----

|                                                                                                                        | December 31, |
|-----------------------------------------------------------------------------------------------------------------------------|--------------|
|                                                                                                                        | 2009         |   | 2008 |
|                                                                                                                        |         |   |   |
| ASSETS                                                                                                                      |         |
| Cash and due from banks                                                                                                     | $            | 34,092 |   | $ | 14,082 |   |
| Interest bearing deposits in other banks                                                                                    |         | 197 |   |   | 271 |   |
| Federal funds sold                                                                                                          |         | 17,112 |   |   | 17,952 |   |
|      Cash and cash equivalents                                                                     |         | 51,401 |   |   | 32,305 |   |
| Investment securities held to maturity                                                                                      |         | 8,031 |   |   | 1,345 |   |
| Loans held for sale                                                                                                         |         | 4,845 |   |   | 453 |   |
| Loans receivable, net of allowance for loan losses of                                                                       |         |   |   |   |   |   |
|      $34,693 and $14,813, respectively                                                             |         | 814,234 |   |   | 896,006 |   |
| Premises and equipment, net                                                                                                 |         | 29,104 |   |   | 30,267 |   |
| Foreclosed real estate                                                                                                      |         | 21,574 |   |   | 6,317 |   |
| Federal Home Loan Bank stock at cost                                                                                        |         | 8,609 |   |   | 8,694 |   |
| Accrued interest receivable and other assets                                                                                |         | 29,990 |   |   | 12,264 |   |
|                                                                                                                        |         |   |   |   |   |   |
| Total assets                                                                                                                | $            | 967,788 |   | $ | 987,651 |   |
|                                                                                                                        |         |   |   |   |   |   |
| LIABILITIES AND STOCKHOLDERS' EQUITY                                                                                        |         |   |   |   |   |   |
| Liabilities                                                                                                                 |         |   |   |   |   |   |
| Deposits                                                                                                                    | $            | 710,329 |   | $ | 683,866 |   |
| Long-term borrowings                                                                                                        |         | 125,000 |   |   | 153,000 |   |
| Subordinated debentures                                                                                                     |         | 24,119 |   |   | 24,119 |   |
| Accrued interest payable and other liabilities                                                                              |         | 2,109 |   |   | 2,999 |   |
|                                                                                                                        |         |   |   |   |   |   |
| Total Liabilities                                                                                                           |         | 861,557 |   |   | 863,984 |   |
|                                                                                                                        |         |   |   |   |   |   |
|                                                                                                                        |         |   |   |   |   |   |
|                                                                                                                        |         |   |   |   |   |   |
| Stockholders’ Equity                                                                                                  |         |   |   |   |   |   |
| Preferred stock, $0.01 par value, 1,000,000 shares authorized:                                                              |         |   |   |   |   |   |
|       Preferred stock series “A”, 437,500 shares issued and outstanding           |         | 4 |   |   | 4 |   |
|       Preferred stock series “B”,  23,393 shares issued and outstanding |         | - |   |   | - |   |
| Common stock, $0.01 par value, 20,000,000 shares authorized;                                                                |         |   |   |   |   |   |
|       10,066,679 shares issued and outstanding                                                |         | 101 |   |   | 101 |   |
| Additional paid-in capital                                                                                                  |         | 73,920 |   |   | 73,522 |   |
| Retained earnings                                                                                                           |         | 32,206 |   |   | 50,040 |   |
|                                                                                                                        |         |   |   |   |   |   |
| Total stockholders' equity                                                                                                  |         | 106,231 |   |   | 123,667 |   |
|                                                                                                                        |         |   |   |   |   |   |
| Total liabilities and stockholders' equity                                                                                  | $            | 967,788 |   | $ | 987,651 |   |

----

|                                                                                           |   | Years Ended December 31, |    |
|------------------------------------------------------------------------------------------------|--------|--------------------------|---------|
|                                                                                           |   | 2009                     |    |   | 2008 |   |   | 2007 |   |
| Interest Income                                                                                |   |                     |    |   |   |   |   |   |   |
|    Loans, including fees                                                        |   | $                        | 52,520  |   |   | $ | 61,703 |   |   | $ | 70,275 |   |
|    Securities, taxable                                                          |   |                     | 104     |   |   |   | 74 |   |   |   | 217 |   |
|    Other                                                                        |   |                     | 34      |   |   |   | 695 |   |   |   | 1,322 |   |
|       Total interest income                                      |   |                     | 52,658  |   |   |   | 62,472 |   |   |   | 71,814 |   |
|                                                                                           |   |                     |    |   |   |   |   |   |   |   |   |   |
| Interest Expense                                                                               |   |                     |    |   |   |   |   |   |   |   |   |   |
|    Deposits                                                                     |   |                     | 19,782  |   |   |   | 25,950 |   |   |   | 29,347 |   |
|    Short-term borrowings                                                        |   |                     | 12      |   |   |   | 62 |   |   |   | 488 |   |
|    Long-term borrowings and subordinated debentures                             |   |                     | 6,257   |   |   |   | 7,491 |   |   |   | 8,341 |   |
|       Total interest expense                                     |   |                     | 26,051  |   |   |   | 33,503 |   |   |   | 38,176 |   |
|                                                                                           |   |                     |    |   |   |   |   |   |   |   |   |   |
|       Net interest income                                        |   |                     | 26,607  |   |   |   | 28,969 |   |   |   | 33,638 |   |
| Provision for loan losses                                                                      |   |                     | 31,402  |   |   |   | 7,481 |   |   |   | 2,462 |   |
|       Net interest income (loss) after provision for loan losses |   |                     | (4,795  | ) |   |   | 21,488 |   |   |   | 31,176 |   |
|                                                                                           |   |                     |    |   |   |   |   |   |   |   |   |   |
| Other Income                                                                                   |   |                     |    |   |   |   |   |   |   |   |   |   |
|    Mortgage banking activities                                                  |   |                     | 316     |   |   |   | 339 |   |   |   | 575 |   |
|    Real estate commissions                                                      |   |                     | 690     |   |   |   | 1,035 |   |   |   | 2,451 |   |
|    Real estate management fees                                                  |   |                     | 677     |   |   |   | 664 |   |   |   | 653 |   |
|    Other                                                                        |   |                     | 818     |   |   |   | 753 |   |   |   | 657 |   |
|       Total other income                                         |   |                     | 2,501   |   |   |   | 2,791 |   |   |   | 4,336 |   |
|                                                                                           |   |                     |    |   |   |   |   |   |   |   |   |   |
| Non-Interest Expenses                                                                          |   |                     |    |   |   |   |   |   |   |   |   |   |
|    Compensation and related expenses                                            |   |                     | 9,377   |   |   |   | 9,117 |   |   |   | 11,070 |   |
|    Occupancy                                                                    |   |                     | 1,365   |   |   |   | 1,640 |   |   |   | 1,696 |   |
|    Foreclosed real estate expenses, net                                         |   |                     | 4,883   |   |   |   | 892 |   |   |   | 231 |   |
|    Legal                                                                        |   |                     | 1,003   |   |   |   | 719 |   |   |   | 341 |   |
|    FDIC assessments and regulatory expense                                      |   |                     | 2,156   |   |   |   | 726 |   |   |   | 278 |   |
|    Other                                                                        |   |                     | 4,078   |   |   |   | 4,199 |   |   |   | 2,876 |   |
|       Total non-interest expenses                                |   |                     | 22,862  |   |   |   | 17,293 |   |   |   | 16,492 |   |
|                                                                                           |   |                     |    |   |   |   |   |   |   |   |   |   |
| Income (loss) before income tax provision (benefit)                                            |   |                     | (25,156 | ) |   |   | 6,986 |   |   |   | 19,020 |   |
| Income tax provision (benefit)                                                                 |   |                     | (9,928  | ) |   |   | 2,873 |   |   |   | 7,909 |   |
|                                                                                           |   |                     |    |   |   |   |   |   |   |   |   |   |
|       Net income (loss)                                          |   | $                        | (15,228 | ) |   | $ | 4,113 |   |   | $ | 11,111 |   |
| Amortization of discount on preferred stock                                                    |   |                     | 270     |   |   |   | 29 |   |   |   | - |   |
| Dividends on preferred stock                                                                   |   |                     | 1,430   |   |   |   | 165 |   |   |   | - |   |
|       Net income (loss) available to common stockholders         |   | $                        | (16,928 | ) |   | $ | 3,919 |   |   | $ | 11,111 |   |
| Basic earnings (loss) per share                                                                |   | $                        | (1.68   | ) |   | $ | 0.39 |   |   | $ | 1.10 |   |
| Diluted earnings (loss)  per share                                                   |   | $                        | (1.68   | ) |   | $ | 0.39 |   |   | $ | 1.10 |   |

