The following presents management's discussion and analysis of the consolidated financial condition of the Company as of March 31, 2009 and December 31, 2008 and results of operations for the three-month periods ended March 31, 2009 and March 31, 2008. This discussion should be read in conjunction with the Company's consolidated condensed financial statements and the related notes appearing elsewhere in this report and the Company's Annual Report on Form 10-K for the year ended December 31, 2008.

Executive Overview

Net Income for the first quarter 2009 was $410,225, a 42.3% decrease from first quarter 2008. The $300,947 decrease in net income was due to increases in loan loss provision expense and FDIC insurance premiums with balances at March 31, 2009 of $960,000 and $279,490, respectively. Provision expenses increased by $660,000 from the $300,000 recorded in the first three months of 2008 due to the continual decline in environmental conditions and to place specific reserves on two commercial loan relationships. FDIC insurance premiums have increased by $111,976 compared to the $167,514 recorded in the first quarter of 2008 due to the increase of the FDIC insurance premium assessments, which have impacted all banks, and due to an increase in deposits of $31.0 million from March 31, 2008.

Net interest income decreased as it was negatively impacted by the decline in net interest margin from 3.15% at March 31, 2008 to 2.85% at March 31, 2009. Operating expenses decreased by $485,513, or 8.9%, in first quarter 2009 compared to first quarter 2008 despite the increase in FDIC Insurance premiums. Of this decrease, $363,949 was due to a decrease in employment expenses and $53,876 was due to a decrease in business development expenses. Most expense categories showed a decrease from the first three months of 2008 to the first three months of 2009, each of which was less than $100,000, including marketing, communication and courier expenses. These decreases were partially offset by small increases in loan and professional costs and data processing expenses.

Total assets increased by $19.0 million from December 31, 2008 to March 31, 2009. The increase in total assets was primarily due to an increase in federal funds sold of $36.6 million, which was funded by an increase of $32.5 million in total deposits and a decrease in long-term investments of $6.0 million. Net loans decreased slightly by $3.7 million from December 31, 2008 to $546.7 million primarily due to a transfer to other real estate owned of $2.7 million.

Total deposits increased by $32.5 million, or 5.5% in the first quarter 2009, primarily driven by an increase in money market and Health Savings Accounts of $24.7 million and $12.0 million, respectively. While brokered certificate of deposits remained relatively unchanged from December 31, 2008, approximately $9.2 million of these deposits are scheduled to mature during the second quarter of 2009. In an effort to decrease our out-of-market funding, the Company has remained liquid during the first three months of 2009 to pay off FHLB advances maturing in the second quarter of 2009 and in anticipation of the brokered certificate of deposits maturities. FHLB advances decreased by $14.0 million from December 31, 2008 to March 31, 2009.

Financial Condition

Total assets were $715.6 million at March 31, 2009 compared to total assets at December 31, 2008 of $696.6 million. The 2.7% increase in assets was primarily due to an increase in federal funds sold of $36.6 million. We have experienced growth in our money markets and certificate of deposits by $24.7 million and $4.6 million, respectively, during the first three months of 2009.

Cash and Investments. Cash and cash equivalents, which include federal funds sold, were $56.9 million at March 31, 2009, an increase of $25.4 million, or 80.3%. Securities available for sale were $71.8 million at the end of the first quarter of 2009, a decrease of $6.0 million from December 31, 2008. The decrease in the investment portfolio was the result of the sale of $5.5 million of mortgage backed securities at a gain of $191,151. We expect to replace the long-term investment portfolio during the second quarter of 2009.

Loans. Total loans were $558.1 million at March 31, 2009 reflecting a 0.5% decrease from total loans of $561.0 million at December 31, 2008. The decline in loans during the first three months of 2009 occurred mainly in the commercial real estate and residential portfolios, offset by increase in the commercial and home equity portfolios. The overall mix of the loan portfolio has remained the same since year-end. The total of commercial and commercial real estate loans in the portfolio was 72.9% at March 31, 2009 and 72.7% at December 31, 2008.

