest-earning
assets                            (16 )             -              (16 )             1            (109 )           (107 )

Total interest income             (26 )          (108 )           (134 )            31              (5 )             26

Interest expense:
Savings, NOW and money
market accounts                     3               -                3              12             (35 )            (23 )
Certificates of deposit          (205 )           (63 )           (268 )           260             116              376

Total deposits                   (202 )           (63 )           (265 )           272              81              353
FHLB advances                      (8 )           (14 )            (22 )            (1 )           (15 )            (16 )

Total interest expense           (210 )           (77 )           (287 )           271              66              337

Increase (decrease) in
net Interest income        $      184        $    (31 )    $       153      $     (240 )      $    (71 )    $      (311 )

Provision for Loan Losses. The allowance for loan losses is established through a provision for loan losses charged to earnings as losses are estimated to have occurred in our loan portfolio. The allowance for loan losses is maintained at a level to provide for probable credit losses related to specifically identified loans and for losses inherent in the loan portfolio that have been incurred as of the balance sheet date. The reserve is comprised of specific reserves and a general reserve.
Specific reserves are assessed for each loan that is reviewed for impairment or for which a probable loss has been identified. The reserve related to loans that are identified as impaired is based on discounted expected future cash flows using the loan's initial effective interest rate, the observable market value of the loan, or the estimated fair value of the collateral for certain collateral dependent loans. Factors contributing to the determination of specific reserves include the financial condition of the borrower, changes in the value of pledged collateral and general economic conditions. General reserves are established based on historical charge-offs considering factors that include risk rating, concentrations and loan type. For the general reserve, management also considers trends in delinquencies and non-accrual loans, concentrations, volatility of risk ratings and the evolving mix in terms of collateral, relative loan size and the degree of seasoning within the various loan products.
Changes in underwriting standards, credit administration and collection policies, regulation and other factors which affect the credit quality and collectability of the loan portfolio also impact the reserve levels. The reserve for loan losses is based on management's estimate of probable credit losses inherent in the loan portfolio; actual credit losses may vary from the current estimate. The reserve for loan losses is reviewed periodically, taking into consideration the risk characteristics of the loan portfolio, past charge-off experience, general economic conditions and other factors that warrant current recognition. As adjustments to the reserve for loan losses become necessary, they are reflected as a provision for loan losses in current-period earnings. Actual loan charge-offs are deducted from and subsequent recoveries of previously charged-off loans are added to the reserve.

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No provision was made to the allowance during fiscal 2008 or fiscal 2007. To the best of management's knowledge, the allowance is maintained at a level believed to cover all known and inherent losses in the loan portfolio, both probable and reasonable.
In 2005, Hurricane Katrina affected the residents and businesses within Hibernia Homestead Bank's market area. The adverse financial impacts of this event on the Bank's loan portfolio were recognized at that time. Management continues to closely monitor the loan portfolio, and no substantial additional losses directly related to Hurricane Katrina have been experienced to date. However, the extent to which the still affected areas within Hibernia's market eventually recover is unknown at this time as are the ultimate adverse additional impacts that might have, if any, on Hibernia Homestead Bank's loan portfolio. Exposure to Changes in Interest Rates
Hibernia Homestead Bank's ability to maintain net interest income depends upon its ability to earn a higher yield on assets than the rates it pays on deposits . . .