----

|                                     |   | Preferred Stock |   |   | CommonStock |   |   | Additional Paid-In Capital |   |   | RetainedEarnings |   |   | Total Stockholders’ Equity |    |
|------------------------------------------|--------|-----------------|--------|--------|-------------|--------|--------|----------------------------|--------|--------|------------------|--------|--------|----------------------------------|---------|
|                                     |   |            |   |   |        |   |   |                       |   |   |             |   |   |                             |    |
| Balance – January 1, 2007          |   | $               | -      |   |        | $      | 92     |                       |   | $      | 28,270           |   |   | $                                | 58,080  |   |   | $ | 86,442 |   |
|                                     |   |            |   |   |        |   |   |                       |   |   |             |   |   |                             |    |   |   |   |   |   |
| Comprehensive Income                     |   |            |   |   |        |   |   |                       |   |   |             |   |   |                             |    |   |   |   |   |   |
|      Net income |   |            | -      |   |        |   | -      |                       |   |   | -                |   |   |                             | 11,111  |   |   |   | 11,111 |   |
| 10% Stock dividend (915,004 shares)      |   |            | -      |   |        |   | 9      |                       |   |   | 18,357           |   |   |                             | (18,366 | ) |   |   | - |   |
| Stock-based compensation                 |   |            | -      |   |        |   | -      |                       |   |   | 128              |   |   |                             | -       |   |   |   | 128 |   |
| Dividends on common stock                |   |            |   |   |        |   |   |                       |   |   |             |   |   |                             |    |   |   |   |   |   |
| ($.24 per share)                         |   |            | -      |   |        |   | -      |                       |   |   | -                |   |   |                             | (2,418  | ) |   |   | (2,418 | ) |
| Exercise of stock options (825 shares)   |   |            | -      |   |        |   | -      |                       |   |   | 13               |   |   |                             | -       |   |   |   | 13 |   |
|                                     |   |            |   |   |        |   |   |                       |   |   |             |   |   |                             |    |   |   |   |   |   |
| Balance - December 31, 2007              |   |            | -      |   |        |   | 101    |                       |   |   | 46,768           |   |   |                             | 48,407  |   |   |   | 95,276 |   |
|                                     |   |            |   |   |        |   |   |                       |   |   |             |   |   |                             |    |   |   |   |   |   |
| Comprehensive Income                     |   |            |   |   |        |   |   |                       |   |   |             |   |   |                             |    |   |   |   |   |   |
|      Net income |   |            | -      |   |        |   | -      |                       |   |   | -                |   |   |                             | 4,113   |   |   |   | 4,113 |   |
| Stock-based compensation                 |   |            | -      |   |        |   | -      |                       |   |   | 128              |   |   |                             | -       |   |   |   | 128 |   |
| Dividends on common stock                |   |            |   |   |        |   |   |                       |   |   |             |   |   |                             |    |   |   |   |   |   |
| ($.24 per share)                         |   |            | -      |   |        |   | -      |                       |   |   | -                |   |   |                             | (2,416  | ) |   |   | (2,416 | ) |
| Dividend declared on Series A            |   |            |   |   |        |   |   |                       |   |   |             |   |   |                             |    |   |   |   |   |   |
| preferred stock ($.08 per share)         |   |            | -      |   |        |   | -      |                       |   |   | -                |   |   |                             | (35     | ) |   |   | (35 | ) |
| Series A preferred stock offering        |   |            | 4      |   |        |   | -      |                       |   |   | 3,249            |   |   |                             | -       |   |   |   | 3,253 |   |
| Series B preferred stock offering        |   |            | -      |   |        |   | -      |                       |   |   | 23,348           |   |   |                             | -       |   |   |   | 23,348 |   |
| Amortization of discount on preferred    |   |            |   |   |        |   |   |                       |   |   |             |   |   |                             |    |   |   |   |   |   |
| stock                                    |   |            | -      |   |        |   | -      |                       |   |   | 29               |   |   |                             | (29     | ) |   |   | - |   |
|                                     |   |            |   |   |        |   |   |                       |   |   |             |   |   |                             |    |   |   |   |   |   |
| Balance - December 31, 2008              |   |            | 4      |   |        |   | 101    |                       |   |   | 73,522           |   |   |                             | 50,040  |   |   |   | 123,667 |   |
|                                     |   |            |   |   |        |   |   |                       |   |   |             |   |   |                             |    |   |   |   |   |   |
| Comprehensive Loss                       |   |            |   |   |        |   |   |                       |   |   |             |   |   |                             |    |   |   |   |   |   |
|      Net loss   |   |            | -      |   |        |   | -      |                       |   |   | -                |   |   |                             | (15,228 | ) |   |   | (15,228 | ) |
| Stock-based compensation                 |   |            | -      |   |        |   | -      |                       |   |   | 128              |   |   |                             | -       |   |   |   | 128 |   |
| Dividends on common stock                |   |            |   |   |        |   |   |                       |   |   |             |   |   |                             |    |   |   |   |   |   |
| ($.09 per share)                         |   |            | -      |   |        |   | -      |                       |   |   | -                |   |   |                             | (906    | ) |   |   | (906 | ) |
| Dividend declared on Series A            |   |            |   |   |        |   |   |                       |   |   |             |   |   |                             |    |   |   |   |   |   |
| preferred stock ($.64 per share)         |   |            | -      |   |        |   | -      |                       |   |   | -                |   |   |                             | (280    | ) |   |   | (280 | ) |
| Dividend declared on Series B            |   |            |   |   |        |   |   |                       |   |   |             |   |   |                             |    |   |   |   |   |   |
| preferred stock                          |   |            | -      |   |        |   | -      |                       |   |   | -                |   |   |                             | (1,150  | ) |   |   | (1,150 | ) |
| Amortization of discount on preferred    |   |            |   |   |        |   |   |                       |   |   |             |   |   |                             |    |   |   |   |   |   |
| stock                                    |   |            | -      |   |        |   | -      |                       |   |   | 270              |   |   |                             | (270    | ) |   |   | - |   |
|                                     |   |            |   |   |        |   |   |                       |   |   |             |   |   |                             |    |   |   |   |   |   |
| Balance - December 31, 2009              |   | $               | 4      |   |        | $      | 101    |                       |   | $      | 73,920           |   |   | $                                | 32,206  |   |   | $ | 106,231 |   |

----

|                                                                                    |   | Years Ended December 31, |    |
|-----------------------------------------------------------------------------------------|--------|--------------------------|---------|
|                                                                                    |   | 2009                     |    |   | 2008 |   |   | 2007 |   |
|                                                                                    |   |                     |    |   |   |   |   |   |   |
| Cash Flows from Operating Activities                                                    |   |                     |    |   |   |   |   |   |   |
|                                                                                    |   |                     |    |   |   |   |   |   |   |
| Net income (loss)                                                                       |   | $                        | (15,228 | ) |   | $ | 4,113 |   |   | $ | 11,111 |   |
| Adjustments to reconcile net income (loss) to net                                       |   |                     |    |   |   |   |   |   |   |   |   |   |
|    cash provided by (used in) operating activities:                      |   |                     |    |   |   |   |   |   |   |   |   |   |
|       Amortization of deferred loan fees                  |   |                     | (2,048  | ) |   |   | (2,546 | ) |   |   | (3,263 | ) |
|       Net amortization of premiums and                    |   |                     |    |   |   |   |   |   |   |   |   |   |
|            discounts             |   |                     | 3       |   |   |   | 3 |   |   |   | 4 |   |
|       Provision for loan losses                           |   |                     | 31,402  |   |   |   | 7,481 |   |   |   | 2,462 |   |
|       Provision for depreciation                          |   |                     | 1,276   |   |   |   | 1,336 |   |   |   | 1,333 |   |
|       Provision for foreclosed real estate                |   |                     | 3,911   |   |   |   | 932 |   |   |   | 100 |   |
|       Gain on sale of loans                               |   |                     | (316    | ) |   |   | (248 | ) |   |   | (177 | ) |
|       (Gain) loss on sale of foreclosed real estate       |   |                     | 15      |   |   |   | (209 | ) |   |   | - |   |
|       Proceeds from loans sold to others                  |   |                     | 29,616  |   |   |   | 14,041 |   |   |   | 20,366 |   |
|       Loans originated for sale                           |   |                     | (33,692 | ) |   |   | (13,145 | ) |   |   | (18,320 | ) |
|       Stock-based compensation expense                    |   |                     | 128     |   |   |   | 128 |   |   |   | 128 |   |
|       Deferred tax benefit                                |   |                     | (9,194  | ) |   |   | (1,839 | ) |   |   | (1,157 | ) |
|       Increase in accrued interest receivable and         |   |                     |    |   |   |   |   |   |   |   |   |   |
|            other assets          |   |                     | (8,532  | ) |   |   | (147 | ) |   |   | (400 | ) |
|       Decrease in accrued interest payable                |   |                     |    |   |   |   |   |   |   |   |   |   |
|            and other liabilities |   |                     | (890    | ) |   |   | (322 | ) |   |   | (1,765 | ) |
|                                                                                    |   |                     |    |   |   |   |   |   |   |   |   |   |
| Net cash provided by (used in) operating activities                                     |   |                     | (3,549  | ) |   |   | 9,578 |   |   |   | 10,422 |   |
|                                                                                    |   |                     |    |   |   |   |   |   |   |   |   |   |
| Cash Flows from Investing Activities                                                    |   |                     |    |   |   |   |   |   |   |   |   |   |
|                                                                                    |   |                     |    |   |   |   |   |   |   |   |   |   |
| Purchase of investment securities                                                       |   |                     | (7,999  | ) |   |   | - |   |   |   | - |   |
| Proceeds from maturing investment securities                                            |   |                     | 1,000   |   |   |   | 1,000 |   |   |   | 4,000 |   |
| Principal collected on mortgage backed securities                                       |   |                     | 310     |   |   |   | 35 |   |   |   | 884 |   |
| Net (increase) decrease in loans                                                        |   |                     | 23,940  |   |   |   | (20,317 | ) |   |   | (61,947 | ) |
| Proceeds from sale of foreclosed real estate                                            |   |                     | 9,708   |   |   |   | 8,173 |   |   |   | 1,319 |   |
| Investment in foreclosed real estate                                                    |   |                     | (413    | ) |   |   | (92 | ) |   |   | (56 | ) |
| Investment in premises and equipment                                                    |   |                     | (137    | ) |   |   | (314 | ) |   |   | (4,013 | ) |
| Proceeds from disposal of premises and                                                  |   |                     |    |   |   |   |   |   |   |   |   |   |
|     equipment                                                       |   |                     | 24      |   |   |   | - |   |   |   | 1,802 |   |
| Purchase of FHLB stock                                                                  |   |                     | -       |   |   |   | - |   |   |   | (704 | ) |
| Redemption of FHLB stock                                                                |   |                     | 85      |   |   |   | 1,478 |   |   |   | - |   |
|                                                                                    |   |                     |    |   |   |   |   |   |   |   |   |   |
| Net cash provided by (used in) investing activities                                     |   |                     | 26,518  |   |   |   | (10,037 | ) |   |   | (58,715 | ) |

