# ** **

 

# **UNITED STATES**

# **SECURITIES AND EXCHANGECOMMISSION**

**Washington, DC 20549**

 

**FORM 10-Q**

 

**(Mark One)**

| **x**                                                  | ** ** | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|--------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------|
|                                                   |
| **For the quarterly period ended September  30, 2007** |
| ** **                                             |
| **OR**                                                 |
|                                                   |
| **o**                                                  | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

For the transition period from             to             

 

Commissionfile number: **333-143696**

 

**Bradford Bancorp, Inc.**

(Exact name of registrant as specified in itscharter)

 

| **Maryland**                                                        | **26-0223245**                        |
|---------------------------------------------------------------------|---------------------------------------|
| State or other  jurisdiction of incorporation or organization) | (I.R.S. Employer  Identification No.) |
|                                                                |                                  |
| **6910 York Road, Baltimore, Maryland**                             | **21212**                             |
| (Address of principal  executive offices)                           | (Zip Code)                            |

 

**(410)377-9600**

(Registrant’s telephone number, includingarea code)

 

**N/A**

(Former name, former address and formerfiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.

Yes     o     No     x

 

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer or a non-accelerated filer.  (See definition of “accelerated filer andlarge accelerated filer” in rule 12b-2 of the Exchange Act).

 

Large accelerated filer     o     Acceleratedfiler     o     Non-acceleratedfiler     x

 

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act).

Yes     o     No     x

 

As of December 1,2007, there were 100 shares of the registrant’s common stock outstanding.

 

 

 

----

 

**BRADFORD BANCORP, INC.**

 

**Table of Contents**

** **
| ** **                         | ** **                                                                                                                                     | **Page No.** |
|------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------|--------------|
| **Part I. Financial  Information** | ** **                                                                                                                                     |
| ** **                         | ** **                                                                                                                                     | ** **   |
| Item 1.                            | Financial Statements                                                                                                                           | 1            |
| ** **                         | ** **                                                                                                                                     | ** **   |
|                               | Consolidated  Statements of Financial Condition as of September 30, 2007 (unaudited) and  December 31, 2006                                    | 2            |
| ** **                         | ** **                                                                                                                                     | ** **   |
|                               | Consolidated  Statements of Income and Other Comprehensive Income for the Three and  Nine Months Ended September 30, 2007 and 2006 (unaudited) | 3            |
|                               |                                                                                                                                           |         |
|                               | Consolidated  Statements of Changes in Equity for the Nine Months Ended September 30,  2007 (unaudited)                                        | 4            |
|                               |                                                                                                                                           |         |
|                               | Consolidated  Statements of Cash Flows for the Nine Months Ended September 30,2007 and 2006 (unaudited)                                        | 5            |
|                               |                                                                                                                                           |         |
|                               | Notes to Consolidated Financial Statements                                                                                                     | 6            |
|                               |                                                                                                                                           |         |
| Item 2.                            | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                                    | 10           |
|                               |                                                                                                                                           |         |
| Item 3.                            | Quantitative  and Qualitative Disclosures about Market Risk                                                                                    | 19           |
|                               |                                                                                                                                           |         |
| Item 4.                            | Controls and  Procedures                                                                                                                       | 21           |
|                               |                                                                                                                                           |         |
| **Part  II. Other Information**    | ** **                                                                                                                                     |
|                               |                                                                                                                                           |         |
| Item 1.                            | Legal Proceedings                                                                                                                              | 21           |
|                               |                                                                                                                                           |         |
| Item 1A.                           | Risk Factors                                                                                                                                   | 21           |
|                               |                                                                                                                                           |         |
| Item 2.                            | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                                   | 21           |
|                               |                                                                                                                                           |         |
| Item 3.                            | Defaults Upon  Senior Securities                                                                                                               | 21           |
|                               |                                                                                                                                           |         |
| Item 4.                            | Submission of  Matters to a Vote of Security Holders                                                                                           | 21           |
|                               |                                                                                                                                           |         |
| Item 5.                            | Other Information                                                                                                                              | 21           |
|                               |                                                                                                                                           |         |
| Item 6.                            | Exhibits                                                                                                                                       | 22           |
|                               |                                                                                                                                           |         |
| ** **                         | **Signatures**                                                                                                                                 | 23           |
|                                    |                                                                                                                                                |              |  |

 

 

----

 

**PARTI.  FINANCIAL INFORMATION**

 

**Item 1. Financial Statements**

 

                Bradford Bancorp, Inc., aMaryland corporation, was formed by Bradford Bank (the “Bank”) to become thestock holding company for the Bank upon completion of the Bank’s conversionfrom the mutual holding company form of organization to the stock holdingcompany form of organization.  At September30, 2007, Bradford Bancorp, Inc. was not an operating company.  Therefore, the information presented in thisreport is for the Bank’s mutual holding company, Bradford Bank MHC, and itssubsidiaries.

 

1

----

 

BRADFORD BANK MHC AND SUBSIDIARIES

Consolidated Statements ofFinancial Condition as of September 30, 2007 (unaudited) and December 31, 2006

 
| ** **                                                                                | ** ** | **September 30,  2007** | ** **  | **December 31,  2006** | ** ** |
|-------------------------------------------------------------------------------------------|------------|-------------------------|-------------|------------------------|------------|
| ** **                                                                                | ** ** | ** **              | ** **  | ** **             | ** ** |
| **ASSETS**                                                                                | ** ** | ** **              | ** **  | ** **             | ** ** |
| Cash and noninterest-bearing deposits                                                     |       | $                       | 2,786,393   |                   | $          | 4,335,893 |   |
| Interest-bearing deposits                                                                 |       | 18,449                  |        | 6,082,888              |       |
| Federal funds sold                                                                        |       | 257,414                 |        | 11,816,708             |       |
| Total cash and cash equivalents                                                           |       | 3,062,256               |        | 22,235,489             |       |
|                                                                                      |       |                    |        |                   |       |
| Certificates of deposit in other financial institutions                                   |       | 2,243,000               |        | 3,032,000              |       |
| Investment securities available-for-sale at fair value                                    |       | 86,505,562              |        | 79,375,019             |       |
| Investment securities held-to-maturity, at cost fair value of  $7,294,219 and $17,583,165 |       | 7,550,309               |        | 18,021,514             |       |
|                                                                                      |       |                    |        |                   |       |
| Loans held for sale                                                                       |       | 24,666,792              |        | —                 |       |
| Loans receivable                                                                          |       | 425,920,763             |        | 383,186,560            |       |
| Less allowance for losses on loans                                                        |       | (2,729,016              | )           | (2,397,545             | )          |
| Total loans receivable, net                                                               |       | 423,191,747             |        | 380,789,015            |       |
|                                                                                      |       |                    |        |                   |       |
| Ground rents                                                                              |       | 2,428,661               |        | 356,517                |       |
| Premises and equipment net of depreciation                                                |       | 5,069,424               |        | 4,914,541              |       |
| Federal Home Loan Bank stock — at cost                                               |       | 4,063,700               |        | 3,105,200              |       |
| Accrued interest receivable                                                               |       | 2,992,202               |        | 2,647,928              |       |
| Income taxes receivable                                                                   |       | 905,984                 |        | 4,421                  |       |
| Deferred income taxes                                                                     |       | 1,277,200               |        | 83,387                 |       |
| Goodwill                                                                                  |       | 8,891,954               |        | 3,903,626              |       |
| Intangible assets                                                                         |       | 1,429,067               |        | 1,272,752              |       |
| Other assets                                                                              |       | 4,228,751               |        | 2,783,360              |       |
| Total assets                                                                              |       | $                       | 578,506,609 |                   | $          | 522,524,769 |   |
|                                                                                      |       |                    |        |                   |       |
| **LIABILITIES AND EQUITY**                                                                | ** ** | ** **              | ** **  | ** **             | ** ** |
| **LIABILITIES**                                                                           | ** ** | ** **              | ** **  | ** **             | ** ** |
| Deposits:                                                                                 |       |                    |        |                   |       |
| Non-interest-bearing                                                                      |       | $                       | 5,573,059   |                   | $          | 6,057,962 |   |
| Interest-bearing                                                                          |       | 451,471,469             |        | 422,803,316            |       |
| Total deposits                                                                            |       | 457,044,528             |        | 428,861,278            |       |
|                                                                                      |       |                    |        |                   |       |
| Short-term borrowings                                                                     |       | 3,500,000               |        | 600,000                |       |
| Long-term borrowings                                                                      |       | 70,300,000              |        | 46,300,000             |       |
| Advance payments by borrowers for taxes and insurance                                     |       | 1,177,072               |        | 765,652                |       |
| Income taxes payable                                                                      |       | —                  |        | 93,724                 |       |
| Other liabilities                                                                         |       | 4,118,318               |        | 2,805,942              |       |
| Total liabilities                                                                         |       | 536,139,918             |        | 479,426,596            |       |
|                                                                                      |       |                    |        |                   |       |
| Commitments and contingencies                                                             |       | —                  |        | —                 |       |
|                                                                                      |       |                    |        |                   |       |
| **EQUITY**                                                                                | ** ** | ** **              | ** **  | ** **             | ** ** |
| Retained earnings — substantially restricted                                         |       | 43,319,507              |        | 44,022,130             |       |
| Accumulated other comprehensive loss                                                      |       | (952,816                | )           | (923,957               | )          |
| Total equity                                                                              |       | 42,366,691              |        | 43,098,173             |       |
| **TOTAL LIABILITIES AND EQUITY**                                                          |       | $                       | 578,506,609 |                   | $          | 522,524,769 |   |
|                                                                                           |            |                         |             |                        |            |  |  |  |

 

*See notes to the unaudited financial statements.*

 

2

----

 