Nonperforming Assets. Nonperforming assets include nonperforming loans and other real estate owned (OREO). Nonperforming loans include loans past due over 90 days and still accruing interest, restructured loans, and all nonaccrual loans. Nonperforming assets have decreased from $19.7 million, or 2.8% of total assets at December 31, 2008 to $18.3 million, or 2.6% of total assets, at March 31, 2009. The decrease is primarily attributed to identifying potential problem loans, creating an exit strategy, and removing the unhealthy loans from the Company's portfolio through demanding a pay-off, refinancing through another institution, or foreclosure. Nonaccrual loans decreased by $4.0 million primarily due to transferring a loan in the amount of $2.7 million to other real estate owned. Total impaired loans at March 31, 2009 were $23.0 million, compared to $23.4 million at December 31, 2008. At March 31, 2009, management believes it has allocated adequate specific reserves for these risks.

Allowance for Loan Losses. In each quarter the allowance for loan a loss is adjusted by management to the amount management believes is necessary to maintain the allowance at adequate levels. Management allocates specific portions of the allowance for loan losses to specific problem loans. Problem loans are identified through a loan risk rating system and monitored through watchlist reporting. Specific reserves are determined for each identified problem loan based on delinquency rates, collateral and other risk factors specific to that problem loan. Management's allocation of the allowance to other loan pools considers various factors including historical loss experience, the present and prospective financial condition of borrowers, industry concentrations within the loan portfolio, general economic conditions, and peer industry data of comparable banks.

The allowance for loan losses at March 31, 2009 was $11.5 million, or 2.06% of total loans outstanding, an increase of $842,645 from $10.7 million, or 1.90% of total loans outstanding, at December 31, 2008. The provision for loan losses during the first three months of 2009 was $960,000 compared to $300,000 in the first three months of 2008. The increase in loan loss provision incurred in the first quarter of 2009 compared to the first quarter 2008 was due to specific allocations reserved on two commercial loan relationships amounting to $1.25 million and the continuing decline in the economic environment.

For the first three months of 2009 we were in a net charge-off position of $117,355 compared to a net recovery position of $527,208 for the first three months of 2008. The Company continues to build its reserves to combat the decline in the economy over the last year. Nonperforming loans decreased significantly by $3.8 million during the first three months of 2009 due to continuous monitoring of problem relationships, demanding payments, creating exit strategies, and the foreclosure of a $2.7 million relationship. The specific allowance allocations increased by $824,000 to $3.9 million in the first quarter of 2009. The amount of the allowance allocated for loan pools increased slightly by 1.0% during the first three months of 2009.

Other Assets. The $2.4 million increase in other assets was primarily attributable to the foreclosure of a commercial real estate loan in the amount of $2.7 million. The increase was offset by a decrease in the equity investment in a limited partnership held at the Holding Company. Due to the volatility of the investment, the board of directors approved the gradual liquidation of this $1.0 million investment. A request was made on October 14, 2008 to withdraw $500,000 from the investment based on the balance at December 31, 2008, which was received January 15, 2009, and to withdraw the remaining balance in increments of $250,000 in April 2009 and July 2009 in accordance with the limited partnership agreement.

Deposits. Total deposits were $618.7 million at March 31, 2009 compared to total deposits at December 31, 2008 of $586.2 million. The increase of $32.5 million, or 5.5%, during the first three months of 2009 was reflective of the $24.7 million increase in money market accounts and the $12.0 increase in the Health Savings Accounts. The increase in Health Savings Account was primarily due to a one-time employer contribution received in the first quarter. Noninterest-bearing demand deposit balances declined by $7.0 million, primarily due to the expiration of promotional rates offered on certificate of deposits and money market accounts. Certificate of deposit accounts grew by $4.6 million from December 31, 2008 to March 31, 2009. The significant growth in our in-market deposits will allow us to let out-of-market funding mature during the second quarter of 2009 without needing replaced. Brokered certificate of deposits were $84.5 million at March 31, 2009 and December 31, 2008.

The following table summarizes the Company's deposit balances at the dates indicated:

                                        March 31, 2009               December 31, 2008
                                      Balance           %           Balance           %
Core deposits:
Noninterest-bearing demand         $  75,079,864        12.1 %   $  82,107,483        14.0 %
Interest-bearing checking             83,667,665        13.5 %      73,452,486        12.5 %
Money market                         165,132,915        26.7 %     140,384,566        24.0 %
Savings                               16,961,656         2.7 %      17,049,660         2.9 %
Time, under $100,000                  95,619,367        15.5 %      93,764,792        16.0 %
Total core deposits                  436,461,467        70.5 %     406,758,987        69.4 %
Non-core deposits:
In-market core deposits:
Time, $100,000 and over               97,698,875        15.8 %      94,926,801        16.2 %
Out-of-market non-core deposits:
Brokered certificate of deposits      84,544,210        13.7 %      84,551,326        14.4 %
Total non-core deposits              182,243,085        29.5 %     179,478,127        30.6 %

