The following presents management's discussion and analysis of the consolidated financial condition of the Company as of June 30, 2009 and December 31, 2008 and results of operations for the six-month periods ended June 30, 2009 and June 30, 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 loss was $4.1 million and $3.7 million for the second quarter 2009 and year-to-date, a increase of $4.4 million and $4.7 million from the same periods in 2008. The increase was due to an increase in loan loss provision expense bringing the quarterly expense to $6.6 million and a write-down in value of an other real estate owned property of $950,000. Provision expenses increased by $5.7 million from the $875,000 recorded in the second quarter 2008 due to the continual decline in environmental conditions, to place specific reserves on three commercial real estate loan relationships, and to replace charge-downs on three commercial and two commercial real estate loan relationships. Upon the receipt of new appraisals, we were required to write down the value of an other real estate owned property to fair value, thus recording an expense of $950,000 through operating expenses. Also adding to the decrease in earnings was an industry-wide increase in FDIC insurance premiums coupled with an industry-wide FDIC special assessment to which our share was $315,000. These two FDIC charges accounted for a total increase of $479,067 from the second quarter 2008 to the second quarter 2009.

Net interest income decreased as it was negatively impacted by the decline in the year-to-date net interest margin from 3.26% at June 30, 2008 to 2.93% at June 30, 2009. Operating expenses increased by $351,943, or 3.2%, in the first half of 2009 compared to the first half of 2008 due to the FDIC Special Assessment of $315,000 and a write-down of the value of an other real estate owned property of $950,000. Offsetting this increase was a decrease of $770,835 in employment expenses and an approximate $320,000 aggregate decrease in occupancy and equipment, marketing, business development, and communication expenses.

Total assets decreased by $10.3 million from December 31, 2008 to June 30, 2009. The decrease in total assets was primarily due to a decrease of $15.7 million in cash and cash equivalents. The decrease in cash was due to net paydown of borrowings between FHLB advances and the Federal Reserve Discount Window of $15.2 million. Net loans decreased by $6.9 million from December 31, 2008 to $543.4 million primarily due to charge-downs of $4.2 million on impaired loans and $950,000 on other real estate owned of $2.7 million.

Total deposits increased $8.4 million, or 1.4%, during the first half of 2009. The increase was primarily driven by increases in non-interest bearing checking accounts and money market accounts of $23.6 million and $10.3 million, respectively. This increase was offset by decreases non-core deposits of $29.2 million, which includes decreases in certificate of deposits greater than $100,000 and brokered certificate of deposits in the amounts of $14.1 and $15.1 million, respectively. In an effort to decrease our out-of-market funding, the Company remained liquid during the first half of 2009 to pay off FHLB advances that have matured. FHLB advances decreased by $18.0 million from December 31, 2008 to June 30, 2009, while Federal Funds Purchased from the Federal Reserve Bank Discount Window increased by $2.8 million.

Financial Condition

Total assets were $686.3 million at June 30, 2009 compared to total assets at December 31, 2008 of $696.6 million. The 1.5% decrease in assets was primarily due to a decrease in cash and cash equivalents by $15.7 million, which was used to pay off maturing FHLB advances in the amount of $18.0 million. We have experienced growth in our non-interest bearing checking accounts and money markets by $23.6 million and $10.3 million, respectively, during the first six months of 2009.

Cash and Investments. Cash and cash equivalents, which include federal funds sold, were $15.9 million at June 30, 2009, a decrease of $15.7 million, or 49.7%. Securities available for sale and held to maturity were $78.0 million and $4.7 million at the end of the second quarter of 2009, an increase of $4.9 million in total securities from December 31, 2008. The increase in the investment portfolio was the result of our strategy to focus on liquidity by using loan principal paydowns and new deposit money to purchase investments and slowly reduce the loan outstandings.

Loans. Total loans were $557.5 million at June 30, 2009 reflecting a 0.6% decrease from total loans of $561.0 million at December 31, 2008. The decline in loans during the first six months of 2009 occurred mainly in the commercial real estate and residential portfolios, offset by increase in the commercial and home equity portfolios. While the residential real estate portfolio has decreased, we have seen a significant increase in the number of brokered loans we have originated. During the first half 2009, we originated 95 loans compared to 23 loans during the same time period in 2008. 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 73.0% at June 30, 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 increased from $19.7 million, or 2.8% of total assets at December 31, 2008 to $25.8 million, or 3.8% of total assets, at June 30, 2009. The increase is primarily attributed to the continued economic downturn and the declining property values. While a few commercial loan customers had to close their business due to a lack of sales, the commercial real estate loan customers are struggling to sell their properties and are additionally battling the decrease in property values. Nonaccrual loans increased by $3.3 million primarily due to three commercial loan relationships and two commercial real estate loan relationships being downgraded to non-accrual and charged-down by $3.9 million to a total value of $7.9 million. Total impaired loans at June 30, 2009 were $28.2 million, compared to $23.4 million at December 31, 2008. At June 30, 2009, management believes it has allocated adequate specific reserves for these risks. Other real estate owned increased by $1.4 million, primarily due to transferring in a commercial property in the amount of $2.7 million during the first quarter, which was charged down by $950,000 to its recently appraised value in the second quarter of 2009.

