The following discussion and financial information are presented to aid in an understanding of the current financial position and results of operations of the Company. The Company is the parent holding company of the Bank. The Bank operates a finance company, Acceptance Loan Company, Inc. ("ALC"). The Company has no operations of any consequence other than the ownership of its subsidiaries.

The accounting principles and reporting policies of the Company, and the methods of applying these principles, conform with accounting principles generally accepted in the United States ("GAAP") and with general practices within the financial services industry. Critical accounting policies relate to securities, loans, allowance for loan losses, derivatives and hedging. A description of these policies, which significantly affect the determination of financial position, results of operations and cash flows, is set forth in Note 2, Summary of Significant Accounting Policies, in the Company's Annual Report on Form 10-K for the year ended December 31, 2008.

The emphasis of this discussion is a comparison of assets, liabilities and shareholders' equity as of March 31, 2009 to year-end 2008, while comparing income and expense for the three-month periods ended March 31, 2009 and 2008.

All yields and ratios presented and discussed herein are based on the accrual basis and not on the tax-equivalent basis, unless otherwise indicated.

This information should be read in conjunction with the Company's unaudited consolidated financial statements and related notes appearing elsewhere in this report and Management's Discussion and Analysis of Financial Condition and Results of Operations appearing in the Company's Annual Report on Form 10-K for the year ended December 31, 2008.

COMPARING THE THREE MONTHS ENDED MARCH 31, 2009 TO THE THREE MONTHS ENDED MARCH
31, 2008

Net income during the first quarter of 2009 decreased $634,000, or 33.3%, as compared to the first quarter of 2008, resulting in a decrease of basic net income per share from $0.31 to $0.21. Annualized return on assets was 0.76% for the first three months of 2009, compared to 1.15% for the same period during 2008. Average return on shareholders' equity decreased to 6.51% for the first three months of 2009, from 9.56% during the first three months of 2008.

Interest income for the 2009 first quarter decreased $1.6 million, or 11.5%, compared to the first quarter of 2008. The decrease in interest income was primarily due to a decrease in interest earned on loans. This decrease is due to an overall decrease in the average yield and a decrease in the volume of loans outstanding, which is offset somewhat by an increase in the volume of investment securities.

Interest expense for the 2009 first quarter decreased $1.2 million, or 24.8%, compared to the first quarter of 2008. This decrease was the result of lower interest rates paid on certificates of deposit and borrowed funds.

Net interest income decreased $378,000, or 4.3%, for the first quarter of 2009, as a result of a decrease in the volume and yield on loans. Asset yields have fallen faster than funding rates as prime adjustable loans have priced downward much faster than certificates of deposit. When interest rates stabilize, we will be able to reprice maturing certificates of deposit, and our net interest margin is expected to improve.

The provision for loan losses was $1.9 million, or 1.9% annualized of average loans, in the first quarter of 2009, compared to $1.4 million, or 1.3% annualized of average loans, in the first quarter of 2008. Charge-offs exceeded recoveries by $1.7 million for the quarter, a decrease of approximately $367,000 over the same period in the prior year.

Total non-interest income decreased $114,000, or 8.4%, for the first quarter of 2009. Service charges and fees on deposit accounts decreased $130,000. Income on bank-owned life insurance increased $4,000, while commissions on credit insurance increased $70,000. Letters of credit and commitment fees decreased $11,000, and all other fees and charges decreased $47,000.

Total non-interest expense decreased $9,000, or 0.2%, in the first quarter of 2009. Salary and employee benefits decreased $69,000; occupancy expense increased $6,000; advertising expense decreased $4,000; stationery and supplies expense increased $13,000; telephone and data circuit expense increased $12,000; and legal and attorney fees increased $188,000.

Income tax expense for the first quarter of 2009 decreased $398,000 over the first quarter of 2008. The decrease during the first three months of 2009 compared to 2008 resulted from lower levels of taxable income. Management estimates the effective tax rate for the Company to increase to approximately 31.0% of pre-tax income for the remainder of the year, as the ratio of tax exempt income and tax credits to taxable income declines.

COMPARING THE MARCH 31, 2009 STATEMENT OF FINANCIAL CONDITION TO DECEMBER 31,
2008

In comparing financial condition at December 31, 2008 to March 31, 2009, total assets increased $10.1 million to $678.1 million, while liabilities increased $9.6 million to $599.0 million. Shareholders' equity increased $440,000 as a result of an increase in other comprehensive income of $803,000, offset by an increase in treasury stock of $3,000 and dividends paid in excess of earnings of $360,000.

Investment securities decreased $4.2 million, or 2.3%, during the first three months of 2009. Investments provide the Company with a stable form of liquidity while maximizing earnings yield. Loans, net of unearned income, decreased $1.6 million, from $408.0 million at December 31, 2008, to $406.4 million at March 31, 2009, due to the slowdown in construction and real estate development in the trade areas served by the Company. Deposits increased $10.5 million, or 2.2%, during the first three months of 2009.

CREDIT QUALITY

At March 31, 2009, the allowance for loan losses was $8.7 million, or 2.2% of loans net of unearned income, compared to $7.8 million, or 1.8% of loans net of unearned income, at March 31, 2008, and $8.5 million, or 2.1% of loans net of unearned income, at December 31, 2008. The coverage ratio of the allowance for loan losses to non-performing assets increased to 23.0% at March 31, 2009, compared to 22.6% at December 31, 2008. Loans on non-accrual declined $688,000, accruing loans past due 90 days or more declined $1.7 million and real estate acquired in settlement of loans increased $2.5 million, as compared to December 31, 2008.

