Forward-Looking Statements

The Company may from time to time make written or oral "forward-looking statements" including statements contained in this Report and in other communications by the Company which are made in good faith pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements, such as statements of the Company's plans, objectives, expectations, estimates and intentions, involve risks and uncertainties and are subject to change based on various important factors (some of which are beyond the Company's control). The following factors, among others, could cause the Company's financial performance to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward-looking statements: the strength of the United States economy in general and the strength of the local economies in which the Company conducts operations; the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System, inflation, interest rate, market and monetary fluctuations; the timely development of and acceptance of new products and services of the Company and the perceived overall value of these products and services by users, including the features, pricing and quality compared to competitors' products and services; the impact of changes in financial services laws and regulations (including laws concerning taxes, banking, securities and insurance); technological changes; acquisitions; changes in consumer spending and saving habits; and the success of the Company at managing the risks involved in the foregoing.

The Company cautions that the foregoing list of important factors is not exclusive. The Company also cautions readers not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date on which they are given. The Company is not obligated to publicly revise or update these forward-looking statements to reflect events or circumstances that arise after any such date. Readers should carefully review the risk factors described in other documents the Company files from time to time with the SEC, including quarterly reports on Form 10-Q, Annual Reports on Form 10-K and any current reports on Form 8-K.

General

The Company's results of operations are dependent primarily on net interest income, which is the difference between the interest income earned on its interest-earning assets, such as loans and securities, and the interest expense paid on its interest-bearing liabilities, such as deposits and borrowings. The Company also generates non-interest income such as service charges, earnings from bank owned life insurance (BOLI), loan exit fees and other fees. The Company's non-interest expenses primarily consist of employee compensation and benefits, occupancy expenses, marketing expenses, data processing costs and other operating expenses. The Company is also subject to losses in its loan portfolio if borrowers fail to meet their obligations. The Company's results of operations are also significantly affected by general economic and competitive conditions, particularly changes in market interest rates, government policies and actions of regulatory agencies.

The following discussion compares the results of operations for the three month period ended March 31, 2009 to the results of operations for the three month period ended March 31, 2008. This discussion should be read in conjunction with the accompanying financial statements and related notes as well as the financial information included in the 2008 Annual Report on Form 10-K/A.

Results of Operations

Net Income. For the quarter ended March 31, 2009, net income totaled $1.5 million, compared to $1.3 million for the quarter ended March 31, 2008. Net income available to common shareholders, which includes the impact of dividends and accretion of discount on preferred stock, was $1.4 million for the three months ended March 31, 2009. Earnings per share presented are calculated on net income available to common shareholders. Diluted earnings per share for the three months ended March 31, 2009 totaled $0.34, compared to $0.31 per share for the same period of 2008. Prior period earnings per share information has been adjusted for the 15% stock dividend paid in the second quarter of 2008.

Net Interest Income. Our primary source of earnings is net interest income, which is the difference between income earned on interest-earning assets, such as loans and investment securities, and interest expense incurred on interest-bearing sources of funds, such as deposits and borrowings. The level of net interest income is determined primarily by the average balances ("volume") and the rate spreads between the interest-earning assets and our funding sources.

Net interest income for the three months ended March 31, 2009 totaled $5.2 million, an increase of 31.6% over $3.9 million for the three months ended March 31, 2008. Interest income of $9.8 million increased $885,000, or 10.0%, from the comparable quarter of 2008 due to an increase in average interest-earning assets of $121.7 million, or 25.6%, that was partially offset by a decline in the yield on average interest-earning assets. The average yield on earning assets fell 88 basis points to 6.64% for the first quarter of 2009 from 7.52% for the first quarter of 2008. The Federal Reserve's targeted fed funds rate of 0 to 0.25% was at historic lows in the first quarter of 2009. That range compares to the average fed funds rate of 3.18% in the first quarter of 2008. The Company's practice of setting floors on commercial and real estate loans has protected the net interest margin from decline.