----

|                                                                                                    |   | Years Ended December 31, |    |
|---------------------------------------------------------------------------------------------------------|--------|--------------------------|---------|
|                                                                                                    |   | 2009                     |    |   | 2008 |   |   | 2007 |   |
|                                                                                                    |   |                     |    |   |   |   |   |   |   |
| Cash Flows from Financing Activities                                                                    |   |                     |    |   |   |   |   |   |   |
|                                                                                                    |   |                     |    |   |   |   |   |   |   |
| Net increase in deposits                                                                                |   | $                        | 26,463  |   |   | $ | 31,093 |   |   | $ | 26,249 |   |
| Net decrease in short-term borrowings                                                                   |   |                     | -       |   |   |   | (15,000 | ) |   |   | (3,000 | ) |
| Additional borrowed funds, long-term                                                                    |   |                     | -       |   |   |   | 30,000 |   |   |   | 40,000 |   |
| Repayment of borrowed funds, long-term                                                                  |   |                     | (28,000 | ) |   |   | (52,000 | ) |   |   | (20,000 | ) |
| Common stock dividends paid                                                                             |   |                     | (906    | ) |   |   | (2,416 | ) |   |   | (2,418 | ) |
| Series “A” preferred stock dividend paid                                                    |   |                     | (280    | ) |   |   | (35 | ) |   |   | - |   |
| Series “B” preferred stock dividend paid                                                    |   |                     | (1,150  | ) |   |   | - |   |   |   | - |   |
| Proceeds from sale of subordinated debentures                                                           |   |                     | -       |   |   |   | 3,500 |   |   |   | - |   |
| Proceeds from sale of Series A preferred stock, net                                                     |   |                     | -       |   |   |   | 3,253 |   |   |   | - |   |
| Proceeds from sale of Series B preferred stock, net                                                     |   |                     | -       |   |   |   | 23,348 |   |   |   | - |   |
| Proceeds from exercise of options                                                                       |   |                     | -       |   |   |   | - |   |   |   | 13 |   |
| Payment of debt issuance costs                                                                          |   |                     | -       |   |   |   | (245 | ) |   |   | - |   |
| Net cash provided by (used in) financing activities                                                     |   |                     | (3,873  | ) |   |   | 21,498 |   |   |   | 40,844 |   |
|                                                                                                    |   |                     |    |   |   |   |   |   |   |   |   |   |
| Increase (decrease) in cash and cash equivalents                                                        |   |                     | 19,096  |   |   |   | 21,039 |   |   |   | (7,449 | ) |
| Cash and cash equivalents at beginning of year                                                          |   |                     | 32,305  |   |   |   | 11,266 |   |   |   | 18,715 |   |
|                                                                                                    |   |                     |    |   |   |   |   |   |   |   |   |   |
| Cash and cash equivalents at end of year                                                                |   | $                        | 51,401  |   |   | $ | 32,305 |   |   | $ | 11,266 |   |
|                                                                                                    |   |                     |    |   |   |   |   |   |   |   |   |   |
|                                                                                                    |   |                     |    |   |   |   |   |   |   |   |   |   |
| Supplemental disclosure of cash flows information:                                                      |   |                     |    |   |   |   |   |   |   |   |   |   |
|      Cash paid during year for:                                                |   |                     |    |   |   |   |   |   |   |   |   |   |
|                                                                                                    |   |                     |    |   |   |   |   |   |   |   |   |   |
|           Interest                                    |   | $                        | 26,410  |   |   | $ | 33,417 |   |   | $ | 38,326 |   |
|                                                                                                    |   |                     |    |   |   |   |   |   |   |   |   |   |
|           Income taxes                                |   | $                        | 2,295   |   |   | $ | 4,900 |   |   | $ | 9,065 |   |
|                                                                                                    |   |                     |    |   |   |   |   |   |   |   |   |   |
|           Transfer of loans to foreclosed real estate |   | $                        | 28,478  |   |   | $ | 12,128 |   |   | $ | 3,342 |   |

----

| A.     | Principles of Consolidation - The consolidated financial statements include the accounts of Severn Bancorp, Inc. ("Bancorp"), and its wholly-owned subsidiaries, SBI Mortgage Company and SBI Mortgage Company's subsidiary, Crownsville Development Corporation, and its subsidiary, Crownsville Holdings I, LLC, and Severn Savings Bank, FSB ("the Bank"), and the Bank's subsidiaries, Louis Hyatt, Inc., Homeowners Title and Escrow Corporation, Severn Financial Services Corporation, SSB Realty Holdings, LLC, SSB Realty Holdings II, LLC, and HS West, LLC. All intercompany accounts and transactions have been eliminated in the accompanying consolidated financial statements. Amounts in the prior year’s consolidated financial statements have been reclassified whenever necessary to conform to the current year’s presentation.  Such reclassifications had no impact on net income. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| B.     | Business - The Bank's primary business activity is the acceptance of deposits from the general public and the use of the proceeds for investments and loan originations. The Bank is subject to competition from other financial institutions.  In addition, the Bank is subject to the regulations of certain federal agencies and undergoes periodic examinations by those regulatory authorities.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   | Bancorp has no reportable segments. Management does not separately allocate expenses, including the cost of funding loan demand, between the retail and real estate operations of Bancorp.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| C.     | Estimates - The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the statement of financial condition and revenues and expenses for the period.  Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change in the near-term relate to the determination of the allowance for loan losses, the fair value of foreclosed real estate, the evaluation of other than temporary impairment of investment securities and the evaluation of deferred income taxes.                                                                                                 |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| D.     | Investment Securities Held to Maturity – Investment securities for which the Bank has the positive intent and ability to hold to maturity are reported at cost, adjusted for premiums and discounts that are recognized in interest income using the interest method over the period to maturity.  Declines in the fair value of held to maturity securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses.  In estimating other than temporary impairment losses, management considers (1) the length of time and the extent to which the fair value has been less than cost and (2) the financial condition and near term prospects of the issuer.                                                                                                                                                                                            |

----

| E.     | Loans Held for Sale - Loans held for sale are carried at lower of cost or market value in the aggregate based on investor quotes.  Net unrealized losses are recognized through a valuation allowance by charges to income.  Mortgage loans held for sale are generally sold with the mortgage servicing rights released by the Bank.  Gains and losses on sales of mortgage loans are recognized based on the difference between the selling price and the carrying value of the related mortgage loans sold.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| F.     | Loans - Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off generally are reported at their outstanding unpaid principal balances adjusted for charge-offs, the allowance for loan losses, and any deferred fees or costs on originated loans.  Interest income is accrued on the unpaid principal balance.  Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the interest method.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   | The accrual of interest on loans is discontinued at the time the loan is 90 days past due.  Past due status is based on contractual terms of the loan.  In all cases, loans are placed on non-accrual or charged-off at an earlier date if collection of principal or interest is considered doubtful.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   | All interest accrued but not collected for loans that are placed on non-accrual or charged-off is reversed against interest income.  The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual.  Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| G.     | Allowance for Loan Losses - An allowance for loan losses is provided through charges to income in an amount that management believes will be adequate to absorb losses on existing loans that may become uncollectible, based on evaluations of the collectability of loans and prior loan loss experience.  The evaluations take into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, and current economic conditions that may affect the borrowers' ability to pay.  Determining the amount of the allowance for loan losses requires the use of estimates and assumptions, which is permitted under generally accepted accounting principles. Actual results could differ significantly from those estimates.  Management believes the allowance for losses on loans is adequate. While management uses available information to estimate losses on loans, future additions to the allowances may be necessary based on changes in economic conditions, particularly in the State of Maryland.  In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for losses on loans.  Such agencies may require the Bank to recognize additions to the allowance based on their judgments about information available to them at the time of their examination. |

----

|   | The allowance consists of specific and general components.  The specific component relates to loans that are classified as impaired.  For such loans that are classified as impaired, an allowance is established when the current market value of the underlying collateral less its estimated disposal costs is lower than the carrying value of that loan.  For loans that are not solely collateral dependent, an allowance is established when the present value of the expected future cash flows of the impaired loan is lower than the carrying value of that loan.  The general component relates to loans that are classified as doubtful, substandard or special mention, as well as non-classified loans.  The general reserve is based on historical loss experience adjusted for qualitative factors.                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   | A loan is considered impaired if it meets either of the following two criteria:· Loans that are 90 days or more in arrears (nonaccrual loans)· Loans where, based on current information and events, it is probable that a borrower will be unable to pay all amounts due according to the contractual terms of   the loan agreement. A loan is considered a troubled debt restructuring when the Company for economic or legal reasons relating to the borrowers financial difficulties grants a concession to the borrower that it would not otherwise consider.  Loan modifications made with terms consistent with current market conditions that the borrower could obtain in the open market are not considered troubled debt restructurings. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.  Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| H.     | Foreclosed Real Estate - Real estate acquired through or in the process of foreclosure is recorded at fair value less estimated disposal costs.  Management periodically evaluates the recoverability of the carrying value of the real estate acquired through foreclosure using estimates as described under the caption "Allowance for Loan Losses". In the event of a subsequent decline, management provides a specific reserve to reduce real estate acquired through foreclosure to fair value less estimated disposal cost. Expenses incurred on foreclosed real estate prior to disposition are charged to expense. Gains or losses on the sale of foreclosed real estate are recognized upon disposition of the property.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |

| I. | Transfers of Financial Assets – Transfers of financial assets, including loan and loan participation sales, are accounted for as sales when control over the assets has been surrendered.  Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from Bancorp, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets and (3) Bancorp does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity. |
|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| J.     | Premises and Equipment - Premises and equipment are carried at cost less accumulated depreciation. Depreciation and amortization of premises and equipment is accumulated by the use of the straight-line method over the estimated useful lives of the assets. Additions and improvements are capitalized, and charges for repairs and maintenance are expensed when incurred. The related cost and accumulated depreciation are eliminated from the accounts when an asset is sold or retired and the resultant gain or loss is credited or charged to income.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| K.     | Income Taxes - Deferred income taxes are recognized for temporary differences between the financial reporting basis and income tax basis of assets and liabilities based on enacted tax rates expected to be in effect when such amounts are realized or settled. Deferred tax assets are recognized only to the extent that it is more likely than not that such amounts will be realized based on consideration of available evidence. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.  To the extent that current available evidence about the future raises doubt about the likelihood of a deferred tax asset being realized, a valuation allowance is established.  The judgment about the level of future taxable income is inherently subjective and is reviewed on a continual basis as regulatory and business factors change.Bancorp recognizes interest and penalties on income taxes as a component of income tax expense.                                                   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| L.     | Statement of Cash Flows - In the statement of cash flows, cash and cash equivalents include cash on hand, amounts due from banks, Federal Home Loan Bank of Atlanta overnight deposits, and federal funds sold.  Generally, federal funds are sold for one day periods.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| M.     | Earnings Per Share - Basic earnings (loss) per share of common stock for the years ended December 31, 2009, 2008 and 2007 is computed by dividing net income (loss) available to common stockholders by 10,066,679, 10,066,679 and 10,066,283, respectively, the weighted average number of shares of common stock outstanding for each year. Diluted earnings per share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued.  Potential common shares that may be issued by Bancorp relate to outstanding stock options, warrants, and convertible preferred stock, and are determined using the treasury stock method.  Diluted earnings per share of common stock for the years ended December 31, 2009, 2008 and 2007, is computed by dividing net income (loss) for each year by 10,066,679, 10,066,679 and 10,066,283, respectively, the weighted average number of diluted shares of common stock. The 2007 amounts have been retroactively adjusted to give effect to the 10% stock dividend effective March 2007. |

----

| N.     | Advertising Cost - Advertising cost is expensed as incurred and totaled $370,000, $476,000 and $460,000 for the years ended December 31, 2009, 2008, and 2007, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| O.     | Recent Accounting Pronouncements - In January 2010, the FASB issued updated guidance on “Equity, Accounting for Distributions to Shareholders with Components of Stock and Cash”.  The amendments in this update clarify that the stock portion of a distribution to shareholders that allows them to elect to receive cash or stock with a potential limitation on the total amount of cash that all shareholders can elect to receive in the aggregate is considered a share issuance that is reflected in earnings per share prospectively and is not a stock dividend.  This update codifies the consensus reached in EITF Issue No. 09-E, Accounting for Stock Dividends, Including Distributions to Shareholders with Components of Stock and Cash.  This update was effective for interim and annual periods ending on or after December 15, 2009, and was applied on a retrospective basis.  The adoption of this guidance did not have a material effect on our consolidated results of operations or financial position. In January 2010, the FASB issued updated guidance on “Consolidation, Accounting and Reporting for Decreases in Ownership of a Subsidiary – A Scope Clarification”.  This update clarifies that the scope of the decrease in ownership provisions of Subtopic 810-10 and related guidance applies to a subsidiary or group of assets that is a business or nonprofit activity; a subsidiary that is a business or nonprofit activity that is transferred to an   equity method investee or joint venture; and an exchange of a group of assets that constitutes a business or nonprofit activity for a noncontrolling interest in an entity  (including an equity method investee or joint venture).  This update also clarifies that the decrease in ownership guidance in Subtopic 810-10 does not apply to: (a) sales of insubstance real estate; and (b) conveyances of oil and gas mineral rights, even if these transfers involve businesses. The amendments in this update expand the disclosure requirements about deconsolidation of a subsidiary or derecognition of a group of assets to include the valuation techniques used to measure the fair value of any retained investment; the nature of any continuing involvement with the subsidiary or entity acquiring the group of assets; and whether the transaction that resulted in the deconsolidation or derecognition was a related party or whether the former subsidiary or entity acquiring the assets will become a related party after the transaction.  This update is effective beginning in the period that the entity adopts the amendments to guidance on “Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB 51)”.  If an entity has previously adopted this guidance, the amendments are effective beginning in the first interim or annual reporting period ending on or after December 15, 2009. The amendments in this update should be applied retrospectively to the first period that an entity adopts the guidance on “Noncontrolling Interests in Consolidated Financial Statements”. The adoption of this guidance did not have a material effect on our consolidated results of operations or financial position. |

----

| P. | Subsequent Events – Bancorp has evaluated events and transactions occurring subsequent to December 31, 2009, the date of the consolidated statements of financial condition, for items that should potentially be recognized or disclosed in the consolidated financial statements.  The evaluation was conducted through the date these consolidated financial statements were issued. |
|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| Q. | Concentration of Credit Risk – From time to time, the Bank will maintain balances with its correspondent bank that exceed the $100,000 ($250,000 through December 31, 2013) federally insured deposit limits.  Management routinely evaluates the credit worthiness of the correspondent bank and does not feel they pose a significant risk to the Bancorp. |
|----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                        |   | AmortizedCost          |   |   | Gross Unrealized Gains |   |   | Gross Unrealized Losses |   |   | FairValue |   |
|-----------------------------|--------|------------------------|--------|--------|------------------------|--------|--------|-------------------------|--------|--------|-----------|--------|
|                        |   | (dollars in thousands) |   |
| December 31, 2009:          |   |                   |   |   |                   |   |   |                    |   |   |      |   |
|                        |   |                   |   |   |                   |   |   |                    |   |   |      |   |
| US Treasury securities      |   | $                      | 6,999  |   |                   | $      | 23     |                    |   | $      | 1         |   |   | $ | 7,021 |   |
| Residential mortgage backed |   |                   |   |   |                   |   |   |                    |   |   |      |   |   |   |   |   |
|  securities            |   |                   | 1,032  |   |                   |   | 15     |                    |   |   | 13        |   |   |   | 1,034 |   |
|   Total           |   | $                      | 8,031  |   |                   | $      | 38     |                    |   | $      | 14        |   |   | $ | 8,055 |   |
|  December 31, 2008:    |   |                   |   |   |                   |   |   |                    |   |   |      |   |   |   |   |   |
|                        |   |                   |   |   |                   |   |   |                    |   |   |      |   |   |   |   |   |
| Residential mortgage backed |   |                   |   |   |                   |   |   |                    |   |   |      |   |   |   |   |   |
|  securities            |   | $                      | 1,345  |   |                   | $      | 11     |                    |   | $      | 27        |   |   | $ | 1,329 |   |

----

|                          | Less than 12 months    |   |   | 12 Months or More |   |   | Total      |   |
|-------------------------------|------------------------|--------|--------|-------------------|--------|--------|------------|--------|
|                          |                   |   |   | Unrealized        |   |   |       |   |   | Unrealized |   |   |   |   |   | Unrealized |   |
|                          | Fair Value             |   |   | Losses            |   |   | Fair Value |   |   | Losses |   |   | Fair Value |   |   | Losses |   |
|                          | (dollars in thousands) |   |
| December 31, 2009:            |                   |   |   |              |   |   |       |   |   |   |   |   |   |   |   |   |   |
|                          |                   |   |   |              |   |   |       |   |   |   |   |   |   |   |   |   |   |
| US Treasury securities        | $                      | 991    |   |              | $      | (1     | )          |   | $ | - |   |   | $ | (- | ) |   | $ | 991 |   |   | $ | (1 | ) |
| Residential mortgage backed   |                   |   |   |              |   |   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|   securities        |                   | -      |   |              |   | (-     | )          |   |   | 267 |   |   |   | (13 | ) |   |   | 267 |   |   |   | (13 | ) |
|     Total | $                      | 991    |   |              | $      | (1     | )          |   | $ | 267 |   |   | $ | (13 | ) |   | $ | 1,258 |   |   | $ | (14 | ) |
|                          |                   |   |   |              |   |   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| December 31, 2008:            |                   |   |   |              |   |   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                          |                   |   |   |              |   |   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Residential mortgage backed   |                   |   |   |              |   |   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|   securities        | $                      | -      |   |              | $      | (-     | )          |   | $ | 1,151 |   |   | $ | (27 | ) |   | $ | 1,151 |   |   | $ | (27 | ) |
|                          |                   |   |   |              |   |   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |

|                            |   | Held to Maturity |   |
|---------------------------------|--------|------------------|--------|
|                            |   | Amortized        |   |   | Estimated |   |
|                            |   | Cost             |   |   | Fair Value |   |
| Due in one year or less         |   | $                | 998    |   |   | $ | 999 |   |
| Due from one year to five years |   |             | 6,001  |   |   |   | 6,022 |   |
| Mortgage-backed securities      |   |             | 1,032  |   |   |   | 1,034 |   |
|                            |   |             |   |   |   |   |   |   |
|                            |   | $                | 8,031  |   |   | $ | 8,055 |   |
|                            |   |             |   |   |   |   |   |   |

----

|                                                                        |   | December 31,           |    |
|-----------------------------------------------------------------------------|--------|------------------------|---------|
|                                                                        |   | 2009                   |    |   | 2008 |   |
|                                                                        |   | (dollars in thousands) |    |
| Residential mortgage                                                        |   | $                      | 343,931 |   |   | $ | 355,909 |   |
| Construction, land acquisition and                                          |   |                   |    |   |   |   |   |   |
|    development                                               |   |                   | 198,933 |   |   |   | 242,359 |   |
| Land                                                                        |   |                   | 71,772  |   |   |   | 82,642 |   |
| Lines of credit                                                             |   |                   | 31,138  |   |   |   | 34,872 |   |
| Commercial real estate                                                      |   |                   | 204,596 |   |   |   | 214,209 |   |
| Commercial non-real estate                                                  |   |                   | 6,923   |   |   |   | 3,084 |   |
| Home equity                                                                 |   |                   | 42,365  |   |   |   | 39,040 |   |
| Consumer                                                                    |   |                   | 1,259   |   |   |   | 1,083 |   |
|                                                                        |   |                   | 900,917 |   |   |   | 973,198 |   |
|                                                                        |   |                   |    |   |   |   |   |   |
|                                                                        |   |                   |    |   |   |   |   |   |
| Less                                                                        |   |                   |    |   |   |   |   |   |
|      Loans in process                              |   |                   | (48,095 | ) |   |   | (57,940 | ) |
|      Allowance for loan losses                     |   |                   | (34,693 | ) |   |   | (14,813 | ) |
|      Deferred loan origination fees and costs, net |   |                   | (3,895  | ) |   |   | (4,439 | ) |
|                                                                        |   |                   |    |   |   |   |   |   |
|                                                                        |   | $                      | 814,234 |   |   | $ | 896,006 |   |