BRADFORD BANK MHC AND SUBSIDIARIES

Consolidated Statements ofIncome and Other Comprehensive Income for the

Three and Nine Months Ended September 30, 2007 and 2006

(Unaudited)

 
| ** **                                                                                                                                                                                                  | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                                                                                                                                                  | ** ** | **2007**                              | ** ** | **2006**                             | ** ** | **2007** | ** ** | **2006** | ** ** |
| **INTEREST INCOME**                                                                                                                                                                                         | ** ** | ** **                            | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest and fees on loans                                                                                                                                                                                  |       | $                                     | 7,704,924  |                                 | $          | 6,131,372 |   | $ | 22,288,129 |   | $ | 17,520,904 |   |
| Interest on mortgage-backed securities                                                                                                                                                                      |       | 438,631                               |       | 453,910                              |       | 1,362,112 |   | 1,376,483 |   |
| Interest on other investments-taxable                                                                                                                                                                       |       | 768,073                               |       | 784,985                              |       | 2,515,359 |   | 2,127,694 |   |
| Interest on other investments-nontaxable                                                                                                                                                                    |       | 125,199                               |       | 115,203                              |       | 348,804 |   | 292,764 |   |
| Total interest income                                                                                                                                                                                       |       | 9,036,827                             |       | 7,485,470                            |       | 26,514,404 |   | 21,317,845 |   |
|                                                                                                                                                                                                        |       |                                  |       |                                 |       |   |   |   |   |
| **INTEREST EXPENSE**                                                                                                                                                                                        | ** ** | ** **                            | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest on deposits                                                                                                                                                                                        |       | 4,765,982                             |       | 3,875,542                            |       | 14,048,895 |   | 10,517,166 |   |
| Interest on borrowings                                                                                                                                                                                      |       | 781,584                               |       | 239,672                              |       | 2,002,937 |   | 594,784 |   |
| Total interest expense                                                                                                                                                                                      |       | 5,547,566                             |       | 4,115,214                            |       | 16,051,832 |   | 11,111,950 |   |
|                                                                                                                                                                                                        |       |                                  |       |                                 |       |   |   |   |   |
| **NET INTEREST INCOME**                                                                                                                                                                                     |       | 3,489,261                             |       | 3,370,256                            |       | 10,462,572 |   | 10,205,895 |   |
|                                                                                                                                                                                                        |       |                                  |       |                                 |       |   |   |   |   |
| **PROVISION FOR LOAN LOSSES**                                                                                                                                                                               |       | 125,000                               |       | 60,000                               |       | 344,000 |   | 180,000 |   |
|                                                                                                                                                                                                        |       |                                  |       |                                 |       |   |   |   |   |
| Net interest income after provision for loan losses                                                                                                                                                         |       | 3,364,261                             |       | 3,310,256                            |       | 10,118,572 |   | 10,025,895 |   |
| ** **                                                                                                                                                                                                  | ** ** | ** **                            | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| **NONINTEREST INCOME**                                                                                                                                                                                      | ** ** | ** **                            | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Commission income                                                                                                                                                                                           |       | 140,660                               |       | 93,965                               |       | 449,878 |   | 273,053 |   |
| Service charges on deposit accounts                                                                                                                                                                         |       | 54,440                                |       | 36,256                               |       | 142,922 |   | 113,362 |   |
| Gain (loss) on sale of investments                                                                                                                                                                          |       | —                                |       | 4,760                                |       | — |   | (11,313 | ) |
| Valuation allowance on loans held for sale                                                                                                                                                                  |       | (600,000                              | )          | —                               |       | (600,000 | ) | — |   |
| Miscellaneous income                                                                                                                                                                                        |       | 240,799                               |       | 102,351                              |       | 595,802 |   | 285,571 |   |
| Total noninterest income                                                                                                                                                                                    |       | (164,101                              | )          | 237,332                              |       | 588,602 |   | 660,673 |   |
|                                                                                                                                                                                                        |       |                                  |       |                                 |       |   |   |   |   |
| **NONINTEREST EXPENSES**                                                                                                                                                                                    | ** ** | ** **                            | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Compensation                                                                                                                                                                                                |       | 1,940,144                             |       | 1,703,310                            |       | 5,731,501 |   | 4,891,601 |   |
| Occupancy expense                                                                                                                                                                                           |       | 295,889                               |       | 223,406                              |       | 815,574 |   | 630,603 |   |
| Advertising                                                                                                                                                                                                 |       | 84,471                                |       | 52,264                               |       | 191,543 |   | 117,661 |   |
| Equipment expenses                                                                                                                                                                                          |       | 157,678                               |       | 115,290                              |       | 446,882 |   | 350,913 |   |
| Data processing services                                                                                                                                                                                    |       | 166,805                               |       | 211,772                              |       | 618,624 |   | 624,750 |   |
| Federal deposit insurance                                                                                                                                                                                   |       | 16,518                                |       | 21,445                               |       | 57,553 |   | 62,781 |   |
| Merger related expenses                                                                                                                                                                                     |       | —                                |       | —                               |       | 2,022,415 |   | — |   |
| Other expenses                                                                                                                                                                                              |       | 814,526                               |       | 639,787                              |       | 2,527,697 |   | 1,747,941 |   |
| Total noninterest expenses                                                                                                                                                                                  |       | 3,476,031                             |       | 2,967,274                            |       | 12,411,789 |   | 8,426,250 |   |
|                                                                                                                                                                                                        |       |                                  |       |                                 |       |   |   |   |   |
| **(LOSS) INCOME BEFORE INCOME TAXES**                                                                                                                                                                       |       | (275,871                              | )          | 580,314                              |       | (1,704,615 | ) | 2,260,318 |   |
| ** **                                                                                                                                                                                                  | ** ** | ** **                            | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| **(BENEFIT) PROVISION FOR INCOME TAXES**                                                                                                                                                                    |       | (184,822                              | )          | 200,258                              |       | (1,001,992 | ) | 746,127 |   |
| ** **                                                                                                                                                                                                  | ** ** | ** **                            | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| **NET (LOSS) INCOME**                                                                                                                                                                                       |       | (91,049                               | )          | 380,056                              |       | (702,623 | ) | 1,514,191 |   |
| ** **                                                                                                                                                                                                  | ** ** | ** **                            | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| **OTHER COMPREHENSIVE INCOME**                                                                                                                                                                              | ** ** | ** **                            | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Change in unrealized holding gain (loss) on available-for-sale  securities-net of taxes of $521,064, $619,146, $18,158 and $119,275,  respectively, net of reclassification adjustments for securities sold |       | 828,144                               |       | 984,028                              |       | (28,859 | ) | 189,568 |   |
|                                                                                                                                                                                                        |       |                                  |       |                                 |       |   |   |   |   |
| **COMPREHENSIVE INCOME (LOSS)**                                                                                                                                                                             |       | $                                     | 737,095    |                                 | $          | 1,364,084 |   | $ | (731,482 | ) | $ | 1,703,759 |   |
|                                                                                                                                                                                                             |            |                                       |            |                                      |            |  |  |  |  |  |  |  |  |  |

 

*See notes to the unaudited financial statements.*

 

3

----

 

BRADFORD BANK MHC AND SUBSIDIARIES

ConsolidatedStatements of Changes in Equity for the Nine Months Ended September 30, 2007

(Unaudited)

 
| ** **                                                                          | ** ** | **Retained  Earnings** | ** ** | **Accumulated  Other  Comprehensive  Loss** | ** ** | **Total** | ** ** |
|-------------------------------------------------------------------------------------|------------|------------------------|------------|---------------------------------------------|------------|-----------|------------|
| Balance at January 1, 2007                                                          |       | $                      | 44,022,130 |                                        | $          | (923,957  | )          | $ | 43,098,173 |   |
| Net Loss                                                                            |       | (702,623               | )          | —                                      |       | (702,623  | )          |
| Unrealized holding loss on securities designated as  available for sale, net of tax |       | —                 |       | (28,859                                     | )          | (28,859   | )          |
| Balance at September 30, 2007                                                       |       | $                      | 43,319,507 |                                        | $          | (952,816  | )          | $ | 42,366,691 |   |

 

*See notes to the unaudited financial statements.*

 

4

----

 

 

 

BRADFORDBANK MHC AND SUBSIDIARIES

Consolidated Statements of CashFlows for the Nine Months Ended September 30, 2007 and 2006