For the quarter ended March 31, 2009, interest expense of $4.6 million decreased by $358,000, or 7.2%, from $5.0 million for the quarter ended March 31, 2008. In order to fund the Company's asset growth, Management successfully implemented deposit account promotions and reduced its reliance on debt. Average interest-bearing liabilities grew $136.7 million, or 31.9%, in the first quarter of 2009 to $564.6 million from $427.9 million for the comparable 2008 period. The average rate paid on interest-bearing liabilities dropped 136 basis points to 3.30% for the three months ended March 31, 2009 from 4.66% for the same period of 2008.

The net interest margin of 3.52% for the first quarter of 2009 increased from 3.33% for the quarter ended March 31, 2008. The increase is due to the cost of funds declining more than the yield on loans.

Non-interest Income. Non-interest income for the quarter ended March 31, 2009 was $171,000 compared to $284,000 in income from the comparable quarter of 2008. The $113,000 decrease was attributable to a $159,000 loss on the sale of one of the OREO properties, which was partially offset by an increase of $144,000 in other miscellaneous income, the majority of which was the reimbursement of prior period legal fees.

Non-interest Expense. Noninterest expense of $2.1 million for the current quarter increased by $328 thousand or 19.0%, above the prior years' comparable quarter of $1.7 million. The change was associated with increased staffing costs related to annual merit raises and higher cost fringe benefits of $138,000, increased legal expense of $68,000 resulting in part from SEC and U.S. Treasury Department filings related to the EESA capital program and an increase in shares tax in the State of Pennsylvania of $71,000.

Income Taxes. The Company recorded income tax expense of $994,000, on income before taxes of $2.5 million for the three months ended March 31, 2009, resulting in an effective tax rate of 39.4%, compared to income tax expense of $832,000 on income before taxes of $2.1 million for the same period of 2007, resulting in an effective tax rate of 39.0%.

                                                                             Interest Yield Table
                                                                          For the three months ended
                                                          March 31, 2009                              March 31, 2008
                                               Average                        Yield/       Average                        Yield/
                                               Balance         Interest        Cost        Balance         Interest        Cost
                                                                   (Amounts in thousands, except percentages
Assets
Loans ¹                                        560,812            9,254         6.69       424,098            8,224         7.80
Investment securities                           35,628              518         5.90        37,169              556         6.02
Federal funds sold and money markets               552                1         0.92        13,998              108         3.10
Total interest-earning assets                  596,992       $    9,773         6.64       475,265       $    8,888         7.52

Allowance for loan loss                         (7,960 )                                    (5,870 )
Other assets                                    50,884                                      19,002
Total assets                                 $ 639,916                                   $ 488,397

Liabilities and Shareholders' Equity
NOWs                                         $  10,326       $       44         1.72 %   $  13,481       $       94         2.80 %
Money markets                                   56,886              260         1.85        32,183              298         3.72
Savings                                         74,662              524         2.85        31,996              286         3.60
Time deposits                                  186,808            1,397         3.03       166,887            2,021         4.87
Brokered certificates of deposit               175,114            1,795         4.16       139,969            1,723         4.95
Total interest-bearing deposits                503,796            4,019         3.24       384,516            4,422         4.63
Borrowings                                      60,821              580         3.87        43,417              535         4.96
Total interest-bearing liabilities             564,617       $    4,599         3.30       427,933       $    4,957         4.66

Non-interest bearing demand deposits            19,267                                      19,040
Other liabilities                                4,012                                       3,867
Shareholder's equity                            52,020                                      37,557
Total liabilities and shareholders' equity   $ 639,916                                   $ 488,397

Net interest income                                          $    5,174                                  $    3,931

Interest rate spread ²                                                          3.34 %                                      2.86 %

Net interest margin ³                                                           3.52 %                                      3.33 %

¹ Non-accrual loans are included in the average balance. Income includes SFAS No. 91 loan fees. 2 Interest rate spread is the difference between the average yield on interest-earning assets and the average cost on interest-bearing liabilities 3 Net interest margin is the ratio of net interest income to average total interest-earning assets

The following discussion compares the financial condition at March 31, 2009 to the financial condition at December 31, 2008. This discussion should be read in conjunction with the accompanying financial statements and related notes as well as statistical information included in the 2008 Annual Report on Form 10-K.