----

|                         |   | 2009                   |    |   | 2008   |   |   | 2007   |   |
|------------------------------|--------|------------------------|---------|--------|--------|--------|--------|--------|--------|
|                         |   | (dollars in thousands) |    |
|                         |   |                   |    |   |   |   |   |   |   |
| Balance at beginning of year |   | $                      | 14,813  |   |   | $      | 10,781 |   |   | $ | 9,026 |   |
| Provision for loan losses    |   |                   | 31,402  |   |   |   | 7,481  |   |   |   | 2,462 |   |
| Charge-offs                  |   |                   | (11,579 | )      |   |   | (3,449 | )      |   |   | (707 | ) |
| Recoveries                   |   |                   | 57      |   |   |   | -      |   |   |   | - |   |
| Balance at end of year       |   | $                      | 34,693  |   |   | $      | 14,813 |   |   | $ | 10,781 |   |

|                                           |   | December 31, 2009 |   |   | Number of loans |   |   | December 31, 2008 |   |   | Number of loans |   |
|------------------------------------------------|--------|-------------------|--------|--------|-----------------|--------|--------|-------------------|--------|--------|-----------------|--------|
|                                           |   |              |   |   |            |   |   |              |   |   |            |   |
| Loans accounted for on a non-accrual basis:    |   |              |   |   |            |   |   |              |   |   |            |   |
| Mortgage loans:                                |   |              |   |   |            |   |   |              |   |   |            |   |
|     Residential - consumer |   | $                 | 38,889 |   |            |   | 83     |              |   | $      | 30,769          |   |   |   | 73 |   |
|     Residential - builder  |   |              | 16,626 |   |            |   | 38     |              |   |   | 20,970          |   |   |   | 45 |   |
|     Commercial             |   |              | 5,237  |   |            |   | 10     |              |   |   | 3,047           |   |   |   | 11 |   |
| Non-mortgage loans:                            |   |              |   |   |            |   |   |              |   |   |            |   |   |   |   |   |
|     Consumer               |   |              | -      |   |            |   | -      |              |   |   | 9               |   |   |   | 2 |   |
|     Commercial             |   |              | 56     |   |            |   | 1      |              |   |   | -               |   |   |   | - |   |
| Total non-accrual loans                        |   | $                 | 60,808 |   |            |   | 132    |              |   | $      | 54,795          |   |   |   | 131 |   |
| Accruing loans greater than 90 days past due   |   | $                 | -      |   |            |   |   |              |   | $      | -               |   |   |   |   |   |
| Foreclosed real-estate                         |   | $                 | 21,574 |   |            |   |   |              |   | $      | 6,317           |   |   |   |   |   |
| Total non-performing assets                    |   | $                 | 82,382 |   |            |   |   |              |   | $      | 61,112          |   |   |   |   |   |

----

| Impaired loans at December 31, 2007                           |   | $      | 17,960  |   |
|---------------------------------------------------------------|--------|--------|---------|--------|
|   Added to impaired loans                           |   |   | 77,897  |   |
|   Gross loans transferred to foreclosed real estate |   |   | (15,258 | )      |
|   Paid off prior to foreclosure                     |   |   | (10,763 | )      |
| Impaired loans at December 31, 2008                           |   |   | 69,836  |   |
|   Added to impaired loans                           |   |   | 123,334 |   |
|   Gross loans transferred to foreclosed real estate |   |   | (35,931 | )      |
|   Paid off prior to foreclosure                     |   |   | (34,298 | )      |
| Impaired loans at December 31, 2009                           |   | $      | 122,941 |   |

|                                        |   | 2009                   |   |   | 2008   |   |   | 2007   |   |
|---------------------------------------------|--------|------------------------|--------|--------|--------|--------|--------|--------|--------|
|                                        |   | (dollars in thousands) |   |
|                                        |   |                   |   |   |   |   |   |   |   |
| Interest income that would have             |   |                   |   |   |   |   |   |   |   |
|      been recorded |   | $                      | 4,588  |   |   | $      | 4,430  |   |   | $ | 649 |   |
| Interest income recognized                  |   |                   | 1,271  |   |   |   | 2,045  |   |   |   | 406 |   |
| Interest income not recognized              |   | $                      | 3,317  |   |   | $      | 2,385  |   |   | $ | 243 |   |

----

| Financial Instruments Whose ContractAmounts Represent Credit Risk |   | Contract AmountAt December 31, |   |
|-------------------------------------------------------------------|--------|--------------------------------|--------|
|                                                              |   | 2009                           |   |   | 2008 |   |
|                                                              |   | (dollars in thousands)         |   |
| Standby letters of credit                                         |   | $                              | 11,935 |   |   | $ | 13,183 |   |
| Home equity lines of credit                                       |   |                           | 19,005 |   |   |   | 23,299 |   |
| Unadvanced construction commitments                               |   |                           | 48,095 |   |   |   | 57,940 |   |
| Mortgage loan commitments                                         |   |                           | 1,211  |   |   |   | 7,962 |   |
| Lines of credit                                                   |   |                           | 23,356 |   |   |   | 38,016 |   |
| Loans sold with limited                                           |   |                           |   |   |   |   |   |   |
|      repurchase provisions               |   | $                              | 16,345 |   |   | $ | 472 |   |

----

|                              |   | December 31,           |   |   | Estimated |   |
|-----------------------------------|--------|------------------------|--------|--------|-----------|--------|
|                              |   | 2009                   |   |   | 2008      |   |   | Useful Lives |   |
|                              |   | (dollars in thousands) |   |   |      |   |
| Land                              |   | $                      | 1,537  |   |      | $      | 1,537 |   |   |   | - |   |
| Building                          |   |                   | 29,023 |   |      |   | 29,047 |   |   | 39 Years |   |
| Leasehold improvements            |   |                   | 1,155  |   |      |   | 1,130 |   |   | 15-27.5 Years |   |
| Furniture, fixtures and equipment |   |                   | 2,688  |   |      |   | 2,575 |   |   | 3-10 Years |   |
|    Total at cost   |   |                   | 34,403 |   |      |   | 34,289 |   |   |   |   |   |
| Accumulated depreciation          |   |                   | (5,299 | )      |      |   | (4,022 | ) |   |   |   |   |
|                              |   | $                      | 29,104 |   |      | $      | 30,267 |   |   |   |   |   |

| Years Ended December 31, (in thousands) |   |
|-----------------------------------------|--------|
| 2010                                    |   | $ | 95 |   |
| 2011                                    |   |   | 95 |   |
| 2012                                    |   |   | 95 |   |
| 2013                                    |   |   | 95 |   |
| 2014                                    |   |   | 95 |   |
| Thereafter                              |   |   | 38 |   |

----

| Foreclosed real estate at December 31, 2007                                     |   | $      | 2,993  |   |
|---------------------------------------------------------------------------------|--------|--------|--------|--------|
|   Transferred from impaired loans, net of specific reserves of $3,130 |   |   | 12,128 |   |
|   Property improvements                                               |   |   | 92     |   |
|   Additional write downs                                              |   |   | (932   | )      |
|   Property sold                                                       |   |   | (7,964 | )      |
| Foreclosed real estate at December 31, 2008                                     |   |   | 6,317  |   |
|   Transferred from impaired loans, net of specific reserves of $7,453 |   |   | 28,478 |   |
|   Property improvements                                               |   |   | 413    |   |
|   Additional write downs                                              |   |   | (3,911 | )      |
|   Property sold                                                       |   |   | (9,723 | )      |
| Foreclosed real estate at December 31, 2009                                     |   | $      | 21,574 |   |

|                          |   | 2009                   |    |   | 2008    |   |
|-------------------------------|--------|------------------------|---------|--------|---------|--------|
| Category                      |   | Amount                 |    |   | Percent |   |   | Amount |   |   | Percent |   |
|                          |   | (dollars in thousands) |    |
|                          |   |                   |    |   |    |   |   |   |   |   |   |   |
| NOW accounts                  |   | $                      | 12,898  |   |    |   | 1.82 | % |   | $ | 12,813 |   |   |   | 1.87 | % |
| Money market accounts         |   |                   | 49,797  |   |    |   | 7.01 | % |   |   | 44,012 |   |   |   | 6.44 | % |
| Passbooks                     |   |                   | 184,311 |   |    |   | 25.95 | % |   |   | 53,319 |   |   |   | 7.80 | % |
| Certificates of deposit       |   |                   | 447,889 |   |    |   | 63.05 | % |   |   | 554,747 |   |   |   | 81.12 | % |
| Non-interest bearing accounts |   |                   | 15,434  |   |    |   | 2.17 | % |   |   | 18,975 |   |   |   | 2.77 | % |
|                          |   |                   |    |   |    |   |   |   |   |   |   |   |   |   |   |   |
| Total deposits                |   | $                      | 710,329 |   |    |   | 100.00 | % |   | $ | 683,866 |   |   |   | 100.00 | % |