(Unaudited)
| ** **                                                                               | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                               | ** ** | **2007**                             | ** ** | **2006** | ** ** |
| **CASH FLOWS FROM OPERATING ACTIVITIES:**                                                | ** ** | ** **                           | ** ** | ** ** | ** ** |
| Interest and fees received on loans and investments                                      |       | $                                    | 25,313,270 |   | $ | 20,395,547 |   |
| Interest paid                                                                            |       | (15,957,160                          | )          | (11,208,082 | ) |
| Other receipts                                                                           |       | 1,188,602                            |       | 671,986 |   |
| Net income taxes paid                                                                    |       | (340,076                             | )          | (704,094 | ) |
| Cash paid to suppliers and employees                                                     |       | (11,884,244                          | )          | (8,449,986 | ) |
| Net cash (used in) provided by operating activities                                      |       | (1,679,608                           | )          | 705,371 |   |
|                                                                                     |       |                                 |       |   |   |
| **CASH FLOWS FROM INVESTING ACTIVITIES:**                                                | ** ** | ** **                           | ** ** | ** ** | ** ** |
| Purchases of investment securities available-for-sale                                    |       | —                               |       | (18,905,389 | ) |
| Proceeds from sales of investment securities available-for-sale                          |       | 1,707,480                            |       | 3,942,016 |   |
| Principal repayments and maturities of investment securities  available-for-sale         |       | 8,492,768                            |       | 7,939,253 |   |
| Purchase of premises and equipment                                                       |       | (572,847                             | )          | (153,364 | ) |
| Redemption of ground rents                                                               |       | 73,214                               |       | 6,000 |   |
| Purchase of Federal Home Loan Bank stock                                                 |       | (478,700                             | )          | (68,300 | ) |
| Net increase in loans                                                                    |       | (28,360,818                          | )          | (31,527,643 | ) |
| Cash purchase paid net of cash acquired for Valley Bancorp, Inc.                         |       | (8,729,887                           | )          | — |   |
| Core deposit and other intangibles acquired                                              |       | (448,021                             | )          | (377,177 | ) |
| Principal repayments and maturities of investment securities held-to-maturity            |       | 351,355                              |       | 577,481 |   |
| Purchase of investment securities held-to-maturity                                       |       | —                               |       | (306,829 | ) |
| Net cash used by investing activities                                                    |       | (27,965,456                          | )          | (38,873,952 | ) |
|                                                                                     |       |                                 |       |   |   |
| **CASH FLOWS FROM FINANCING ACTIVITIES:**                                                | ** ** | ** **                           | ** ** | ** ** | ** ** |
| Net increase (decrease) in:                                                              |       |                                 |       |   |   |
| Deposits                                                                                 |       | (8,839,589                           | )          | 36,515,970 |   |
| Federal funds purchased                                                                  |       | —                               |       | (2,600,000 | ) |
| Advances by borrowers for taxes and insurance                                            |       | 411,420                              |       | 410,782 |   |
| Increase (decrease) in short-term borrowings                                             |       | 2,900,000                            |       | (2,000,000 | ) |
| Increase in long-term borrowings                                                         |       | 16,000,000                           |       | 7,035,000 |   |
| Net cash provided by financing activities                                                |       | 10,471,831                           |       | 39,361,752 |   |
| **(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS**                                     |       | (19,173,233                          | )          | 1,193,171 |   |
| **CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD**                                       |       | 22,235,489                           |       | 6,130,034 |   |
| **CASH AND CASH EQUIVALENTS,****END OF PERIOD**                                          |       | $                                    | 3,062,256  |   | $ | 7,323,205 |   |
| **RECONCILIATION OF NET INCOME TO NET CASH (USED  IN) PROVIDED BY OPERATING ACTIVITIES** |       |                                 |       |   |   |
| Net (loss) income                                                                        |       | $                                    | (702,623   | ) | $ | 1,514,191 |   |
| Adjustments:                                                                             |       |                                 |       |   |   |
| Deferred income taxes                                                                    |       | (866,310                             | )          | 42,033 |   |
| Depreciation and amortization                                                            |       | 507,369                              |       | 468,740 |   |
| Amortization of premiums, discounts, deferred loan fees and  intangible assets           |       | (304,010                             | )          | (55,222 | ) |
| Loan origination costs deferred                                                          |       | (261,143                             | )          | (134,269 | ) |
| Amortization of premium on certificate amounts                                           |       | (74,070                              | )          | (134,600 | ) |
| Loss on sale of investments                                                              |       | —                               |       | 11,313 |   |
| Valuation allowance on loans held for sale                                               |       | 600,000                              |       | — |   |
| Provision for loan losses                                                                |       | 344,000                              |       | 180,000 |   |
| Effect of changes in operating assets and liabilities:                                   |       |                                 |       |   |   |
| Accrued interest receivable                                                              |       | (344,274                             | )          | (577,954 | ) |
| Income taxes receivable                                                                  |       | (382,034                             | )          | — |   |
| Other assets                                                                             |       | (1,415,163                           | )          | 66,106 |   |
| Income taxes payable                                                                     |       | (93,724                              | )          | — |   |
| Other liabilities                                                                        |       | 1,312,374                            |       | (674,967 | ) |
| **NET CASH (USED IN) PROVIDED BY OPERATING  ACTIVITIES**                                 |       | $                                    | (1,679,608 | ) | $ | 705,371 |   |
| **Supplemental information:**                                                            | ** ** | ** **                           | ** ** | ** ** | ** ** |
| Transfer of loans from portfolio to held for sale                                        |       | $                                    | 24,666,792 |   | — |   |
|                                                                                          |            |                                      |            |  |  |  |  |  |  |

** **

***See notes to the unaudited financialstatements***

** **

**5**

----

 

 

** **

**BRADFORD BANK MHC ANDSUBSIDIARIES**

**Notes to the Unaudited FinancialStatements**

###### **September 30, 2007**

 

**(1)           Basisof Presentation**

 

**               **The accompanying unaudited interimconsolidated financial statements of Bradford Bank MHC have been prepared inaccordance with generally accepted accounting principles for interim financialinformation and with the instructions to Form 10-Q and Rule 10-01 of RegulationS-X.  Accordingly, they do not includeall of the information and footnotes required by generally accepted accountingprinciples for complete financial statements. In the opinion of management, all adjustments (consisting only of normalrecurring accruals) considered necessary for a fair presentation have beenincluded.  Such adjustments were of anormal recurring nature.  The results ofoperations for the nine-month period ended September 30, 2007 are notnecessarily indicative of the results that may be expected for the entire yearor any other interim period.  Foradditional information, refer to the financial statements and footnotes theretoof Bradford Bank MHC included in Bradford Bancorp, Inc.’s (the “Company” or “BradfordBancorp”) prospectus which was filed with the Securities and ExchangeCommission (“SEC”) on November 1, 2007, and is available through the SEC’swebsite at www.sec.gov.

 

                In preparingfinancial statements in conformity with U. S. generally accepted accountingprinciples, management is required to make estimates and assumptions thataffect the reported amounts of assets and liabilities and the disclosure ofcontingent assets and liabilities at the date of the financial statements andincome and expenses during the reporting period. Actual results could differsignificantly from those estimates. Material estimates that are particularly susceptible to significantchange in the near term relate to determination of the allowance for loanlosses and the fair values of financial instruments.

 

                Certain priorperiod amounts have been reclassified to correspond with the current periodpresentations.

 

**Principles of Consolidation**

 

                Bradford Bancorp, Inc., a Marylandcorporation, was formed by Bradford Bank (the “Bank”) to become the stockholding company for the Bank upon completion of the Bank’s conversion from themutual holding company form of organization to the stock holding company formof organization.  At September 30, 2007,Bradford Bancorp, Inc. was not an operating company.  Therefore, the information presented in thisreport is for the Bank’s mutual holding company, Bradford Bank MHC, and its subsidiaries.

 

The consolidated financial statements as of September30, 2007 and December 31, 2006 and for the three and nine months endedSeptember 30, 2007 and September 30, 2006 include the accounts of Bradford BankMHC, Bradford Mid-Tier Company, Bradford Bank and any subsidiaries of BradfordBank.  All intercompany balances andtransactions have been eliminated in consolidation.

 

**(2)           Reorganization**

 

                The Bank completedits reorganization into a no-stock mutual holding company structure (the “Reorganization”)on July 15, 2005.  As part of theReorganization, Bradford Bank converted from a federally chartered mutualsavings bank to a federally chartered stock savings bank.  The Bank became a wholly owned subsidiary ofBradford Mid-Tier Company in the Reorganization, which in turn is wholly ownedby Bradford Bank MHC, a mutual holding company.

 

**(3)           Plan of Conversion**

 

**               **The respective Boards of Directors of Bradford Bank, Bradford Mid-Tier Company and Bradford Bank MHC unanimously adopted a plan of conversion on March 16, 2007, as amended on May 23, 2007 and August 8, 2007. Under the plan of conversion, Bradford Bank will convert from the mutual holding company form of organization to the stock holding company form of organization and become a wholly owned subsidiary of Bradford Bancorp, a newly formed Maryland corporation.  Following the conversion, Bradford Bank MHC and Bradford Mid-Tier Company will no longer exist.

 

6

----

 

                The conversion toa stock holding company structure also includes the offering by BradfordBancorp of its common stock to qualifying depositors and borrowers of BradfordBank in a subscription offering and, if necessary, to members of the generalpublic through a community offering and/or a syndicate of registeredbroker-dealers. The amount of capital being raised in the offering is based onan appraisal of Bradford Bancorp.  Mostof the terms of the offering are required by the regulations of the Office ofThrift Supervision.  The Office of ThriftSupervision approved our plan of conversion, subject to the fulfillment ofcertain conditions, including the approval of the plan of conversion byBradford Bank MHC’s members.  The plan ofconversion also provides for the establishment of Bradford Bank Foundation****and our funding of the foundation with $250,000 in cash and$2.75 million in Bradford Bancorp common stock. The establishment of Bradford Bank Foundation****issubject to a separate vote of Bradford Bank MHC’s members at the specialmeeting.

 

In connection with the conversion, Bradford Bancorpwill acquire Patapsco Bancorp in a merger, whereby Patapsco Bancorp will bemerged with and into Bradford Bancorp and Patapsco Bancorp’s wholly ownedsubsidiary, Patapsco Bank, will be merged with and into Bradford Bank.  In connection with the merger, PatapscoBancorp’s stockholders will be given the opportunity to exchange their sharesof Patapsco Bancorp common stock for $23.00 in cash, 2.3 shares of BradfordBancorp common stock, or a combination thereof, subject to the election andproration procedures set forth in the merger agreement.

 

**(4)           Mergerswith Golden Prague Federal Savings and Loan Association and Senator Bank**

 

                On June 20, 2007,Bradford Bank MHC completed the mergers of Golden Prague Federal Savings &Loan Association (“Golden Prague”) and Senator Bank (“Senator”) with and intoBradford Bank.  Bradford Bank MHC, GoldenPrague and Senator entered into separate definitive agreements in January2007.  Since Golden Prague and Senatorwere both mutual institutions, there was no purchase price paid.  The mergers were accounted for using thepooling-of-interests method of accounting and, accordingly, Bradford Bank MHC’sconsolidated financial statements for all periods prior to the mergers havebeen restated to include the accounts of Golden Prague and Senator.  There were no transactions between BradfordBank MHC and Golden Prague and Senator prior to the mergers.

 

                Golden Prague hashistorically reported on a fiscal year ended January 31st and the results ofits operations are included in the financial results of Bradford Bank MHC forthe year ended December 31, 2006.  Therewere no significant events or transactions in the intervening periods thatwould materially affect the financial position or results of operations for theperiods presented.