Total assets at March 31, 2009 amounted to $637.6 million, compared to $602.0 million at December 31, 2008, resulting in an increase of $35.7 million, or 5.9%. This increase was driven primarily by planned loan growth as the Company continued to expand its loan portfolio through development of new and existing business relationships.

Investment securities amounted to $33.5 million at March 31, 2009 versus $34.4 million at December 31, 2008. The net unrealized loss that existed as of March 31, 2009 in the available-for-sale investment portfolio is largely the result of market changes in interest rates and economic conditions since the securities were purchased. This factor, coupled with the fact the Company has both the intent and ability to hold securities for a period of time sufficient to allow for any anticipated recovery in fair value or maturity, substantiates the Company's belief that the unrealized losses in the available-for-sale portfolio are temporary. The Company continuously monitors the investment portfolio to determine the impact of changing economic conditions. Management utilizes third party sources to value securities to determine whether other-than-temporary impairment exists. To the extent that adverse changes in interest rates, credit movements and other factors occur, the Company may be required to record other-than-temporary impairment charges in the future.

Total loans at March 31, 2009 were $581.2 million, which represented an increase of $33.5 million, or 6.1% above the level of $547.7 million at December 31, 2008. Growth was concentrated in the commercial real estate loan portfolio.

The allowance for loan losses amounted to $8.5 million at March 31, 2009 compared to $7.8 million at December 31, 2008. The ratio of the allowance for loan losses to total loans increased from 1.42% at December 31, 2008 to 1.47% at March 31, 2009. The Company's management has taken non-performing loans and other loans of concern into consideration in establishing the allowance for loan losses. The Company continues to monitor its allowance for loan losses and will make future additions or reductions in light of the level and performance of loans in its portfolio and as economic conditions dictate. The current level of the allowance for loan losses is a result of the Company's management's assessment of the risks within the portfolio based upon the information revealed in credit management, monitoring and reporting processes. The Company utilizes a risk-rating system on all commercial, business, agricultural, construction, multi-family, residential and commercial real estate loans, including purchased loans. This risk assessment takes into account the composition of the loan portfolio and historical loss experience for each major loan category. In addition qualitative adjustments are made for levels and trends in delinquencies, non-accruals and impaired loans; trends in volume; effects, if any, for changes in the Company's credit policy; experience and depth of the lending staff; any national and local economic trends and conditions impacting the portfolio; and concentrations of credit within the total portfolio.

The following table sets forth the allocation of the Bank's allowance for loan losses by loan category at the dates indicated. The portion of the loan loss allowance allocated to each loan category is not indicative of totals available solely to cover losses inherent in the loan category. Rather, the total loan loss allowance is a valuation reserve applicable to the entire loan portfolio.

                                         March 31, 2009                       December 31, 2008
                                          Percentage of                          Percentage of
                           Amount          Gross Loans          Amount            Gross Loans
                                      (Amounts in thousands, except percentages)

Commercial                 $   307              3.6 %           $   283                 3.6 %
Real estate construction
Residential                  1,378             16.1               1,240                15.9
Commercial                     539              6.3                 448                 5.8
Real estate mortgage
Residential                  1,498             17.5               1,281                16.5
Commercial                   4,667             54.6               4,381                56.3
Consumer                       154              1.8                 144                 1.9
Total Loans                $ 8,543            100.0 %           $ 7,777               100.0 %

Although the Company's management believes that it uses the best information available to determine the allowance for loan losses, unforeseen market conditions could result in adjustments to the allowance, which could significantly impact the Company's financial results, if circumstances differ substantially from the assumptions used in making the final determinations. Future additions to the Company's allowances may result from periodic loan, property and collateral reviews coupled with negative trends in the factors noted above and therefore cannot always be accurately predicted in advance.