----

|                         |   | Amount                 |    |
|------------------------------|--------|------------------------|---------|
|                         |   | (dollars in thousands) |    |
| One year or less             |   | $                      | 337,902 |   |
| More than 1 year to 2 years  |   |                   | 37,425  |   |
| More than 2 years to 3 years |   |                   | 54,045  |   |
| More than 3 years to 4 years |   |                   | 12,400  |   |
| More than 4 years to 5 years |   |                   | 6,117   |   |
|                         |   | $                      | 447,889 |   |

|                    |   | For Years Ended December 31, |   |
|-------------------------|--------|------------------------------|--------|
|                    |   | 2009                         |   |   | 2008 |   |   | 2007 |   |
|                    |   | (dollars in thousands)       |   |
|                    |   |                         |   |   |   |   |   |   |   |
| NOW accounts            |   | $                            | 65     |   |   | $ | 102 |   |   | $ | 115 |   |
| Money market accounts   |   |                         | 626    |   |   |   | 1,295 |   |   |   | 3,068 |   |
| Passbooks               |   |                         | 2,589  |   |   |   | 633 |   |   |   | 436 |   |
| Certificates of deposit |   |                         | 16,502 |   |   |   | 23,920 |   |   |   | 25,728 |   |
|                    |   | $                            | 19,782 |   |   | $ | 25,950 |   |   | $ | 29,347 |   |

| Rate             |   |   | Amount |    |   | Maturity |       |
|------------------|--------|--------|--------|---------|--------|----------|------------|
| 5.000            | %      |   | $      | 10,000  |   |     | 2010       |   |
| -                | %      |   |   | -       |   |     | 2011       |   |
| -                | %      |   |   | -       |   |     | 2012       |   |
| -                | %      |   |   | -       |   |     | 2013       |   |
| 2.940% to 4.210% |   |   |   | 25,000  |   |     | 2014       |   |
| 2.580% to 4.340% |   |   |   | 90,000  |   |     | Thereafter |   |
|             |   |   | $      | 125,000 |   |     |       |   |

----

----

----

----

|                                    |   |             |    |   |     |   |   | Weighted  |   |   |      |   |
|-----------------------------------------|--------|------------------|---------|--------|----------|--------|--------|-----------|--------|--------|-----------|--------|
|                                    |   |             |    |   | Weighted |   |   | Average   |   |   | Aggregate |   |
|                                    |   |             |    |   | Average  |   |   | Remaining |   |   | Intrinsic |   |
|                                    |   | Shares           |    |   | Price    |   |   | Life      |   |   | Value     |   |
| Options outstanding, December 31, 2007  |   |             | 122,815 |   |     | $      | 15.85  |      |   |   |      |   |   |   |
| Options granted                         |   |             | -       |   |     |   | -      |      |   |   |      |   |   |   |
| Options exercised                       |   |             | -       |   |     |   | -      |      |   |   |      |   |   |   |
| Options forfeited                       |   |             | (7,865  | )      |     |   | 15.62  |      |   |   |      |   | $ | - |   |
| Options outstanding, December 31, 2008  |   |             | 114,950 |   |     |   | 15.87  |      |   |   |      |   |   |   |   |
| Options granted                         |   |             | -       |   |     |   | -      |      |   |   |      |   |   |   |   |
| Options exercised                       |   |             | -       |   |     |   | -      |      |   |   |      |   |   |   |   |
| Options forfeited                       |   |             | (4,235  | )      |     |   | 15.62  |      |   |   |      |   |   |   |   |
| Options outstanding, December 31, 2009  |   |             | 110,715 |   |     | $      | 15.88  |      |   |   | 1.14      |   |   | $ | - |   |
| Options exercisable, December 31, 2009  |   |             | 86,999  |   |     | $      | 15.87  |      |   |   | 1.14      |   |   | $ | - |   |
| Option price range at December 31, 2009 |   | $15.62 to $17.18 |    |   |     |   |   |

----

|                                             |   |   |    |   | Weighted |   |
|--------------------------------------------------|--------|--------|---------|--------|----------|--------|
|                                             |   |   |    |   | Average  |   |
|                                             |   | Shares |    |   | Price    |   |
| Nonvested options outstanding, December 31, 2008 |   |   | 45,879  |   |     | $      | 15.89 |   |
| Nonvested options granted                        |   |   | -       |   |     |   | - |   |
| Nonvested options vested                         |   |   | (17,928 | )      |     |   | 15.94 |   |
| Nonvested options forfeited                      |   |   | (4,235  | )      |     |   | 15.62 |   |
| Nonvested options outstanding, December 31, 2009 |   |   | 23,716  |   |     | $      | 15.90 |   |

----

|               |   |   Actual     |    |   |  For CapitalAdequacy Purposes |   |   | To Be WellCapitalized UnderPrompt CorrectiveAction Provisions |   |
|--------------------|--------|------------------------|---------|--------|------------------------------------|--------|--------|---------------------------------------------------------------|--------|
|               |   | Amount                 |    |   | %                                  |   |   | Amount                                                        |   |   | % |   |   | Amount |   |   | % |   |
|               |   | (dollars in thousands) |    |
| December 31, 2009  |   |                   |    |   |                               |   |   |                                                          |   |   |   |   |   |   |   |   |   |   |
| Tangible (1)       |   | $                      | 112,340 |   |                               |   | 11.8   | %                                                             |   | $ | 14,431 |   |   |   | 1.50 | % |   |   | N/A |   |   |   | N/A |   |
| Tier I capital (2) |   |                   | 112,340 |   |                               |   | 14.4   | %                                                             |   |   | N/A |   |   |   | N/A |   |   | $ | 46,579 |   |   |   | 6.00 | % |
| Core (1)           |   |                   | 112,340 |   |                               |   | 11.8   | %                                                             |   |   | 38,483 |   |   |   | 4.00 | % |   |   | 48,104 |   |   |   | 5.00 | % |
| Total (2)          |   |                   | 122,032 |   |                               |   | 15.7   | %                                                             |   |   | 62,105 |   |   |   | 8.00 | % |   |   | 77,632 |   |   |   | 10.00 | % |
|               |   |                   |    |   |                               |   |   |                                                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| December 31, 2008  |   |                   |    |   |                               |   |   |                                                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Tangible (1)       |   | $                      | 132,890 |   |                               |   | 13.5   | %                                                             |   | $ | 14,743 |   |   |   | 1.50 | % |   |   | N/A |   |   |   | N/A |   |
| Tier I capital (2) |   |                   | 132,890 |   |                               |   | 16.9   | %                                                             |   |   | N/A |   |   |   | N/A |   |   | $ | 47,047 |   |   |   | 6.00 | % |
| Core (1)           |   |                   | 132,890 |   |                               |   | 13.5   | %                                                             |   |   | 39,314 |   |   |   | 4.00 | % |   |   | 49,142 |   |   |   | 5.00 | % |
| Total (2)          |   |                   | 142,199 |   |                               |   | 18.1   | %                                                             |   |   | 62,730 |   |   |   | 8.00 | % |   |   | 78,412 |   |   |   | 10.00 | % |

----

|                                  |   |                   |   |
|---------------------------------------|--------|------------------------|--------|
|                                  |   | 2009                   |   |   | 2008 |   |   | 2007 |   |
|                                  |   | (dollars in thousands) |   |
|                                  |   |                   |   |   |   |   |   |   |   |
| Current                               |   |                   |   |   |   |   |   |   |   |
|      Federal |   | $                      | (617   | ) |   | $ | 3,747 |   |   | $ | 7,471 |   |
|      State   |   |                   | (117   | ) |   |   | 965 |   |   |   | 1,595 |   |
|                                  |   |                   | (734   | ) |   |   | 4,712 |   |   |   | 9,066 |   |
| Deferred                              |   |                   |   |   |   |   |   |   |   |   |   |   |
|      Federal |   |                   | (7,342 | ) |   |   | (1,461 | ) |   |   | (863 | ) |
|      State   |   |                   | (1,852 | ) |   |   | (378 | ) |   |   | (294 | ) |
|                                  |   |                   | (9,194 | ) |   |   | (1,839 | ) |   |   | (1,157 | ) |
|                                  |   |                   |   |   |   |   |   |   |   |   |   |   |
| Total income tax provision (benefit)  |   | $                      | (9,928 | ) |   | $ | 2,873 |   |   | $ | 7,909 |   |

|                                            |   | 2009                   |   |   | 2008                           |   |   | 2007         |   |
|-------------------------------------------------|--------|------------------------|--------|--------|--------------------------------|--------|--------|--------------|--------|
|                                            |   |  Amount           |   |   | Percent of PretaxIncome (Loss) |   |   |  Amount |   |   | Percent of Pretax Income |   |   |  Amount |   |   | Percent of PretaxIncome |   |
|                                            |   | (dollars in thousands) |   |
| Statutory Federal                               |   |                   |   |   |                           |   |   |         |   |   |   |   |   |   |   |   |   |   |
|      income tax rate   |   | $                      | (8,553 | )      |                           |   | 34.0   | %            |   | $ | 2,375 |   |   |   | 34.0 | % |   | $ | 6,657 |   |   |   | 35.0 | % |
| State tax net of                                |   |                   |   |   |                           |   |   |         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|      Federal income    |   |                   |   |   |                           |   |   |         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|       tax benefit |   |                   | (1,384 | )      |                           |   | 5.5    | %            |   |   | 387 |   |   |   | 5.5 | % |   |   | 846 |   |   |   | 4.5 | % |
| Other adjustments                               |   |                   | 9      |   |                           |   | -      | %            |   |   | 111 |   |   |   | 1.6 | % |   |   | 406 |   |   |   | 2.1 | % |
|                                            |   | $                      | (9,928 | )      |                           |   | 39.5   | %            |   | $ | 2,873 |   |   |   | 41.1 | % |   | $ | 7,909 |   |   |   | 41.6 | % |