 

                The net interest income and netincome previously reported by the Company and Golden Prague and Senator and thecombined amounts presented in the accompanying consolidated statements ofincome and other comprehensive income are summarized as follows:

 

| ** **           | ** ** | **(unaudited)**                      | ** ** |
|----------------------|------------|--------------------------------------|------------|
| ** **           | ** ** | **Nine months ended  September 30,** | ** ** |
| ** **           | ** ** | **2007**                             | ** ** | **2006** | ** ** |
|                 |       |                                 |       |   |   |
| Net interest income: |       |                                 |       |   |   |
| Bradford Bank MHC    |       | $                                    | 10,116,688 |   | $ | 9,417,145 |   |
| Golden Prague        |       | 178,441                              |       | 502,882 |   |
| Senator Bank         |       | 167,443                              |       | 285,868 |   |
| Total                |       | $                                    | 10,462,572 |   | $ | 10,205,895 |   |
|                 |       |                                 |       |   |   |
| Net income (loss):   |       |                                 |       |   |   |
| Bradford Bank MHC    |       | $                                    | 480,081    |   | $ | 1,707,307 |   |
| Golden Prague        |       | (862,677                             | )          | (152,868 | ) |
| Senator Bank         |       | (320,025                             | )          | (40,248 | ) |
| Total                |       | $                                    | (702,623   | ) | $ | 1,514,191 |   |
|                      |            |                                      |            |  |  |  |  |  |  |  |

 

7

----

 

 

                Merger related expenses of$2,022,415 are included in the consolidated statement of income and othercomprehensive income for the nine months ended September 30, 2007 and consistof $65,000 for systems conversion costs, $330,371 for professional fees,$349,580 for contract termination fees, $385,000 for termination of the GoldenPrague multiemployer pension plan, $743,464 for severance and consultingcontracts, and $149,000 for other expenses.

 

 

 

**(5)           Acquisitionof Valley Bancorp, Inc.**

 

                On January 19,2007, the Company acquired all of the outstanding common stock of ValleyBancorp, Inc., the parent company of Valley Bank of Maryland.  Valley Bank of Maryland was a communityfinancial institution operating one branch in the northwest suburbs ofBaltimore, Maryland.  The aggregatepurchase price, consisting solely of cash, was $9,310,730 for all of theoutstanding common stock and the cancellation of outstanding options.  Information presented in the accompanyingfinancial statements as of September 30, 2007 includes the assets andliabilities acquired from Valley Bancorp, Inc. and the results of operationssince January 19, 2007.

 

**(6)           Earningsper Share**

 

When presented, basic earnings per share are computedby dividing income available to common stockholders by the weighted averagenumber of common stock outstanding for the period. Diluted earnings per sharereflects the potential dilution that could occur if securities or othercontracts to issue common stock were exercised or converted into common stockor resulted in the issuance of common stock that then shared in the earnings ofthe entity.  Because Bradford Bancorp hadnot issued any shares of common stock to the public as of September 30, 2007,per share earnings data is not meaningful for this quarter or prior comparativeperiods and is therefore not presented.

 

**(7)           RecentAccounting Pronouncements**

 

                In September 2006,the FASB issued Statement No. 158, (“SFAS No. 158”), “Employers’ Accounting forDefined Benefit Pension and Other Postretirement Plans — an amendment of FASBStatements No. 87, 88, 106 and 132(R).” SFAS No. 158 requires a company that sponsors a postretirement benefitplan to fully recognize, as an asset or liability, the over-funded orunder-funded status of its benefit plan in its balance sheet.  The funded status is measured as thedifference between the fair value of the plan’s assets and its benefitobligation (projected benefit obligation for pension plans and accumulatedpostretirement benefit obligation for other postretirement benefit plans).  In years prior to 2006, the funded status ofsuch plans was reported in the notes to the financial statements.  This provision is effective for publiccompanies for fiscal years ending after December 15, 2006.  In addition, SFAS No. 158 also requires acompany to measure its plan assets and benefit obligations as of its year-endbalance sheet date.  Currently, a companyis permitted to choose a measurement date up to three months prior to itsyear-end to measure the plan assets and obligations.  The new provision is effective for allcompanies with fiscal years ending after December 15, 2008.  Bradford Bank MHC adopted SFAS No. 158 as ofDecember 31, 2006.  At that date, thefair value of plan assets exceeded the projected benefit obligation forBradford Bank’s qualified defined benefit plan by $136,032, and the projectedbenefit obligation of its non-qualified defined benefit plans exceeded the fairvalue of plan assets by $230,516. Accordingly, such amounts are included in “Otherassets” and “Other liabilities”, respectively, in the Consolidated Statement ofFinancial Condition as of December 31, 2006.

 

                InFebruary 2006, the FASB issued SFAS No. 155, “*Accounting for Certain Hybrid Financial Instruments”*, whichpermits, but does not require, fair value accounting for any hybrid financialinstrument that contains an embedded derivative that would otherwise requirebifurcation in accordance with SFAS No. 133, “Accounting for DerivativeInstruments and Hedging Activities”.  Thestatement also subjects beneficial interests in securitized financial assets tothe requirements of SFAS No. 133.  Thisstatement is effective for all financial instruments acquired, issued, orsubject to remeasurement for fiscal years beginning after September 15,2006.  The adoption of this Statement onJanuary 1, 2007 did not have a material impact on Bradford Bank MHC’s financialposition, results of operations or cash flows.

 

8

----

 

                In March 2006,the FASB issued SFAS No. 156, *“Accountingfor Servicing of Financial Assets- an amendment of FASB Statement No. 140.”  *The statement amends SFASNo. 140 by (1) requiring the separate accounting for servicing assetsand servicing liabilities, which arise from the sale of financial assets;(2) requiring all separately recognized serving assets and servicingliabilities to be initially measured at fair value, if practicable; and(3) permitting an entity to choose between an amortization method or a fairvalue method for subsequent measurement for each class of separately recognizedservicing assets and servicing liabilities. This statement is effective for fiscal years beginning afterSeptember 15, 2006, with earlier adoption permitted.  The adoption of this Statement on January 1,2007 did not have a material impact on Bradford Bank MHC’s financial position,results of operations or cash flows.

 

                In June 2006,the FASB issued FASB Interpretation No. 48 (“FIN 48”), *“Accounting for Uncertainty in Income Taxes*.”  This interpretation applies to all taxpositions accounted for in accordance with SFAS No. 109, *“Accounting for Income Taxes.”  *FIN 48 clarifies the applicationof SFAS No. 109 by defining the criteria that an individual tax positionmust meet in order for the position to be recognized within the financialstatements and provides guidance on measurement, de-recognition,classification, interest and penalties, accounting in interim periods,disclosure and transition for tax positions. In May 2007, the FASB issued FASB Interpretation No. 48-1, *Definition of Settlement in FASB Interpretation No. 48*,which provides guidance on how an enterprise should determine whether a taxposition is effectively settled for the purpose of recognizing previously unrecognizedtax benefits.  These interpretations areeffective for fiscal years beginning after December 15, 2006.  The adoption of this Statement on January 1,2007 did not have a material impact on Bradford Bank MHC’s financial position,results of operations or cash flows.

 

                InSeptember 2006, the FASB issued SFAS No. 157, *“Fair Value Measurements”. *This Statement defines fair value,establishes a framework for measuring fair value, and expands disclosures aboutfair value measurements.  It clarifies thatfair value is the price that would be received to sell an asset or paid totransfer a liability in an orderly transaction between market participants inthe market in which the reporting entity transacts.  This Statement does not require any new fairvalue measurements, but rather, it provides enhanced guidance to otherpronouncements that require or permit assets or liabilities to be measured atfair value. This Statement is effective for fiscal years beginning afterNovember 15, 2007 for financial assets and liabilities and November 15,2008 for non-financial assets and liabilities, with earlier adoptionpermitted.  Bradford Bank MHC does notexpect that the adoption of this Statement will have a material impact on itsfinancial position, results of operations or cash flows.

                InFebruary 2007, the FASB issued SFAS No. 159, “*The FairValue Option for Financial Assets and Liabilities*”. This statementpermits entities to measure many financial instruments and certain other itemsat fair value.  The objective is toimprove financial reporting by providing entities with the opportunity tomitigate volatility in reported earnings caused by measuring related assets andliabilities differently without having to apply complex hedge accountingprovisions. This pronouncement is effective as of the beginning of an entity’sfirst fiscal year that begins after November 15, 2007.  Bradford Bank MHC is evaluating the impact ofthis new standard, but currently believes that adoption will not have amaterial impact on its financial position or results of operations.

 

9

----

 

**Item 2.    Management’s Discussion and Analysis or Planof Operation**

 

**               **Management’s discussion and analysis of the financialcondition and results of operations at September 30, 2007 and September 30,2006, and for the three and nine months then ended is intended to assist inunderstanding the financial condition and results of operations of BradfordBank MHC.  The information contained inthis item should be read in conjunction with the unaudited financial statementsand the notes and tables thereto, appearing in Part I, Item 1 of this document.

 

**Forward-Looking Statements**

 

                This quarterlyreport contains forward-looking statements that are based on assumptions and maydescribe future plans, strategies and expectations of Bradford Bancorp andBradford Bank MHC.  These forward-lookingstatements are generally identified by use of the words “believe,” “expect,” “intend,”“anticipate,” “estimate,” “project” or similar expressions.

 

Bradford Bancorp and Bradford Bank MHC’s ability topredict results or the actual effect of future plans or strategies isinherently uncertain.  Factors whichcould have a material adverse effect on the operations of Bradford Bancorp andits subsidiaries include, but are not limited to, changes in interest rates,national and regional economic conditions, legislative and regulatory changes,monetary and fiscal policies of the U.S. Government, including policies of theU.S. Treasury and the Federal Reserve Board, the quality and composition of theloan or investment portfolios, demand for loan products, deposit flows,competition, demand for financial services in Bradford Bancorp and BradfordBank’s market area, changes in real estate market values in Bradford Bancorpand Bradford Bank’s market area, changes in relevant accounting principles andguidelines and inability of third party service providers to perform.  Additional risks and uncertainties aredescribed in Bradford Bancorp’s prospectus which was filed with the SEC onNovember 1, 2007, and is available through the SEC’s website at www.sec.gov.  These risks and uncertainties should beconsidered in evaluating forward-looking statements and undue reliance shouldnot be placed on such statements.  Exceptas required by applicable law or regulation, Bradford Bancorp does notundertake, and specifically disclaims any obligation, to release publicly theresult of any revisions that may be made to any forward-looking statements toreflect events or circumstances after the date of the statements or to reflectthe occurrence of anticipated or unanticipated events.