Total deposits $ 618,704,552 100.0 % $ 586,237,114 100.0 %

Borrowings. The Company had borrowings in the amount of $25.2 million in Federal Home Loan Bank ("FHLB") advances at March 31, 2009 and $39.2 million at December 31, 2008. All FHLB advances are bullet advances and mature in a range from April 2009 through March 2013.

Other Liabilities. Other liabilities remained flat from December 31, 2008 to March 31, 2009 at $3.3 million. There was a decrease of $76,546 in accrued interest payable as the 75 basis point drop in short-term interest rates in December 2008 is beginning to reflect in the repricing of the deposit portfolio.

Results of Operations

For The Three-Month Periods Ended March 31

Results of operations for the three-month period ended March 31, 2009 reflected net income of $410,225, or $0.10 per diluted share. This was a $300,947, or 42.3%, decrease from 2008's first quarter net income of $711,172, or $0.17 per diluted share. The operating results for the three-month period ended March 31, 2009 were favorable as we were faced with a steep decrease in the net interest margin, we recorded an additional $660,000 to provision expense compared to the same period in 2008, and FDIC insurance premiums increased by $111,976 compared to the amount recorded as of March 31, 2008. Our non-interest income grew by $148,529 primarily due to a net gain on sale of available for securities. As interest rates began dropping dramatically in 2008 causing a compression of our net interest margin, we continually looked for ways to decrease our non-interest expenses, which we have been successful in accomplishing over the last year. Non-interest expenses decreased by $485,513, or 8.9%, from March 31, 2008 to March 31, 2009 primarily due to decreases in most operating expense categories, including employment, occupancy and equipment, business development, and courier expenses.

Total revenue, defined as net interest income plus total noninterest income, declined by $390,419 from the first quarter 2008 to the first quarter 2009 primarily due to the 30 basis point drop in net interest margin over the same period of time. The 4.0% decrease in short-term interest rates during 2008, of which 75 basis points of the 4.0% drop occurred in December 2008, was the primary reason for the decline in the net interest margin. For the three-month period ended March 31, 2009, net interest income decreased 10.6%, while total noninterest income increased 9.1% from the same period one year ago primarily due to a net gain recognized on the sale of available for sale securities of $191,151.

Performance Ratios                 March 31
                               2009        2008

Return on average assets *       0.24 %      0.41 %
Return on average equity *       3.33 %      5.91 %
Net interest margin (TEY) *      2.85 %      3.15 %
Efficiency ratio                78.87 %     81.52 %

* annualized

Net Interest Income. Interest income for the three-month periods ended March 31, 2009 and 2008 was $7.9 million and $10.3 million, respectively, while interest expense for the first quarter was $3.4 million in 2009 and $5.2 million in 2008, resulting in net interest income of $4.5 million for the first quarter of 2009 and $5.1 million for the first quarter of 2008. While average earning assets decreased slightly, short-term interest rates decreased 400 basis points in 2008 and continue to remain low during the first quarter of 2009, thus negatively impacting net interest margin and causing a decrease in our net interest income. In a declining interest-rate environment, our variable rate assets re-price immediately, but our variable rate liabilities typically re-price over a time period of thirty to forty-five days. The tax equivalent net interest margin for the first quarter of 2009 was 2.85%, while the tax equivalent net interest margin for the first quarter of 2008 was 3.15%. If there are no changes in the current Federal Funds rate of 0.00% - 0.25% in the near future, we expect our net interest margin to begin leveling out.