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 June 30, 2009 was $14.1 million, or 2.53% of total loans outstanding, an increase of $3.5 million from $10.7 million, or 1.90% of total loans outstanding, at December 31, 2008. The provision for loan losses during the first six months of 2009 was $7.5 million compared to $1.2 million in the first six months of 2008. The increase in loan loss provision incurred in the second quarter of 2009 compared to the second quarter 2008 was due to an increase of $3.6 million in specific allocations reserved on three commercial real estate loan relationships amounting to $10.8 million, charge-offs of $3.9 million of which only $1.5 million was previously specifically reserved, and the continuing decline in the economic environment.

For the first six-months of 2009 we were in a net charge-off position of $4.1 million compared to a net charge-off position of $409,110 for the first six-months of 2008. As the economy continues to decline, an added strain has been placed on our customers who depend on sales of inventory and/or services to be able repay their notes based on the current terms, which contributed to the increase in nonperforming loans of $4.7 million during the first six-months of 2009. To prepare for an extended economic downturn, our Company continues to build its reserves to ensure adequate coverage in the case of unforeseen losses. We also have seen a significant decline in the sale of residential development lots causing our customers' cash flow to slowly diminish requiring us to downgrade the relationships and add specific reserves for the declining property values. The specific allowance allocations increased by $5.3 million to $6.1 million in the second quarter of 2009 primarily due to becoming more granular in our allowance for loan and lease loss calculation. During the second quarter of 2009, we have reviewed all loan relationships greater than $1.5 million in the "special mention" category and $1.0 million in the "substandard" category in detail and set a specific reserve for each one of those loans.

Other Assets. The $4.5 million increase in other assets was primarily attributable to the increase in the deferred tax asset of $4.0 million, which was recorded based on the increase in the allowance for loan and lease losses. At this time, we believe we will be able to use the deferred tax asset within a reasonable time frame as the majority of the balance is comprised of the allowance for loan and lease losses. As we begin to use and/or reduce the balance of the allowance for loan and lease losses, the deferred tax asset will be directly impacted and will begin to decrease. We will also be able to carryback the tax net operating loss created in 2009 to the tax year ending December 31, 2008 with none to carryforward. The foreclosure of a commercial real estate loan in the amount of $2.7 million during the first quarter also added to the increase, but was written down by $950,000 to fair value during the second quarter based on an updated appraisal received in June 2009. 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. The second installment was received on April 15, 2009 in the amount of $240,437. The remaining balance $95,045 will be distributed in accordance with the limited partnership agreement.

Deposits. Total deposits were $594.6 million at June 30, 2009 compared to total deposits at December 31, 2008 of $586.2 million. The increase of $8.4 million, or 1.4%, during the first six months of 2009 was reflective of the $37.6 million increase in core deposits, including increases of $23.6 million in non-interest bearing checking accounts and $10.3 million in money market accounts. The increase was offset by a $29.2 million decrease in non-core deposits, which includes a decrease of $14.1 million and $15.1 million in certificate of deposits greater than $100,000 and brokered certificate of deposits, respectively. The significant growth in our in-market deposits during the second quarter allowed us to let out-of-market funding mature without being replaced. Brokered certificate of deposits were $69.4 million and $84.5 million at June 30, 2009 and December 31, 2008, respectively.

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

                                         June 30, 2009               December 31, 2008
                                      Balance           %           Balance           %
Core deposits:
Noninterest-bearing demand         $ 105,667,772        17.8 %   $  82,107,483        14.0 %
Interest-bearing checking             77,808,746        13.1 %      73,452,486        12.5 %
Money market                         150,645,511        25.3 %     140,384,566        24.0 %
Savings                               16,843,785         2.8 %      17,049,660         2.9 %
Time, under $100,000                  93,394,748        15.7 %      93,764,792        16.0 %
Total core deposits                  444,360,562        74.7 %     406,758,987        69.4 %
Non-core deposits:
In-market core deposits:
Time, $100,000 and over               80,790,172        13.6 %      94,926,801        16.2 %
Out-of-market non-core deposits:
Brokered certificate of deposits      69,443,014        11.7 %      84,551,326        14.4 %
Total non-core deposits              150,233,186        25.3 %     179,478,127        30.6 %

Total deposits $ 594,593,748 100.0 % $ 586,237,114 100.0 %

Borrowings. The Company had borrowings in the amount of $21.2 million in Federal Home Loan Bank ("FHLB") advances at June 30, 2009 and $39.2 million at December 31, 2008. All FHLB advances are bullet advances and mature in a range from August 2009 through March 2013.