 

**General**

 

                Bradford Bancorp, Inc. is a Maryland corporation thatwas formed by Bradford Bank to become the stock holding company for BradfordBank upon completion of Bradford Bank’s conversion from the mutual holdingcompany form of organization to the stock holding company form oforganization.  At September 30, 2007,Bradford Bancorp, Inc. was not an operating company.  Therefore, the information presented in thisreport is for Bradford Bank’s mutual holding company, Bradford Bank MHC, andits subsidiaries.

 

                Bradford Bank is afederally chartered savings bank that operates from its corporate headquartersand nine full-service locations in the greater Baltimore metropolitanarea.  We offer a variety of deposit andloan products to individuals and small businesses, most of which are located inour primary market area, which consists of Baltimore City and Anne Arundel,Baltimore and Howard Counties, Maryland. Since 2001, we have emphasized commercial lending and have grown ourcommercial loan portfolio (including commercial real estate, acquisition,development and construction, commercial construction and commercial businessloans) to $177.5 million, or 39.5% of total loans at September 30, 2007.  At September 30, 2007, Bradford Bank MHC hadtotal consolidated assets of $578.5 million, deposits of $457.0 million andtotal equity of $42.4 million.  TheFederal Deposit Insurance Corporation insures Bradford Bank’s savings accountsup to the applicable legal limits. Bradford Bank is a member of the Federal Home Loan Bank System.

 

                Simultaneous with the completion of Bradford Bank’sconversion, Bradford Bancorp will acquire Patapsco Bancorp and its wholly ownedsubsidiary, Patapsco Bank.  Patapsco Bankis a Maryland chartered commercial bank that operates out of five locations inthe greater Baltimore metropolitan area. In the future, Bradford Bancorp might also acquire or organize otheroperating subsidiaries, including other financial institutions or financialservices companies, although it currently has no specific plans or agreementsto do so other than the merger with Patapsco Bancorp.

 

10

----

 

**Comparison of Financial Condition at September 30,2007 and December 31, 2006**

 

***                Overview.***  In January 2007, BradfordBancorp acquired Valley Bancorp and its subsidiary, Valley Bank.  The assets of Valley Bancorp, excludingintangibles, totaled $49.4 million and is the primary reason for the increasein Bradford Bancorp’s assets of $56.0 million from December 31, 2006 toSeptember 30, 2007.  The acquisition ofValley Bancorp included investments of $6.6 million, net loans of $38.7million, and ground rents of $2.1 million, and is the primary reason for theincreases in those balance sheet line items from December 31, 2006 to September30, 2007.  The loan portfolio of ValleyBancorp was primarily composed of $16.1 million of residential mortgage loans,$7.5 million of residential acquisition, development and construction loans,and $4.0 million of commercial real estate loans.  Because the purchase price paid exceeded thenet book value of Valley Bancorp, goodwill increased by $4.9 million and otherintangible assets increased by $0.4 million. The cash purchase price of $9.3 million for all the outstanding stock ofValley Bancorp accounts for a portion of the $19.2 million decrease in cash andcash equivalents in the nine months. Deposits assumed with Valley Bancorp totaled $37.3 million andborrowings totaled $8.0 million.

 

Excludingthe effect of the funding of the purchase price of the Valley Bancorpacquisition, cash and cash equivalents decreased by an additional $9.9 millionto fund loan growth, and the loan portfolio, including loans held for sale,increased by $28.7 million, or 7.5%.  Thecomposition of the $28.7 million increase was primarily indirect automobileloans ($12.8 million, or 114.0%), commercial real estate loans ($6.3 million,or 14.9%), and consumer marine loans acquired from a broker ($4.1million).  At September 30, 2007, theCompany reclassified the indirect automobile portfolio net of the valuationallowance to loans held for sale as discussed below under “Noninterest Income”.Borrowings increased by $18.9 million over the borrowings assumed with ValleyBancorp primarily to fund loan growth. Excluding the $37.3 million in deposits assumed with Valley Bancorp,deposits decreased $9.2 million, or 2.1%, due to competitive pressure and lowerrate offerings during the period as part of a strategy to reduce the overallcost of funds.  Retained earningsdecreased $703,000, or 1.6%, at September 30, 2007 as a result of the net lossfor the period.

 

***Loans.***** Our primary lending activity isthe origination of loans secured by real estate.  We originate one- to four-family residential,commercial real estate, acquisition, development and construction, commercialconstruction, commercial business and consumer loans.  The following table sets forth the composition of ourloan portfolio at the dates indicated.

 
| ** **                                | ** ** | **September 30, 2007**     | ** ** | **December 31, 2006** | ** ** |
|-------------------------------------------|------------|----------------------------|------------|-----------------------|------------|
| ** **                                | ** ** | **Amount**                 | ** ** | **Percent**           | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| ** **                                | ** ** | **(Dollars in thousands)** | ** ** |
| Residential real estate:                  |       |                       |       |                  |       |   |   |   |   |
| One- to four-family                       |       | $                          | 202,858    |                  | 45.10      | % | $ | 185,068 |   | 48.38 | % |
| Commercial real estate                    |       | 66,392                     |       | 14.76                 |       | 55,831 |   | 14.59 |   |
| Acquisition, development and construction |       | 78,194                     |       | 17.38                 |       | 71,371 |   | 18.66 |   |
| Commercial construction                   |       | 11,153                     |       | 2.48                  |       | 9,205 |   | 2.41 |   |
| Total real estate mortgage loans          |       | 358,597                    |       | 79.72                 |       | 321,475 |   | 84.04 |   |
| Commercial business                       |       | 21,767                     |       | 4.84                  |       | 17,118 |   | 4.47 |   |
| Consumer:                                 |       |                       |       |                  |       |   |   |   |   |
| Home equity loans                         |       | 20,235                     |       | 4.50                  |       | 16,208 |   | 4.24 |   |
| Home equity lines of credit               |       | 15,584                     |       | 3.46                  |       | 13,747 |   | 3.59 |   |
| Auto loans                                |       | 1,226                      |       | 5.63                  |       | 12,426 |   | 3.25 |   |
| Other consumer loans                      |       | 8,321                      |       | 1.85                  |       | 1,575 |   | 0.41 |   |
| Total consumer loans                      |       | 45,366                     |       | 15.44                 |       | 43,956 |   | 11.49 |   |
|                                      |       |                       |       |                  |       |   |   |   |   |
| Total loans                               |       | 425,730                    |       | 100.00                | %          | 382,549 |   | 100.00 | % |
|                                      |       |                       |       |                  |       |   |   |   |   |
| Less:                                     |       |                       |       |                  |       |   |   |   |   |
| Net deferred loan fees                    |       | (81                        | )          |                  |       | 241 |   |   |   |
| Premium on loans purchased                |       | 272                        |       |                  |       | 397 |   |   |   |
| Allowance for losses                      |       | (2,729                     | )          |                  |       | (2,398 | ) |   |   |
|                                      |       |                       |       |                  |       |   |   |   |   |
| Loans, net                                |       | $                          | 423,192    |                  |       |   | $ | 380,789 |   |   |   |

 

11

----

 

***Nonperforming Assets. ***Thefollowing table provides information with respect to our nonperforming assetsat the dates indicated.  We did not haveany troubled debt restructurings or any accruing loans past due 90 days or moreat the dates presented.

 

| ** **                                 | ** ** | **September 30,  2007**    | ** ** | **December 31,  2006** | ** ** |
|--------------------------------------------|------------|----------------------------|------------|------------------------|------------|
| ** **                                 | ** ** | **(Dollars in thousands)** | ** ** |
| Nonaccrual loans:                          |       |                       |       |                   |       |
| Real-estate loans                          |       | $                          | 1,213      |                   | $          | 1,266 |   |
| Commercial business                        |       | 196                        |       | 181                    |       |
| Consumer                                   |       | 232                        |       | 121                    |       |
| Total                                      |       | 1,641                      |       | 1,568                  |       |
| Real estate owned                          |       | 370                        |       | 120                    |       |
| Total nonperforming assets                 |       | $                          | 2,011      |                   | $          | 1,688 |   |
|                                       |       |                       |       |                   |       |
| Total nonperforming loans to total loans   |       | 0.39                       | %          | 0.41                   | %          |
| Total nonperforming loans to total assets  |       | 0.28                       | %          | 0.30                   | %          |
| Total nonperforming assets to total assets |       | 0.35                       | %          | 0.32                   | %          |

 

Nonaccrual loans increased $73,000 to $1.64 million atSeptember 30, 2007, compared to $1.57 million at December 31, 2006.  This increaseprimarily resulted from an increase in home equity loans and lines ofcredit classified as nonaccrual.

 

***Securities. ***At September 30, 2007, the investment securities portfolio was $94.1million, or 16.3% of total assets.  Atthat date, 82.6% of the investment portfolio was invested in U.S. governmentand agency securities and mortgage-backed securities.  The remainder was invested primarily inmunicipal bonds, trust preferred securities and equity securities.