The following table reflects the average balance, interest earned or paid, and yields or costs of the Company's assets, liabilities and stockholders' equity at and for the dates indicated:

                                               As of and For The Three Month Period Ended
                                       March 31, 2009                               March 31, 2008
                                         Interest      Annualized                     Interest      Annualized
                           Average        Earned          Yield         Average        Earned          Yield
($ in thousands)           Balance       or Paid         or Cost        Balance       or Paid         or Cost
Assets
Short-term investments
and interest-earning
deposits                  $   1,554     $        -            0.00 %   $  15,503     $      117            3.04 %
Federal funds sold           19,363              7            0.15 %       7,427             66            3.57 %
Securities - taxable         59,585            634            4.32 %      49,803            615            4.97 %
Securities - tax exempt
(1)                          21,739            343            6.40 %      20,550            324            6.34 %
Loans held for sale             864              -            0.00 %           -              -            0.00 %
Loans                       559,607          7,048            5.11 %     570,240          9,267            6.54 %
Total interest-earning
assets                      662,712          8,032            4.91 %     663,523         10,389            6.30 %
Allowance for loan
losses                      (10,948 )                                     (8,522 )
Cash and due from banks      11,236                                       13,459
Other assets                 33,431                                       32,964
Total assets              $ 696,431                                    $ 701,424
Liabilities and
Stockholders' Equity
Interest-bearing
checking                  $  84,621     $      177            0.85 %   $  62,397     $      220            1.42 %
Savings                      17,400             21            0.49 %      15,242             45            1.19 %
Money market                152,462            481            1.28 %     130,492            956            2.95 %
Certificates of deposit     271,298          2,164            3.23 %     329,976          3,421            4.17 %
FHLB advances                26,157            250            3.88 %      24,189            274            4.56 %
Junior subordinated
debt                         17,527            280            6.48 %      17,527            282            6.47 %
Total interest-bearing
liabilities                 569,465          3,373            2.39 %     579,823          5,198            3.61 %
Noninterest-bearing
checking                     73,026                                       69,296
Other liabilities             3,998                                        3,878
Stockholders' equity         49,942                                       48,427
Total liabilities and
stockholders' equity      $ 696,431                                    $ 701,424
Net interest income                     $    4,659                                   $    5,191
Rate spread                                                   2.52 %                                       2.69 %
Net interest income as
a percent of average
earning assets                                                2.85 %                                       3.15 %

(1) Computed on a tax equivalent basis for tax exempt securities using a 34% statutory tax rate.

Provision for Loan Losses. A provision for loan losses was recorded in the amount of $960,000, 70 basis points, annualized, on average loans during the first quarter of 2009 as compared to $300,000, or 21 basis points, annualized, on average loans for the first quarter of 2008. The cause for the increase in provision recorded for the first quarter of 2009 was twofold. First, two commercial loan relationships with principal balances totaling $6.6 million have started to deteriorate requiring specific reserves allocated to them totaling $1.25 million. Second, we have improved our loan monitoring process and have incorporated environmental factors into our loan rating and reserving process. We realize that during times of economic declines that a properly structured and performing loan could struggle; therefore, we account for this when the loan is being rated. The allowance for loan losses at March 31, 2009 totaled $11.5 million and was 2.06% of total loans outstanding on that date. For the three-month period ended March 31, 2009 we were in a net charge-off position of $117,355, or 9 basis points, annualized, on average loans compared to net recovery of $527,208, or 37 basis points, annualized, on average loans during the same period a year ago.

Noninterest Income. Noninterest income was $1.8 million during the first quarter of 2009. This was a $148,529, or 9.1%, increase compared to the first quarter of 2008. The majority of the increase relates to the increase in gain on sale of available for sale securities of $131,314 and an increase in loan broker fees of $77,220. These increases were offset by a decline in service charges of $63,377 and trust and brokerage fees of $26,503. Service charge income decreased due to reconfiguring our fee structure on our Health Savings Account product, as we eliminated the service charges and reduced interest rates. Trust and brokerage fees have decreased compared to March 31, 2008 as the stock market has not recovered from its rapid decline of approximately 40% in 2008. The market decline directly impacts trust and brokerage fees as they are typically determined by the amount of assets under management.

Noninterest Expense. Noninterest expense was $5.0 million for the first quarter of 2009 while noninterest expense for the three-month period ended March 31, 2008 was $5.5 million. The main components of noninterest expense for the first quarter of 2009 were salaries and benefits of $2.7 million, occupancy and equipment costs of $698,592, and loan and professional expenses in the amount of $311,944. We experienced a decrease in several operating expense accounts in the first quarter 2009 compared to the first quarter 2008, including decreases in employment expenses of $363,949, occupancy and equipment of $59,723, and business development of $53,876. There was a significant increase in FDIC insurance premiums as the FDIC has continued to increase the premiums for all banks in order to replenish the depleting insurance reserve due to an increasing number of bank failures across the nation and increased FDIC insurance limits to $250,000 for interest-bearing accounts and unlimited insurance for non-interest bearing accounts from the previous $100,000 insurance limit on all deposit accounts. The increase from first quarter 2008 to first quarter 2009 was $111,976.