Other Liabilities. Other liabilities increased slightly by $341,906 to $3.7 million from December 31, 2008 to June 30, 2009. The increase was primarily due to an increase in FDIC insurance premiums that are accrued during the quarter to be paid during the third quarter 2009. This accrual also includes the FDIC special assessment in the amount of $315,000.

Results of Operations

For The Three-Month Periods Ended June 30

Results of operations for the three-month period ended June 30, 2009 reflected net loss of $4.1 million, or ($1.00) per diluted share. This was a $4.4 million decrease from 2008's second quarter net income of $342,707, or $0.08 per diluted share. The operating results for the three-month period ended June 30, 2009 were unfavorable as we were faced with a decrease in the net interest margin, recording an additional $5.7 million to provision expense compared to the same period in 2008, and increases in FDIC insurance premiums of $479,067 compared to the amount recorded as of June 30, 2008. Our non-interest income grew by $130,479 primarily due to an increase in loan broker fees of $128,591 from an increase in mortgage originations. 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. While our non-interest expenses increased by $837,456, the increase was primarily due a write-down of $950,000 on an other real estate owned property and a special assessment from the FDIC of $315,000. Most non-interest expenses decreased, including employment expenses by $406,886,or 13.3%, and marketing by $89,799, or 40.1%.

Total revenue, defined as net interest income plus total noninterest income, declined by $342,134 from the second quarter 2008 to the second quarter 2009 primarily due to the 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 June 30, 2009, net interest income decreased 8.9%, while total noninterest income increased 8.9% from the same period one year ago primarily due to an increase in loan broker fees.

                   Performance Ratios               June 30
                                                  2009    2008

                   Return on average assets *     -2.32%  0.20%
                   Return on average equity *    -32.66%  2.78%
                   Net interest margin (TEY) *     3.02%  3.37%
                   Efficiency ratio              100.57% 83.10%

* annualized

Net Interest Income. Interest income for the three-month periods ended June 30, 2009 and 2008 was $8.1 million and $9.3 million, respectively, while interest expense for the second quarter was $3.3 million in 2009 and $4.0 million in 2008, resulting in net interest income of $4.8 million for the second quarter of 2009 and $5.3 million for the second quarter of 2008. While average earning assets increased slightly, short-term interest rates decreased 400 basis points in 2008 and continue to remain low during the second 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 second quarter of 2009 was 3.02%, while the tax equivalent net interest margin for the second quarter of 2008 was 3.37%. 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
                                      June 30, 2009                                      June 30, 2008
                                       Interest                                           Interest
                       Average        Earned or         Annualized        Average        Earned or         Annualized
($ in thousands)       Balance           Paid         Yield or Cost       Balance           Paid         Yield or Cost
Assets
Short-term
investments and
interest-earning
deposits              $    2,438     $          -               0.00 %   $    5,264     $         41               3.13 %
Federal funds sold         4,849                3               0.25 %        4,781               48               4.04 %
Securities -
taxable                   62,826              781               4.99 %       52,706              648               4.94 %
Securities - tax
exempt (1)                23,421              368               6.30 %       21,830              344               6.34 %
Loans held for sale        2,190                -               0.00 %          551                -               0.00 %
Loans                    561,814            7,100               5.07 %      561,647            8,348               5.98 %
Total
interest-earning
assets                   657,538            8,252               5.03 %      646,779            9,429               5.87 %
Allowance for loan
losses                   (11,294 )                                           (9,299 )
Cash and due from
banks                     26,683                                             15,845
Other assets              35,355                                             32,221
Total assets          $  708,282                                         $  685,546
Liabilities and
Stockholders'
Equity
Interest-bearing
checking              $   83,597     $        172               0.83 %   $   66,866     $        199               1.20 %
Savings                   16,940               16               0.38 %       16,777               45               1.08 %
Money market             157,684              436               1.11 %      135,542              747               2.22 %
Certificates of
deposit                  265,507            2,180               3.29 %      289,527            2,442               3.39 %
Short-term
borrowings                   453                1               0.89 %            -                -               0.00 %
FHLB Advances             23,133              217               3.76 %       34,041              299               3.53 %
Junior subordinated
debt                      17,527              283               6.49 %       17,527              283               6.49 %
Total
interest-bearing
liabilities              564,841            3,305               2.35 %      560,280            4,015               2.90 %
Noninterest-bearing
checking                  88,921                                             71,851
Other liabilities          4,217                                              4,164
Stockholders'
equity                    50,303                                             49,251
Total liabilities
and stockholders'
equity                $  708,282                                         $  685,546
Net interest income                  $      4,947                                       $      5,414
Rate spread                                                     2.68 %                                             2.97 %
Net interest income
as a percent of
average earning
assets                                                          3.02 %                                             3.37 %