 

The following table sets forth the amortized cost andfair value of our securities portfolio at the dates indicated.

 
| ** **                            | ** ** | **September 30, 2007**     | ** ** | **December 31, 2006** | ** ** |
|---------------------------------------|------------|----------------------------|------------|-----------------------|------------|
| ** **                            | ** ** | **Amortized  Cost**        | ** ** | **Fair  Value**       | ** ** | **Amortized  Cost** | ** ** | **Fair  Value** | ** ** |
| ** **                            | ** ** | **(Dollars in thousands)** | ** ** |
| Securities available-for-sale:        |       |                       |       |                  |       |   |   |   |   |
| U.S. Government and agency securities |       | $                          | 43,804     |                  | $          | 43,529 |   | $ | 39,434 |   | $ | 38,930 |   |
| Mortgage-backed securities            |       | 26,997                     |       | 26,572                |       | 22,310 |   | 22,008 |   |
| Trust preferred securities            |       | 4,500                      |       | 4,502                 |       | 4,500 |   | 4,561 |   |
| Municipal bonds                       |       | 11,592                     |       | 11,486                |       | 11,891 |   | 11,951 |   |
| Equity securities and mutual funds    |       | 408                        |       | 417                   |       | 1,964 |   | 1,925 |   |
| Total securities available-for-sale   |       | $                          | 87,301     |                  | $          | 86,506 |   | $ | 80,099 |   | $ | 79,375 |   |
|                                  |       |                       |       |                  |       |   |   |   |   |
| Securities held-to-maturity:          |       |                       |       |                  |       |   |   |   |   |
| U.S. Government and agency securities |       | $                          | —     |                  | $          | — |   | $ | 3,848 |   | $ | 3,705 |   |
| Mortgage-backed securities            |       | 7,550                      |       | 7,294                 |       | 14,174 |   | 13,878 |   |
| Total securities held-to-maturity     |       | 7,550                      |       | 7,294                 |       | 18,022 |   | 17,583 |   |
| Total                                 |       | $                          | 94,851     |                  | $          | 93,800 |   | $ | 98,121 |   | $ | 96,958 |   |
|                                       |            |                            |            |                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

                The amortized costof the securities available-for-sale increased $7.2 million , or 9.0%, betweenDecember 31, 2006 and September 30, 2007 as a result of the change inclassification of securities at the acquisition date of investment securitiesacquired with Golden Prague and Senator from held-to-maturity toavailable-for-sale.  The amortized costof the securities held-to-maturity decreased $10.5 million, or 58.1%, betweenDecember 31, 2006 and September 30, 2007 primarily for the same reason asavailable-for-sale securities increased. In general, total investment securities decreased for maturities andmortgage backed security payments.

 

12

----

 

 

 

***Deposits***. Our primary source of funds is our deposit accounts,which are comprised of demand deposits, NOW accounts, passbook accounts, moneymarket deposit accounts and certificates of deposits.

 

The following table sets forth the balances of ourdeposit products at the dates indicated.

 
| ** **                          | ** ** | **September 30, 2007**     | ** ** | **December 31, 2006** | ** ** |
|-------------------------------------|------------|----------------------------|------------|-----------------------|------------|
| ** **                          | ** ** | **Amount**                 | ** ** | **%**                 | ** ** | **Amount** | ** ** | **%** | ** ** |
| ** **                          | ** ** | **(Dollars in thousands)** | ** ** |
| Noninterest-bearing demand deposits |       | $                          | 5,573      |                  | 1.22       | % | $ | 6,058 |   | 1.41 | % |
| Interest-bearing demand deposits    |       | 50,115                     |       | 10.96                 |       | 42,275 |   | 9.86 |   |
| Savings accounts                    |       | 28,553                     |       | 6.25                  |       | 32,724 |   | 7.63 |   |
| Certificates of deposit             |       | 372,392                    |       | 81.48                 |       | 347,555 |   | 81.04 |   |
| Other deposits                      |       | 412                        |       | 0.09                  |       | 249 |   | 0.06 |   |
| Total                               |       | $                          | 457,045    |                  | 100.00     | % | $ | 428,861 |   | 100.00 | % |

 

Total deposits increased to $457.0 million during thenine months ended September 30, 2007, an increase of $28.1 million, or 6.6%, due to the acquisition ofValley Bank.  Excluding the effect of thedeposits assumed from Valley Bank, deposits declined $9.2 million, or 2.1%.

 

***Borrowings***. We utilize borrowings from a variety of sources tosupplement our supply of funds for loans and investments.  The following sets forth informationconcerning our borrowings for the periods indicated.

 
| ** **                                                                  | ** ** | **Nine Months  Ended  September 30, 2007** | ** ** | **Year Ended  December 31, 2006** | ** ** |
|-----------------------------------------------------------------------------|------------|--------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                  | ** ** | **(Dollars in thousands)**                 | ** ** |
| Maximum amount of advances outstanding at any month-end during the  period: |       |                                       |       |                              |       |
| FHLB Advances                                                               |       | $                                          | 69,400     |                              | $          | 46,900 |   |
| Other borrowings                                                            |       | 6,500                                      |       | 14,000                            |       |
| Average advances outstanding during the period:                             |       |                                       |       |                              |       |
| FHLB Advances                                                               |       | 53,777                                     |       | 21,514                            |       |
| Other borrowings                                                            |       | 5,659                                      |       | 2,483                             |       |
| Weighted average interest rate during the period:                           |       |                                       |       |                              |       |
| FHLB Advances                                                               |       | 4.48                                       | %          | 3.96                              | %          |
| Other borrowings                                                            |       | 6.58                                       | %          | 5.49                              | %          |
| Balance outstanding at end of period:                                       |       |                                       |       |                              |       |
| FHLB Advances                                                               |       | 67,300                                     |       | 46,900                            |       |
| Other borrowings                                                            |       | 6,500                                      |       | —                            |       |
| Weighted average interest rate at end of period:                            |       |                                       |       |                              |       |
| FHLB Advances                                                               |       | 4.20                                       | %          | 4.68                              | %          |
| Other borrowings                                                            |       | 6.17                                       | %          | —                            |       |
|                                                                             |            |                                            |            |                                   |            |  |  |

 

**Results of Operations for the Three and NineMonths Ended September 30, 2007 and September 30, 2006**

 

**                *General. ***For the three and nine month periodsended September 30, 2007 as compared to 2006, net income declined principallyas a result of merger related expenses, impairment loss on the potential saleof the indirect automobile loan portfolio, increased interest expense andoperating costs.  Net income decreased by$471,000, or 124.0%, during the three months ended September 30, 2007 ascompared to the three months ended September 30, 2006.  Net income decreased by $2.2 million, or146.5%, for the nine months ended September 30, 2007 as compared to the sameperiod of the prior year.  The three andnine month comparisons were affected by recognition of a $600,000 valuationallowance to reflect the impairment of the indirect automobile loan portfoliothat was classified as held for sale as discussed below under “NoninterestIncome.”  The nine-month comparison wasalso affected by the merger costs related to the acquisition of Golden Pragueand Senator Bank which amounted to $2.0 million.  Interest expense increased by 34.8% and44.5%, respectively, for the same periods and other

 

13

----

 

expenses increased by 17.2% and 47.3%, respectively,for these periods, including the $2.0 million of merger related costs.

 

                ***Net Interest Income. ***Net interest income increasedduring both the three and nine month periods ended September 30, 2007 comparedto the three and nine month periods ended September 30, 2006 primarily due toloan growth.  Interest income increasedduring these periods as a result of the increases in the average balances ofloans and the increases in the average yields on loans and investments.  The average yields increased as a result ofrecent loan growth priced at current market yields.  Interest expense increased over the samethree and nine month periods as a result of higher balances of deposits andborrowings combined with higher weighted average rates paid onliabilities.  As a result of the cost offunds increasing more than the yield on loans and investments, the net interestmargin fell from 2.89% in the 2006 three month period to 2.57% in the 2007three month period and from 2.98% in the 2006 nine month period to 2.64% in the2007 nine month period.  Although generalmarket rates of interest stopped rising in June 2006, Bradford Bancorpexperienced rising deposit costs as maturing certificates of deposit repricedfrom lower rates at the date of origination to current market rates.  In addition, the competitive deposit marketin which Bradford Bancorp operates caused interest rates on time depositproducts to increase to meet competitive pricing pressures.

 

***                Analysisof Net Interest Income.***

** **
| ** **                                        | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|---------------------------------------------------|------------|--------------------------------------|------------|-------------------------------------|------------|
| **(Dollars in thousands)**                        | ** ** | **2007**                             | ** ** | **2006**                            | ** ** | **Change** | ** ** | **% Change** | ** ** | **2007** | ** ** | **2006** | ** ** | **Change** | ** ** | **%  Change** | ** ** |
| ** **                                        | ** ** | ** **                           | ** ** | ** **                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Components  of net interest income**            | ** ** | ** **                           | ** ** | ** **                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Loans                                             |       | $                                    | 7,705      |                                | $          | 6,131 |   | $ | 1,574 |   | 25.67 | % | $ | 22,288 |   | $ | 17,521 |   | $ | 4,767 |   | 27.21 | % |
| Investment  securities (tax-equivalent basis) (1) |       | 1,389                                |       | 1,409                               |       | (20 | ) | (1.42 | ) | 4,397 |   | 3,938 |   | 459 |   | 11.66 |   |
| Total interest  income (tax-equivalent basis)     |       | 9,094                                |       | 7,540                               |       | 1,554 |   | 20.61 |   | 26,685 |   | 21,459 |   | 5,226 |   | 24.35 |   |
| Deposits                                          |       | 4,766                                |       | 3,875                               |       | 891 |   | 22.99 |   | 14,049 |   | 10,517 |   | 3,532 |   | 33.58 |   |
| Borrowings                                        |       | 782                                  |       | 240                                 |       | 542 |   | 225.83 |   | 2,003 |   | 595 |   | 1,408 |   | 236.64 |   |
| Total interest  expense                           |       | 5,548                                |       | 4,115                               |       | 1,433 |   | 34.82 |   | 16,052 |   | 11,112 |   | 4,940 |   | 44.46 |   |
| Net interest  income (tax-equivalent basis)       |       | 3,546                                |       | 3,425                               |       | 121 |   | 3.53 |   | 10,633 |   | 10,347 |   | 286 |   | 2.76 |   |
| **Average  yield and rates paid**                 | ** ** | ** **                           | ** ** | ** **                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest-earning  assets (tax-equivalent basis)   |       | 6.54                                 | %          | 6.33                                | %          | 0.21 | bp | 3.32 | % | 6.64 | % | 6.20 | % | 0.44 | bp | 7.10 | % |
| Interest-bearing  liabilities                     |       | 4.21                                 |       | 3.77                                |       | 0.44 |   | 11.67 |   | 4.23 |   | 3.50 |   | 0.73 |   | 20.86 |   |
| Interest rate  spread (tax-equivalent basis)      |       | 2.33                                 |       | 2.56                                |       | (0.23 | ) | (8.98 | ) | 2.41 |   | 2.70 |   | (0.29 | ) | (10.74 | ) |
| Net interest  margin (tax-equivalent basis)       |       | 2.57                                 |       | 2.89                                |       | (0.32 | ) | (11.07 | ) | 2.64 |   | 2.98 |   | (0.34 | ) | (11.41 | ) |
| **Average  balances**                             | ** ** | ** **                           | ** ** | ** **                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Loans                                             |       | $                                    | 445,001    |                                | $          | 359,918 |   | $ | 85,083 |   | 23.64 | % | $ | 425,622 |   | $ | 351,233 |   | $ | 74,389 |   | 21.18 | % |
| Investment  securities                            |       | 106,820                              |       | 112,497                             |       | (5,677 | ) | (5.05 | ) | 111,815 |   | 111,807 |   | 8 |   | 0.01 |   |
| Deposits                                          |       | 454,125                              |       | 412,854                             |       | 41,271 |   | 10.00 |   | 447,776 |   | 404,966 |   | 42,810 |   | 10.57 |   |
| Borrowings                                        |       | 68,485                               |       | 20,638                              |       | 47,847 |   | 231.84 |   | 59,378 |   | 19,727 |   | 39,651 |   | 201.00 |   |