Activity in the allowance for loan losses is summarized as follows (dollars in thousands):

                                                  Three Months Ended
                                                       March 31,
                                                   2009          2008
              Balance at Beginning of Period    $    8,532     $  8,535

              Charge-Offs                           (2,125 )     (2,577 )
              Recoveries                               413          498

              Net Loans Charged-Off                 (1,712 )     (2,079 )

              Additions Charged to Operations        1,909        1,360


              Balance at End of Period          $    8,729     $  7,816

Net charge-offs for the quarter ended March 31, 2009 were $1.7 million, or 1.7% of average loans on an annualized basis, a decrease of 17.7%, or $367,000, from the charge-offs of $2.1 million, or 1.9% of average loans on an annualized basis, reported a year earlier. The provision for loan losses for the first three months of 2009 was $1.9 million, compared to $1.4 million in the first three months of 2008.

The Company maintains the allowance for loan losses at a level deemed adequate by management to absorb possible losses from loans in the portfolio. In determining the adequacy of the allowance for loan losses, management considers numerous factors, including, but not limited to, management's estimate of
(a) future economic conditions, (b) the financial condition and liquidity of certain loan customers and (c) collateral values of property securing certain loans. Because these factors and others involve the use of management's estimation and judgment, the

allowance for loan losses is inherently subject to adjustment at future dates. Unfavorable changes in the factors used by management to determine the adequacy of the allowance, including increased loan delinquencies and subsequent charge-offs, or the availability of new information, could require additional provisions, in excess of normal provisions, to the allowance for loan losses in future periods. There can be no assurance that loan losses in future periods will not exceed the allowance for loan losses or that additions to the allowances will not be required.

Non-performing assets were as follows (dollars in thousands):

                                                   March 31,        December 31,        March 31,
                                                     2009               2008              2008
Loans Accounted for on a Non-Accrual Basis        $     9,570      $       10,258      $    15,899
Accruing Loans Past Due 90 Days or More                 7,666               9,323            4,951
Real Estate Acquired in Settlement of Loans            20,670              18,131           11,414


Total                                             $    37,906      $       37,712      $    32,264

Non-Performing Assets as a Percentage of Net
Loans and Other Real Estate                              8.88 %              8.85 %           7.36 %

Non-performing assets as a percentage of net loans and other real estate was 8.9% at March 31, 2009 and December 31, 2008. Loans on non-accrual status decreased $688,000, accruing loans past due 90 days or more decreased $1.7 million and real estate acquired in settlement of loans increased $2.5 million from December 31, 2008 to March 31, 2009. Other real estate acquired as of March 31, 2009 consists of twenty-one residential properties and nine commercial properties totaling $13.4 million at the Bank and one hundred forty-five residential properties totaling $7.3 million at ALC. Management is making every effort to dispose of these properties in a timely manner, but the national recession and the severely depressed real estate market continues to have a negative impact on this process. In spite of the bad economic conditions, management believes that, by closely monitoring these non-performing assets, through aggressive collection and sales efforts, they can be reduced to a more manageable level. Management reviews these loans and reports to the Board of Directors monthly. Loans past due 90 days or more and still accruing are reviewed closely by management and are allowed to continue accruing interest only when management believes that underlying collateral values and the financial strength of the borrowers are sufficient to protect the Bank from loss. If at any time management determines that there may be a loss of interest or principal, these loans will be changed to non-accrual and their asset value downgraded.

Impaired loans totaled $20.2 million, $24.4 million and $5.6 million as of March 31, 2009, December 31, 2008 and March 31, 2008, respectively. Impaired loans at March 31, 2009 consist mainly of seven commercial real estate loans and three residential development loans. Based on management's analysis, these loans are considered impaired based on current collateral values. There was approximately $1.8 million, $1.6 million and $1.3 million in the allowance for loan losses specifically allocated to these impaired loans at March 31, 2009, December 31, 2008 and March 31, 2008, respectively.

LIQUIDITY AND CAPITAL RESOURCES

The Bank's primary sources of funds are customer deposits, Federal Home Loan Bank advances, repayments of loan principal and interest from loans and investments. While scheduled principal repayments on loans and mortgage-backed securities are a relatively predictable source of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions and competition, making them less predictable. The Bank manages the pricing of its deposits to maintain a desired deposit balance. In addition, the Bank invests in short-term interest-earning assets, which provide liquidity to meet lending requirements.

The Bank currently has up to $110.7 million in borrowing capacity from the Federal Home Loan Bank and $10.0 million in established federal funds lines.

The Bank is required to maintain certain levels of regulatory capital. At March 31, 2009 and December 31, 2008, the Company and the Bank were in compliance with all regulatory capital requirements.

Management is not aware of any condition that currently exists that would have an adverse effect on the liquidity, capital resources or operation of the Company. However, the Company is a defendant in certain claims and legal actions arising in the ordinary course of business. See Note 7 to Item 1, "Guarantees, Commitments and Contingencies," for a discussion of such claims and legal actions.