(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 $6.6 million, or 471 basis points (annualized) on average loans during second quarter of 2009 as compared to $875,000, or 62 basis points (annualized) on average loans for the second quarter of 2008. The cause for the increase in provision recorded for the second quarter of 2009 was twofold. First, three commercial real estate loan relationships were reserved to fair value after receiving updated appraisals which increased the specific reserves by $3.6 million. Second, we charged-down three commercial loan relationships and two commercial real estate loan relationship by $3.9 million of which only $1.5 million was reserved for prior to the charge-down. 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 June 30, 2009 totaled $14.1 million and was 2.53% of total loans outstanding on that date. For the three-month period ended June 30, 2009, we were in a net charge-off position of $3.9 million, or 281 basis points (annualized) on average loans compared to net charge-offs of $936,318, or 67 basis points (annualized) on average loans during the same period a year ago.

Noninterest Income. Noninterest income was $1.6 million during the second quarter of 2009. This was a $130,479, or 8.9%, increase compared to the second quarter of 2008. The majority of the increase relates to an increase in loan broker fees of $128,591. While there was not a significant increase in residential mortgage balances, we experienced a significant increase in mortgage originations in the second quarter 2009 at 95 compared to the second quarter 2008 of approximately 35 loans. Trust and brokerage fees have decreased compared to June 30, 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 $6.5 million for the second quarter of 2009 while noninterest expense for the six-month period ended June 30, 2008 was $5.6 million. The main components of noninterest expense for the second quarter of 2009 were salaries and benefits of $2.6 million, occupancy and equipment costs of $692,810, FDIC insurance premiums and FDIC special assessment totaling $679,308, and loan and professional expenses in the amount of $383,196. While our total non-interest expenses increased by $837,456, the majority of the increase is due to a write-down of a property in other real estate owned by $950,000 and an increase in FDIC insurance premiums coupled with a special assessment totaling $479,067. 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. Without those two expenses, we would have experienced a decrease as several operating expense accounts showed declines in the second quarter 2009 compared to the second quarter 2008, including employment expenses of $408,886, marketing of $89,799, and communication of $36,610. We experienced an increase of $107,271 in our processing charges as we have implemented consumer and business on-line banking in an effort to reduce costs in the future.

Income Taxes. During the quarters ended June 30, 2009 and 2008, the Company recorded ($2.5 million) and ($75,033), in income taxes benefit. The effective tax rate recorded was (37.8%) for the second quarter 2009 as compared to (28%) for the second quarter 2008. The tax benefit in 2009 is the result of a net loss coupled with excess tax-exempt income over net income from bank owned life insurance income and municipal bond income.

For The Six-Month Periods Ended June 30

Results of operations for the six-month period ended June 30, 2009 reflected net loss of $3.7 million, or ($0.90) per diluted share. This was a $4.7 million decrease from 2008's second quarter net income of $1.1 million, or $0.26 per diluted share. The operating results for the six-month period ended June 30, 2009 were unfavorable as we were faced with a low net interest margin, recording an additional $6.3 million in provision expense compared to the same period in 2008, and FDIC insurance premiums increased by $591,043 compared to the amount recorded as of June 30, 2008. Our non-interest income grew by $279,008 primarily due to a net gain on sale of available for securities and an increase in brokered loan fees. Non-interest expenses increased by $351,943, or 3.2%, from June 30, 2008 to June 30, 2009 primarily due an increase in FDIC insurance premiums and a write-down in other real estate owned.

Total revenue, defined as net interest income plus total noninterest income, declined by $732,553 from the second quarter 2008 to the second quarter 2009 primarily due to the 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 six-month period ended June 30, 2009, net interest income decreased 9.7%, while total noninterest income increased 9.0% from the same period one year ago primarily due to a net gain recognized on the sale of available for sale securities of $195,012 and an increase in loan brokered fees of $205,811.

. . .