----

(1)          Interest and rates are presented on atax-equivalent basis utilizing a federal tax rate of 34.0% and a state tax rateof 7.0%.  See “*—Explanationof Use of Non-GAAP Financial Measures*.”

 

14

----

 

                Thefollowing table summarizes average balances and average yields and costs forthe three and nine months ended September 30, 2007 and 2006.  Interest and rates are presented on atax-equivalent basis utilizing a federal tax rate of 34.0% and a state tax rateof 7.0%.  See “*—Explanationof Use of Non-GAAP Financial Measures*.”

 
| ** **                                                | ** ** | **Three  Months Ended September 30,** | ** ** | **Nine  Months Ended September 30,** | ** ** |
|-----------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                                                | ** ** | **2007**                              | ** ** | **2006**                             | ** ** | **2007** | ** ** | **2006** | ** ** |
| **(Dollars  in thousands)**                               | ** ** | **Average  Balance**                  | ** ** | **Interest  And  Dividends**         | ** ** | **Yield/  Cost** | ** ** | **Average  Balance** | ** ** | **Interest  And  Dividends** | ** ** | **Yield/  Cost** | ** ** | **Average  Balance** | ** ** | **Interest  And  Dividends** | ** ** | **Yield/  Cost** | ** ** | **Average  Balance** | ** ** | **Interest  And  Dividends** | ** ** | **Yield/  Cost** | ** ** |
| ** **                                                | ** ** | ** **                            | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Assets:**                                               |       |                                  |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-earning assets:                                  |       |                                  |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans                                                     |       | $                                     | 445,001    |                                 | $          | 7,705 |   | 6.87 | % | $ | 359,918 |   | $ | 6,131 |   | 6.76 | % | $ | 425,622 |   | $ | 22,288 |   | 7.00 | % | $ | 351,233 |   | $ | 17,521 |   | 6.67 | % |
| Mortgage-backed securities                                |       | 35,409                                |       | 440                                  |       | 4.93 |   | 38,514 |   | 514 |   | 5.29 |   | 35,667 |   | 1,371 |   | 5.14 |   | 40,698 |   | 1,455 |   | 4.78 |   |
| Municipal bonds (tax-equivalent basis)                    |       | 11,595                                |       | 150                                  |       | 5.13 |   | 11,497 |   | 146 |   | 5.04 |   | 11,675 |   | 451 |   | 5.16 |   | 9,844 |   | 371 |   | 5.04 |   |
| U. S. government agency securities (tax-equivalent basis) |       | 45,089                                |       | 578                                  |       | 5.09 |   | 44,978 |   | 546 |   | 4.82 |   | 45,360 |   | 1,748 |   | 5.15 |   | 42,166 |   | 1,424 |   | 4.52 |   |
| Other interest-earning assets                             |       | 14,727                                |       | 221                                  |       | 5.95 |   | 17,508 |   | 203 |   | 4.60 |   | 19,112 |   | 827 |   | 5.79 |   | 19,099 |   | 688 |   | 4.82 |   |
| Total interest-earning assets                             |       | 551,821                               |       | 9,094                                |       | 6.54 |   | 472,415 |   | 7,540 |   | 6.33 |   | 537,436 |   | 26,685 |   | 6.64 |   | 463,040 |   | 21,459 |   | 6.20 |   |
|                                                      |       |                                  |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Noninterest-earning assets                                |       | 21,143                                |       |                                 |       |   |   | 14,597 |   |   |   |   |   | 20,894 |   |   |   |   |   | 14,773 |   |   |   |   |   |
| Total assets                                              |       | 572,964                               |       |                                 |       |   |   | 487,012 |   |   |   |   |   | 558,330 |   |   |   |   |   | 477,813 |   |   |   |   |   |
|                                                      |       |                                  |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Liabilities and equity:**                               |       |                                  |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing liabilities:                             |       |                                  |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Savings deposits                                          |       | 29,459                                |       | 84                                   |       | 1.13 |   | 30,905 |   | 107 |   | 1.37 |   | 30,067 |   | 245 |   | 1.09 |   | 35,349 |   | 347 |   | 1.31 |   |
| NOW deposits                                              |       | 36,757                                |       | 238                                  |       | 2.57 |   | 23,129 |   | 108 |   | 1.85 |   | 34,221 |   | 631 |   | 2.47 |   | 19,759 |   | 217 |   | 1.47 |   |
| Money market deposits                                     |       | 14,454                                |       | 95                                   |       | 2.61 |   | 16,069 |   | 58 |   | 1.43 |   | 15,945 |   | 270 |   | 2.26 |   | 19,610 |   | 211 |   | 1.44 |   |
| Certificates of deposit                                   |       | 373,455                               |       | 4,349                                |       | 4.62 |   | 342,751 |   | 3,602 |   | 4.17 |   | 367,543 |   | 12,903 |   | 4.69 |   | 330,248 |   | 9,742 |   | 3.94 |   |
| Total interest-bearing deposits                           |       | 454,125                               |       | 4,766                                |       | 4.16 |   | 412,854 |   | 3,875 |   | 3.72 |   | 447,776 |   | 14,049 |   | 4.19 |   | 404,966 |   | 10,517 |   | 3.47 |   |
|                                                      |       |                                  |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| FHLB advances and other borrowings                        |       | 68,485                                |       | 782                                  |       | 4.53 |   | 20,638 |   | 240 |   | 4.61 |   | 59,378 |   | 2,003 |   | 4.51 |   | 19,727 |   | 595 |   | 4.03 |   |
| Total interest-bearing liabilities                        |       | 522,610                               |       | 5,548                                |       | 4.21 |   | 433,492 |   | 4,115 |   | 3.77 |   | 507,154 |   | 16,052 |   | 4.23 |   | 424,693 |   | 11,112 |   | 3.50 |   |
|                                                      |       |                                  |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Noninterest-bearing demand deposits                       |       | 8,163                                 |       |                                 |       |   |   | 8,682 |   |   |   |   |   | 8,898 |   |   |   |   |   | 8,526 |   |   |   |   |   |
| Other noninterest-bearing liabilities                     |       | 1,693                                 |       |                                 |       |   |   | 2,510 |   |   |   |   |   | 2,797 |   |   |   |   |   | 2,522 |   |   |   |   |   |
| Total liabilities                                         |       | 532,466                               |       |                                 |       |   |   | 444,684 |   |   |   |   |   | 518,849 |   |   |   |   |   | 435,741 |   |   |   |   |   |
|                                                      |       |                                  |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                      |       |                                  |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Retained earnings                                         |       | 42,031                                |       |                                 |       |   |   | 43,616 |   |   |   |   |   | 40,504 |   |   |   |   |   | 43,175 |   |   |   |   |   |
| Accumulated other comprehensive income                    |       | (1,533                                | )          |                                 |       |   |   | (1,288 | ) |   |   |   |   | (1,023 | ) |   |   |   |   | (1,103 | ) |   |   |   |   |
| Total equity                                              |       | 40,498                                |       |                                 |       |   |   | 42,328 |   |   |   |   |   | 39,481 |   |   |   |   |   | 42,072 |   |   |   |   |   |
| Total liabilities and equity                              |       | $                                     | 572,964    |                                 |       |   |   |   | $ | 487,012 |   |   |   |   |   | $ | 558,330 |   |   |   |   |   | $ | 477,813 |   |   |   |   |   |
|                                                      |       |                                  |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net interest income (tax-equivalent basis)                |       |                                  |       | $                                    | 3,546      |   |   |   |   |   | $ | 3,425 |   |   |   |   |   | $ | 10,633 |   |   |   |   |   | $ | 10,347 |   |   |   |

 

15

----

 

 

***               ******Provision for Loan Losses. ***Based on our evaluation of loan loss factors,management made provisions for loan losses of $125,000 and $60,000 in the threemonths ended September 30, 2007 and 2006, respectively, and provisions of$344,000 and $180,000 for the nine months ended September 30, 2007 and 2006,respectively.  Charge-offs increasedduring the 2007 periods as compared to 2006, and the loan portfolio increasedas well, principally due to increased levels of commercial real estate,residential acquisition, development and construction, indirect automobileloans and consumer loans.  Although as ofSeptember 30, 2007, classified assets had decreased from June 30, 2007, the levelremained higher than at September 30, 2006 as a result of portfolio growth andslowdowns in the real estate market. Loan balances increased by 17.6% from December 31, 2006, although aportion of this increase related to loans acquired from Valley Bancorp.  Valley Bancorp maintained a total allowancefor loan losses of $262,000 which was assumed in the acquisition.  Net losses to average loans amounted to 0.06%as compared to a recovery of 0.01% for the three months ended September 30,2007 and 2006, respectively, and 0.13% as compared to a recovery of 0.02% forthe nine months ended September 30, 2007 and 2006.  The allowance for loan losses as a percent ofloans was 0.61% as of September 30, 2007 and 0.44% at September 30, 2006.  The increase in the ratio of the allowancefor loan losses to loans was the result of a large provision in the fourthquarter of 2006 which was the result of economic factors combined with anincrease in classified assets and delinquencies near the end of 2006 and theassumption of the Valley Bancorp allowance.