----

|                                                                 |   | 2009                   |   |   | 2008   |   |
|----------------------------------------------------------------------|--------|------------------------|--------|--------|--------|--------|
|                                                                 |   | (dollars in thousands) |   |
| Deferred Tax Assets:                                                 |   |                   |   |   |   |   |
|      Allowance for loan losses              |   | $                      | 14,003 |   |   | $      | 5,979 |   |
|      Reserve on foreclosed real estate      |   |                   | 1,084  |   |   |   | 286 |   |
|      Reserve for uncollected interest       |   |                   | 1,079  |   |   |   | 758 |   |
|      State net operating loss carryforwards |   |                   | 772    |   |   |   | 472 |   |
|      Other                                  |   |                   | 13     |   |   |   | 9 |   |
| Total deferred tax assets                                            |   |                   | 16,951 |   |   |   | 7,504 |   |
| Valuation allowance                                                  |   |                   | (768   | )      |   |   | (439 | ) |
| Total deferred tax assets, net of valuation allowance                |   |                   | 16,183 |   |   |   | 7,065 |   |
|                                                                 |   |                   |   |   |   |   |   |   |
| Deferred Tax Liabilities:                                            |   |                   |   |   |   |   |   |   |
|      Federal Home Loan Bank stock dividends |   |                   | (84    | )      |   |   | (84 | ) |
|      Loan origination costs                 |   |                   | (506   | )      |   |   | (715 | ) |
|      Accelerated depreciation               |   |                   | (1,156 | )      |   |   | (875 | ) |
|      Prepaid expenses                       |   |                   | (159   | )      |   |   | (301 | ) |
|      Other                                  |   |                   | 5      |   |   |   | (1 | ) |
| Total deferred tax liabilities                                       |   |                   | (1,900 | )      |   |   | (1,976 | ) |
|                                                                 |   |                   |   |   |   |   |   |   |
| Net deferred tax assets                                              |   | $                      | 14,283 |   |   | $      | 5,089 |   |

----

----

|                                         |   | Fair Value Measurement at December 31, 2009 Using |   |
|----------------------------------------------|--------|---------------------------------------------------|--------|
|                                         |   | Total                                             |   |   | Level 1 |   |   | Level 2 |   |   | Level 3 |   |
|                                         |   |                                              |   |   |   |   |   |   |   |   |   |   |
| Loans accounted for under FASB ASC 310-10-35 |   | $                                                 | 50,403 |   |   |   | - |   |   |   | - |   |   | $ | 50,403 |   |
| Foreclosed real estate                       |   |                                              | 21,574 |   |   |   | - |   |   |   | - |   |   |   | 21,574 |   |

|                                         |   | Fair Value Measurement at December 31, 2008 Using |   |
|----------------------------------------------|--------|---------------------------------------------------|--------|
|                                         |   | Total                                             |   |   | Level 1 |   |   | Level 2 |   |   | Level 3 |   |
|                                         |   |                                              |   |   |   |   |   |   |   |   |   |   |
| Loans accounted for under FASB ASC 310-10-35 |   | $                                                 | 32,054 |   |   |   | - |   |   |   | - |   |   | $ | 32,054 |   |
| Foreclosed real estate                       |   |                                              | 6,317  |   |   |   | - |   |   |   | - |   |   |   | 6,317 |   |

----

----

|                                           |   | Impaired Loans |    |   | Foreclosed Real Estate |   |
|------------------------------------------------|--------|----------------|---------|--------|------------------------|--------|
| Balance at December 31, 2008                   |   | $              | 32,054  |   |                   | $      | 6,317 |   |
|   Transfer to foreclosed real estate |   |           | (22,850 | )      |                   |   | 28,478 |   |
|   Additions                          |   |           | 77,889  |   |                   |   | 413 |   |
|   Additional reserves                |   |           | (10,093 | )      |                   |   | (3,911 | ) |
|   Paid off/sold                      |   |           | (26,597 | )      |                   |   | (9,723 | ) |
| Balance at December 31, 2009                   |   | $              | 50,403  |   |                   | $      | 21,574 |   |

|   |
|--------|

|                          |   | December 31, 2009      |    |   | December 31, 2008 |   |
|-------------------------------|--------|------------------------|---------|--------|-------------------|--------|
|                          |   | CarryingAmount         |    |   | FairValue         |   |   | CarryingAmount |   |   | FairValue |   |
|                          |   | (dollars in thousands) |    |
|                          |   |                   |    |   |              |   |   |   |   |   |   |   |
| Financial Assets              |   |                   |    |   |              |   |   |   |   |   |   |   |
| Cash and cash equivalents     |   | $                      | 51,401  |   |              | $      | 51,401 |   |   | $ | 32,305 |   |   | $ | 32,305 |   |
| Investment securities         |   |                   | 8,031   |   |              |   | 8,055 |   |   |   | 1,345 |   |   |   | 1,329 |   |
| FHLB stock                    |   |                   | 8,609   |   |              |   | 8,609 |   |   |   | 8,694 |   |   |   | 8,694 |   |
| Loans held for sale           |   |                   | 4,845   |   |              |   | 4,845 |   |   |   | 453 |   |   |   | 453 |   |
| Loans receivable, net         |   |                   | 814,234 |   |              |   | 843,780 |   |   |   | 896,006 |   |   |   | 899,991 |   |
| Accrued interest receivable   |   |                   | 3,361   |   |              |   | 3,361 |   |   |   | 4,363 |   |   |   | 4,363 |   |
|                          |   |                   |    |   |              |   |   |   |   |   |   |   |   |   |   |   |
| Financial Liabilities         |   |                   |    |   |              |   |   |   |   |   |   |   |   |   |   |   |
| Deposits                      |   | $                      | 710,329 |   |              | $      | 713,299 |   |   | $ | 683,866 |   |   | $ | 687,067 |   |
| FHLB advances                 |   |                   | 125,000 |   |              |   | 117,799 |   |   |   | 153,000 |   |   |   | 151,142 |   |
| Subordinated debentures       |   |                   | 24,119  |   |              |   | 24,119 |   |   |   | 24,119 |   |   |   | 24,119 |   |
| Accrued interest payable      |   |                   | 760     |   |              |   | 760 |   |   |   | 1,120 |   |   |   | 1,120 |   |
|                          |   |                   |    |   |              |   |   |   |   |   |   |   |   |   |   |   |
| Off Balance Sheet Commitments |   | $                      | -       |   |              | $      | - |   |   | $ | - |   |   | $ | - |   |
|                          |   |                   |    |   |              |   |   |   |   |   |   |   |   |   |   |   |

----

|                                                                                         |   | December 31,           |    |
|----------------------------------------------------------------------------------------------|--------|------------------------|---------|
|                                                                                         |   | 2009                   |    |   | 2008 |   |
|                                                                                         |   | (dollars in thousands) |    |
| Statements of Financial Condition                                                            |   |                   |    |   |   |   |
|                                                                                         |   |                   |    |   |   |   |
| Cash                                                                                         |   | $                      | 4,151   |   |   | $ | 8,289 |   |
| Equity in net assets of subsidiaries:                                                        |   |                   |    |   |   |   |   |   |
|    Bank                                                                       |   |                   | 118,268 |   |   |   | 132,890 |   |
|    Non-Bank                                                                   |   |                   | 5,774   |   |   |   | 4,887 |   |
| Loans, net of allowance for loan losses of    $232 and $41, respectively |   |                   | 947     |   |   |   | 1,157 |   |
| Other assets                                                                                 |   |                   | 1,318   |   |   |   | 1,317 |   |
|                                                                                         |   |                   |    |   |   |   |   |   |
| Total assets                                                                                 |   | $                      | 130,458 |   |   | $ | 148,540 |   |
|                                                                                         |   |                   |    |   |   |   |   |   |
| Subordinated debentures                                                                      |   | $                      | 24,119  |   |   | $ | 24,119 |   |
| Other liabilities                                                                            |   |                   | 108     |   |   |   | 754 |   |
|                                                                                         |   |                   |    |   |   |   |   |   |
| Total liabilities                                                                            |   |                   | 24,227  |   |   |   | 24,873 |   |
|                                                                                         |   |                   |    |   |   |   |   |   |
| Stockholders’ equity                                                                   |   |                   | 106,231 |   |   |   | 123,667 |   |
|                                                                                         |   |                   |    |   |   |   |   |   |
| Total liabilities and stockholders’ equity                                             |   | $                      | 130,458 |   |   | $ | 148,540 |   |

|                                                                          |   | For the Years Ended December 31, |    |
|-------------------------------------------------------------------------------|--------|----------------------------------|---------|
|                                                                          |   | 2009                             |    |   | 2008 |   |   | 2007 |   |
|                                                                          |   | (dollars in thousands)           |    |
| Statements of Operations                                                      |   |                             |    |   |   |   |   |   |   |
|  Interest income                                                         |   | $                                | 76      |   |   | $ | 118 |   |   | $ | 116 |   |
| Interest expense on subordinated debentures                                   |   |                             | 880     |   |   |   | 1,188 |   |   |   | 1,487 |   |
|                                                                          |   |                             |    |   |   |   |   |   |   |   |   |   |
| Net interest expense                                                          |   |                             | (804    | ) |   |   | (1,070 | ) |   |   | (1,371 | ) |
|  Dividends received from subsidiaries                                    |   |                             | 1,567   |   |   |   | 3,393 |   |   |   | 6,182 |   |
| General and administrative expenses                                           |   |                             | 599     |   |   |   | 50 |   |   |   | 282 |   |
|                                                                          |   |                             |    |   |   |   |   |   |   |   |   |   |
|  Income before income taxes and equity in                                |   |                             | 164     |   |   |   | 2,273 |   |   |   | 4,529 |   |
|      undistributed net income (loss) of subsidiaries |   |                             |    |   |   |   |   |   |   |   |   |   |
|                                                                          |   |                             |    |   |   |   |   |   |   |   |   |   |
| Income tax benefit                                                            |   |                             | 342     |   |   |   | 57 |   |   |   | 2 |   |
| Equity in undistributed net income (loss) of subsidiaries                     |   |                             | (15,734 | ) |   |   | 1,783 |   |   |   | 6,580 |   |
|                                                                          |   |                             |    |   |   |   |   |   |   |   |   |   |
| Net income (loss)                                                             |   | $                                | (15,228 | ) |   | $ | 4,113 |   |   | $ | 11,111 |   |