Income Taxes. During the quarters ended March 31, 2009 and 2008, the Company recorded ($32,766) and $231,193, in income taxes benefit and income tax expense, respectively. The effective tax rate recorded was (8.7%) for 2009 as compared to 24.5% for 2008. The tax benefit in 2009 is the result of excess tax-exempt income over net income from bank owned life insurance income and municipal bond income.

Liquidity and Capital Resources

Liquidity. Our general liquidity strategy is to fund growth with deposits and to maintain an adequate level of short- and medium-term investments to meet typical daily loan and deposit activity needs. The first quarter showed a substantial increase in deposits of $32.5 million from December 31, 2008. While we continued to show steady in-market deposit growth, we positioned ourselves to allow our out-of-market brokered certificate of deposits and FHLB advances to mature in the second quarter without replacing those funds through the use of out-of-market products. Currently, all of FHLB advances are fixed rate bullet advances with no callable options; therefore, we must wait until maturity to repay. Included in our out-of-market funding base are borrowings from the FHLB and trust preferred securities and, beginning with the second quarter of 2003, brokered CDs. In the aggregate these out-of-market deposits and borrowings represented $127.3 million, or 19.2% of our total funding, at March 31, 2009. This was up slightly from $106.7 million, or 16.7% at March 31, 2008. Total deposits at March 31, 2009 were $618.7 million and the loan to deposit ratio was 90.21%. Total borrowings at March 31, 2009 were $42.7 million. We expect to experience more moderate loan growth in the near-term due to a shift in management's strategy, which focuses more on profitability, rather than growth. Funding for the loan growth will continue to come from in-market sources.

Capital Resources. Stockholders' equity is a noninterest-bearing source of funds, which provides support for asset growth. Stockholders' equity was $50.3 million and $49.6 million at March 31, 2009 and December 31, 2008, respectively. Affecting the increase in stockholders' equity during the first three months of 2009 was $410,225 in net income and $233,123 in unrealized gains, net of tax, on available for sale securities and the interest rate floor. Additionally, we recorded $18,673 of stock option and restricted stock compensation expense per FAS123R.

During the first three months of 2009, we made no dividend payments. In the second quarter of 2008, the Company issued a press release stating that we elected to forego the declaration of a dividend on its common stock indefinitely. The decision was based on the desire to retain capital and hedge against challenging economic and banking industry conditions as well as to maintain Tower Bank's current "well capitalized" status within the Federal Reserve System. Our ability to pay future cash and stock dividends is subject to limitations under various laws and regulations and to prudent and sound banking practices.

The following table summarizes the capital ratios of the Company and the Bank at the dates indicated:

                                      March 31, 2009                               December 31, 2008
                                          Well-          Minimum                         Well-          Minimum
                         Actual        Capitalized       Required       Actual        Capitalized       Required

The Company
Leverage capital             9.52 %            5.00 %         4.00 %        9.69 %            5.00 %         4.00 %
Tier 1 risk-based           11.47 %            6.00 %         4.00 %       11.66 %            6.00 %         4.00 %
Total risk-based            12.77 %           10.00 %         8.00 %       12.99 %           10.00 %         8.00 %

The Bank
Leverage capital             9.01 %            5.00 %         4.00 %        9.04 %            5.00 %         4.00 %
Tier 1 risk-based           10.82 %            6.00 %         4.00 %       10.87 %            6.00 %         4.00 %
Total risk-based            12.08 %           10.00 %         8.00 %       12.12 %           10.00 %         8.00 %

Commitments and Off-Balance Sheet Risk

The Bank maintains off-balance-sheet instruments in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized, if any, in the balance sheet. The Bank's maximum exposure to loan loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual notional amount of these instruments. Such financial instruments are recorded when they are funded. Fair value of the Bank's off-balance-sheet instruments (commitments to extend credit and standby letters of credit) is based on rates currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties' credit standing. At March 31, 2009, the rates on existing off-balance-sheet instruments were equivalent to current market rates, considering the underlying credit standing of the counterparties.

Tabular disclosure of the Company's contractual obligations as of the end of our . . .