Non-performing loans, expressed as a percentage of total loans, amounted to 2.1% at March 31, 2009 versus 1.5% at December 31, 2008. At March 31, 2009, the Company had $12.2 million in non-accruing loans, which increased from $8.2 million at December 31, 2008.

Total deposits amounted to $518.3 million at March 31, 2009 and increased by $23.0 million, or 4.6%, from $495.3 million at December 31, 2008.
Interest-bearing deposits increased by 5.4% and noninterest-bearing decreased by 12.4%.

Borrowings, which included Federal Home Loan Bank (FHLB) advances, repurchase agreements and subordinated debentures amounted to $56.9 million at March 31, 2009, a decrease of $5.0 million from $61.9 million at December 31, 2008.

Shareholders' equity was $58.1 million at March 31, 2009 and $40.3 million at December 31, 2008. In addition to net income of $1.5 million, perpetual preferred stock issued under the Treasury Capital Purchase Program (CPP) totaled $16.3 million.

Critical Accounting Policy

The Company's financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. The financial information contained within these statements is, to a significant extent, financial information that is used on approximate measures of the financial effects of transactions and events that have already occurred. Based on its consideration of accounting policies that involve the most complex and subjective decisions and assessments, management has identified its most critical accounting policy to be related to the allowance for loan losses. The Company's allowance for loan loss methodology incorporates a variety of risk considerations, both quantitative and qualitative in establishing an allowance for loan loss that management believes is

Valuation of Investments

Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near term prospects of the issues and (3) the intent and the ability of the Company to retain its investment in the issues for a period of time sufficient to allow for any anticipated recovery in fair value. In addition, Management utilizes third party sources to value securities to determine whether other-than-temporary impairment exists.

Management does not believe any individual unrealized loss as of March 31, 2009 represents an other-than-temporary impairment. The Company believes it will collect all amounts contractually due on these securities as it has the ability to hold these securities until the fair value is at least equal to the carrying value. Should the impairment become other-than-temporary, the carrying value of the investment will be reduced and the unrealized loss will be recorded in the statement of income.

Liquidity and Capital Resources

Liquidity describes our ability to meet the financial obligations that arise out of the ordinary course of business. Liquidity addresses the Company's ability to meet deposit withdrawals on demand or at contractual maturity, to repay borrowings as they mature, and to fund current and planned expenditures. Liquidity is derived from increased repayment and income from interest-earning assets. The loan to deposit ratio was 112.1% and 110.6% at March 31, 2009 and December 31, 2008, respectively. Funds received from new and existing depositors provided a large source of liquidity for the three month period ended March 31, 2009. The Company seeks to rely primarily on core deposits from customers to provide stable and cost-effective sources of funding to support local growth. The Company also seeks to augment such deposits with longer term and higher yielding certificates of deposit. To the extent that retail deposits are not adequate to fund customer loan demand, liquidity needs can be met in the short-term funds market. As of March 31, 2009, the Company had short term lines of credit with PNC Bank for $13.0 million and Atlantic Central Bankers Bank for $3.0 million. There were no outstanding borrowings on these lines at March 31, 2009. Longer term funding can be obtained through the issuance of trust preferred securities and advances from the FHLB. As of March 31, 2009, the Company maintained lines of credit with the FHLB of $83.7 million, of which $33.5 million was outstanding at March 31, 2009.

Capital

A strong capital position is fundamental to support the continued growth of the Company. The Company and the Bank are subject to various regulatory capital requirements. Regulatory capital is defined in terms of Tier I capital (shareholders' equity as adjusted for unrealized gains or losses on available-for-sale securities), Tier II capital (which includes a portion of the allowance for loan losses) and total capital (Tier I plus Tier II). Risk-based capital ratios are expressed as a percentage of risk-weighted assets. Risk-weighted assets are determined by assigning various weights to all assets and off-balance sheet associated risk in accordance with regulatory criteria. Regulators have also adopted minimum Tier I leverage ratio standards, which measure the ratio of Tier I capital to total assets.

At March 31, 2009, the Company's management believes that the Company and the Bank are "well-capitalized" and in compliance with all applicable regulatory requirements.