----

|                                                                 |   | For the Years Ended December 31, |    |
|----------------------------------------------------------------------|--------|----------------------------------|---------|
|                                                                 |   | 2009                             |    |   | 2008 |   |   | 2007 |   |
|                                                                 |   | (dollars in thousands)           |    |
|                                                                 |   |                             |    |   |   |   |   |   |   |
| Statements of Cash Flows                                             |   |                             |    |   |   |   |   |   |   |
|                                                                 |   |                             |    |   |   |   |   |   |   |
| Cash Flows from Operating Activities:                                |   |                             |    |   |   |   |   |   |   |
| Net (loss) income                                                    |   | $                                | (15,228 | ) |   | $ | 4,113 |   |   | $ | 11,111 |   |
| Adjustments to reconcile net (loss) income to net                    |   |                             |    |   |   |   |   |   |   |   |   |   |
|      cash provided by operating activities: |   |                             |    |   |   |   |   |   |   |   |   |   |
| Equity in undistributed (earnings) loss of subsidiaries              |   |                             | 15,734  |   |   |   | (1,783 | ) |   |   | (6,580 | ) |
| Provision for loan losses                                            |   |                             | 209     |   |   |   | 41 |   |   |   | - |   |
| (Increase) decrease in other assets                                  |   |                             | (1      | ) |   |   | 311 |   |   |   | (705 | ) |
| Stock-based compensation expense                                     |   |                             | 128     |   |   |   | 128 |   |   |   | 128 |   |
| Increase (decrease) in other liabilities                             |   |                             | (646    | ) |   |   | 61 |   |   |   | 153 |   |
|                                                                 |   |                             |    |   |   |   |   |   |   |   |   |   |
| Cash provided by operating activities                                |   |                             | 196     |   |   |   | 2,871 |   |   |   | 4,107 |   |
|                                                                 |   |                             |    |   |   |   |   |   |   |   |   |   |
| Cash Flows from Investing Activities:                                |   |                             |    |   |   |   |   |   |   |   |   |   |
|      Net decrease in loans                  |   |                             | 2       |   |   |   | 1 |   |   |   | - |   |
|      Investment in subsidiaries             |   |                             | (2,000  | ) |   |   | (23,893 | ) |   |   | (1,440 | ) |
|                                                                 |   |                             |    |   |   |   |   |   |   |   |   |   |
| Cash used in investing activities                                    |   |                             | (1,998  | ) |   |   | (23,892 | ) |   |   | (1,440 | ) |
|  Cash Flows from Financing Activities:                          |   |                             |    |   |   |   |   |   |   |   |   |   |
| Dividends paid on common stock                                       |   |                             | (906    | ) |   |   | (2,416 | ) |   |   | (2,418 | ) |
| Series A preferred stock dividend paid                               |   |                             | (280    | ) |   |   | (35 | ) |   |   | - |   |
| Series B preferred stock dividend paid                               |   |                             | (1,150  | ) |   |   | - |   |   |   | - |   |
| Proceeds from sale of subordinated debentures                        |   |                             | -       |   |   |   | 3,500 |   |   |   | - |   |
| Proceeds from sale of Series A preferred stock, net                  |   |                             | -       |   |   |   | 3,253 |   |   |   | - |   |
| Proceeds from sale of Series B preferred stock, net                  |   |                             | -       |   |   |   | 23,348 |   |   |   | - |   |
| Proceeds from exercise of options                                    |   |                             | -       |   |   |   | - |   |   |   | 13 |   |
| Payment of debt issuance cost                                        |   |                             | -       |   |   |   | (245 | ) |   |   | - |   |
|                                                                 |   |                             |    |   |   |   |   |   |   |   |   |   |
| Cash provided by (used in) financing activities                      |   |                             | (2,336  | ) |   |   | 27,405 |   |   |   | (2,405 | ) |
|                                                                 |   |                             |    |   |   |   |   |   |   |   |   |   |
| Increase (decrease) in cash and cash equivalents                     |   |                             | (4,138  | ) |   |   | 6,384 |   |   |   | 262 |   |
|                                                                 |   |                             |    |   |   |   |   |   |   |   |   |   |
| Cash and cash equivalents at beginning of year                       |   |                             | 8,289   |   |   |   | 1,905 |   |   |   | 1,643 |   |
|                                                                 |   |                             |    |   |   |   |   |   |   |   |   |   |
| Cash and cash equivalents at end of year                             |   | $                                | 4,151   |   |   | $ | 8,289 |   |   | $ | 1,905 |   |

----

|                                                                                                                        |   | First Quarter                                 |   |   | Second Quarter |   |    | Third Quarter |   |   | Fourth Quarter |   |
|-----------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------|--------|--------|----------------|--------|---------|---------------|--------|--------|----------------|--------|
|                                                                                                                        |   | (dollars in thousands, except per share data) |   |
|                                                                                                                        |   |                                          |   |   |           |   |    |          |   |   |           |   |
| Interest income                                                                                                             |   | $                                             | 13,616 |   |           | $      | 12,873  |          |   | $      | 13,347         |   |   | $ | 12,822 |   |
| Interest expense                                                                                                            |   |                                          | 7,211  |   |           |   | 6,877   |          |   |   | 6,296          |   |   |   | 5,667 |   |
|    Net interest income                                                                                       |   |                                          | 6,405  |   |           |   | 5,996   |          |   |   | 7,051          |   |   |   | 7,155 |   |
| Provision for loan losses                                                                                                   |   |                                          | 4,534  |   |           |   | 12,501  |          |   |   | 8,909          |   |   |   | 5,458 |   |
|                                                                                                                        |   |                                          |   |   |           |   |    |          |   |   |           |   |   |   |   |   |
|    Net interest income (loss) after provision for        loan losses |   |                                          | 1,871  |   |           |   | (6,505  | )             |   |   | (1,858         | )      |   |   | 1,697 |   |
| Other income                                                                                                                |   |                                          | 616    |   |           |   | 729     |          |   |   | 570            |   |   |   | 586 |   |
| Other expenses                                                                                                              |   |                                          | 4,546  |   |           |   | 5,708   |          |   |   | 5,980          |   |   |   | 6,628 |   |
|                                                                                                                        |   |                                          |   |   |           |   |    |          |   |   |           |   |   |   |   |   |
| Loss before income tax benefit                                                                                              |   |                                          | (2,059 | )      |           |   | (11,484 | )             |   |   | (7,268         | )      |   |   | (4,345 | ) |
| Income tax benefit                                                                                                          |   |                                          | (714   | )      |           |   | (4,611  | )             |   |   | (2,909         | )      |   |   | (1,694 | ) |
|    Net loss                                                                                                  |   | $                                             | (1,345 | )      |           | $      | (6,873  | )             |   | $      | (4,359         | )      |   | $ | (2,651 | ) |
|                                                                                                                        |   |                                          |   |   |           |   |    |          |   |   |           |   |   |   |   |   |
| Per share data:                                                                                                             |   |                                          |   |   |           |   |    |          |   |   |           |   |   |   |   |   |
|    Loss – basic                                                                                        |   | $                                             | (.18   | )      |           | $      | (.73    | )             |   | $      | (.48           | )      |   | $ | (.31 | ) |
|    Loss – diluted                                                                                      |   | $                                             | (.18   | )      |           | $      | (.73    | )             |   | $      | (.48           | )      |   | $ | (.31 | ) |

|                                                                  |   | First Quarter                                 |   |   | Second Quarter |   |   | Third Quarter |   |   | Fourth Quarter |   |
|-----------------------------------------------------------------------|--------|-----------------------------------------------|--------|--------|----------------|--------|--------|---------------|--------|--------|----------------|--------|
|                                                                  |   | (dollars in thousands, except per share data) |   |
|                                                                  |   |                                          |   |   |           |   |   |          |   |   |           |   |
| Interest income                                                       |   | $                                             | 17,151 |   |           | $      | 15,741 |          |   | $      | 15,048         |   |   | $ | 14,532 |   |
| Interest expense                                                      |   |                                          | 9,234  |   |           |   | 8,363  |          |   |   | 7,924          |   |   |   | 7,982 |   |
|    Net interest income                                 |   |                                          | 7,917  |   |           |   | 7,378  |          |   |   | 7,124          |   |   |   | 6,550 |   |
| Provision for loan losses                                             |   |                                          | 750    |   |           |   | 750    |          |   |   | 2,865          |   |   |   | 3,116 |   |
|                                                                  |   |                                          |   |   |           |   |   |          |   |   |           |   |   |   |   |   |
|    Net interest income after provision for loan losses |   |                                          | 7,167  |   |           |   | 6,628  |          |   |   | 4,259          |   |   |   | 3,434 |   |
| Other income                                                          |   |                                          | 520    |   |           |   | 852    |          |   |   | 737            |   |   |   | 682 |   |
| Other expenses                                                        |   |                                          | 4,086  |   |           |   | 4,734  |          |   |   | 3,988          |   |   |   | 4,485 |   |
|                                                                  |   |                                          |   |   |           |   |   |          |   |   |           |   |   |   |   |   |
| Income (loss) before income tax provision (benefit)                   |   |                                          | 3,601  |   |           |   | 2,746  |          |   |   | 1,008          |   |   |   | (369 | ) |
| Income tax provision (benefit)                                        |   |                                          | 1,466  |   |           |   | 1,125  |          |   |   | 421            |   |   |   | (139 | ) |
|    Net income (loss)                                   |   | $                                             | 2,135  |   |           | $      | 1,621  |          |   | $      | 587            |   |   | $ | (230 | ) |
|                                                                  |   |                                          |   |   |           |   |   |          |   |   |           |   |   |   |   |   |
| Per share data                                                        |   |                                          |   |   |           |   |   |          |   |   |           |   |   |   |   |   |
|    Earnings (loss) – basic                       |   | $                                             | .21    |   |           | $      | .16    |          |   | $      | .06            |   |   | $ | (.04 | ) |
|    Earnings (loss) – diluted                     |   | $                                             | .21    |   |           | $      | .16    |          |   | $      | .06            |   |   | $ | (.04 | ) |

----