 

***                NoninterestIncome.****** ***Noninterest income decreased $401,000 to a loss of $164,000 for thethree months ended September 30, 2007 as compared to income of $237,000 for thethree months ended September 30, 2006. The loss incurred in the 2007 period was the result of an impairmentloss estimated at $600,000 to reflect the potential sale of Bradford Bancorp’sindirect automobile loan portfolio. Excluding the loss recorded for this potential transaction, noninterestincome for the three months ended September 30, 2007 would have increased by$199,000, or 84.0%, over the comparable 2006 period, principally due to highercommission income from Bradford Title LLC, a title insurance agency acquired inlate 2006, and from Bradford Financial Group, Inc., and from increased groundrent income resulting from the acquisition of Valley Bancorp.  For the nine months ended September 30, 2007,noninterest income decreased $71,000 or 10.8% as compared to the same period of2006.  Excluding the $600,000 impairmentloss recorded to reflect the potential sale of the indirect automobileportfolio, noninterest income for the nine months ended September 30, 2007would have increased by $529,000 or 80.2% for the same reasons as cited for thethree month period.  Commission incomeincreased in the 2007 nine month period by $177,000 and ground rent incomeincreased by $180,000 over the 2006 nine month period.

 

                As of September 30, 2007,Bradford Bancorp recorded an impairment loss estimated at $600,000 using thirdparty indications of value on a possible sale of the indirect automobile loanportfolio.  Bradford Bancorp ceasedoriginating these loans in August 2007 and has effectively exited this line ofbusiness.  While Bradford Bancorp has notdetermined that a sale of the portfolio is the most appropriate course ofaction, it is evaluating its options with respect to this portfolio, one ofwhich is a possible sale to a third party. If a sale occurs, the loss incurred may be more or less than the amountestimated.  At September 30, 2007, thisportfolio totaled $25.3 million, including $587,000 in fees paid to dealers fororiginating the loans.  If a sale occurs,Bradford Bancorp may use a portion of the proceeds of the sale to pay downshort-term borrowings and the remainder to fund anticipated commercial loangrowth in the near term.  In accountingfor the loss, Bradford Bancorp considered the requirements of the *“Interagency Guidance on Certain Loans Held for Sale”*issued March 26, 2001.  Bradford Bancorpbelieves this unrealized loss is solely attributable to the comparatively lowyield of this portfolio of approximately 5.60% and not as a result of creditquality as losses in this portfolio experienced to date amount to only $10,000.  Additionally, the average FICO score exceeds735 and there are no loans past due greater than 60 days and only $5,000 inloans past due greater than 30 days as of September 30, 2007.

 

***                NoninterestExpense. ***Noninterest expense increased $509,000for the three months ended September 30, 2007 over the three months endedSeptember 30, 2006.  Of this amount,$237,000 related to compensation and benefits costs.  Compensation expense increased as we addedstaff due to the acquisition of Valley Bancorp and from the addition of loanstaff to expand our commercial lending and indirect automobile lending.  However, upon review and due to inadequateprofitability of the portfolio, in August 2007, we decided to cease neworiginations for our indirect lending program. Occupancy expense increased in large part due to the Valley Bancorpacquisition and related rent expense and due to increased building maintenancecosts.  Other expenses that increasedincluded amortization of intangible assets related to the Valley Bancorpacquisition, legal fees and professional fees.

 

16

----

 

                Noninterestexpense increased $3.9 million for the nine months ended September 30, 2007over the nine months ended September 30, 2006. Included in this amount was $2.0 million of merger related costs inconnection with the mergers with Golden Prague and Senator Bank.  Of the remaining $1.9 million increase,$840,000 related to compensation and benefits costs, due primarily to the ValleyBancorp acquisition and increased commercial and indirect automobile lendingstaffs.  Occupancy costs also wereaffected by the new locations acquired in the acquisition and relatedexpenses.  Other expenses increased overthe same period in 2006 primarily due to legal fees, which were affected in thefirst quarter of 2006 by recoveries of legal fees received from a commercialborrower which had been expensed in a prior fiscal year.  In addition, the amortization of intangibleassets increased due to the Valley Bancorp acquisition as well as professionalservices costs.  In 2007, we alsoincurred approximately $115,000 of workout expenses related to problem loans.

 

***                IncomeTax Expense.****** ***Income taxes were lower in both the three months andthe nine months ended September 30, 2007 as compared to the same periods in2006 because earnings before taxes were lower combined with increasedtax-exempt income.  A tax benefit of$185,000 was recorded for the three months ended September 30, 2007 as comparedto a tax provision of $200,000 for the three months ended September 30, 2006reflecting an effective tax rate of 34.5% for the 2006 period.  The benefit recorded for the three-monthperiod ended September 30, 2007 reflects the loss from operations caused byrecognition of an impairment loss on the potential sale of the indirectautomobile portfolio.

 

                BradfordBancorp experienced a tax benefit of $1.0 million for the nine months endedSeptember 30, 2007 compared to an income tax provision of $746,000 for the ninemonths ended September 30, 2006 reflecting an effective tax rate of 33.0% forthe 2006 period.  The benefit recorded inthe nine months ended September 30, 2007 reflected the operating loss caused bythe merger related costs for the acquisition of Golden Prague and Senator Bank,the recognition of the impairment loss on the potential sale of the indirectautomobile portfolio, and a reduction of the valuation allowance related to thedeferred taxes associated with Golden Prague’s net operating loss carryforwardsbased on an evaluation reflecting Bradford Bancorp’s ability to utilize suchloss carryforwards in the future.

 

**Explanation of Use of Non-GAAP Financial Measures**

 

                We believe that itis common practice in the banking industry to present interest income andrelated yield information on tax exempt securities on a tax-equivalent basisand that such information is useful to investors because it facilitatescomparisons among financial institutions. However, the adjustment of interest income and yields on tax exemptsecurities to a tax-equivalent amount may be considered to include non-GAAPfinancial information.  A reconciliationto GAAP is provided below.

 
| ** **                                               | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|----------------------------------------------------------|------------|--------------------------------------|------------|-------------------------------------|------------|
| ** **                                               | ** ** | **2007**                             | ** ** | **2006**                            | ** ** | **2007** | ** ** | **2006** | ** ** |
| **(Dollars in thousands)**                               | ** ** | **Interest**                         | ** ** | **Average  Yield**                  | ** ** | **Interest** | ** ** | **Average  Yield** | ** ** | **Interest** | ** ** | **Average  Yield** | ** ** | **Interest** | ** ** | **Average  Yield** | ** ** |
| Municipal bonds (non-tax adjusted)                       |       | $111                                 |       | 3.80                                | %          | $109 |   | 3.78 | % | $334 |   | 3.83 | % | $276 |   | 3.75 | % |
| Tax-equivalent adjustment (1)                            |       | 39                                   |       |                                |       | 37 |   |   |   | 117 |   |   |   | 95 |   |   |   |
| Municipal bonds (tax-equivalent basis)                   |       | 150                                  |       | 5.13                                |       | 146 |   | 5.04 |   | 451 |   | 5.16 |   | 371 |   | 5.04 |   |
|                                                     |       |                                 |       |                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| U.S. government agency securities (non-tax adjusted)     |       | 560                                  |       | 4.92                                |       | 528 |   | 4.66 |   | 1,694 |   | 4.99 |   | 1,378 |   | 4.37 |   |
| Tax-equivalent adjustment (1)                            |       | 18                                   |       |                                |       | 18 |   |   |   | 54 |   |   |   | 46 |   |   |   |
| U.S. government agency securities (tax equivalent basis) |       | 578                                  |       | 5.09                                |       | 546 |   | 4.82 |   | 1,748 |   | 5.15 |   | 1,424 |   | 4.52 |   |
|                                                     |       |                                 |       |                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Net interest income (non-tax adjusted)                   |       | 3,489                                |       |                                |       | 3,370 |   |   |   | 10,462 |   |   |   | 10,206 |   |   |   |
| Tax-equivalent adjustment (1)                            |       | 57                                   |       |                                |       | 55 |   |   |   | 171 |   |   |   | 141 |   |   |   |
| Net interest income (tax-equivalent basis)               |       | 3,546                                |       |                                |       | 3,425 |   |   |   | 10,633 |   |   |   | 10,347 |   |   |   |
|                                                     |       |                                 |       |                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest rate spread (no tax adjustment)                 |       |                                 |       | 2.29                                |       |   |   | 2.52 |   |   |   | 2.36 |   |   |   | 2.66 |   |
| Net interest margin (no tax adjustment)                  |       |                                 |       | 2.51                                |       |   |   | 2.83 |   |   |   | 2.60 |   |   |   | 2.95 |   |

----

(1)          The tax-equivalent adjustmentis based on a federal tax rate of 34.0% and a state tax rate of 7.0% for allperiods presented.

** **

17

----

 

 

** **

**Liquidity and Capital Management**

 

**                *Liquidity Management.*** Liquidity is the ability to meet current and future financialobligations of a short-term nature. Our primary sources of funds consist ofdeposit inflows, loan repayments, maturities and sales of securities, andborrowings from the Federal Home Loan Bank of Atlanta.  While maturities and scheduled amortizationof loans and securities are predictable sources of funds, deposit flows andloan prepayments are greatly influenced by general interest rates, economicconditions and competition. Prepayment rates can have a significant impact oninterest income.  Because of the largepercentage of loans we hold, rising or falling interest rates have asignificant impact on the prepayment speeds of our earning assets that in turnaffect the rate sensitivity position. When interest rates rise, prepaymentstend to slow. When interest rates fall, prepayments tend to rise. Our assetsensitivity would be reduced if prepayments slow and vice versa. While webelieve these assumptions to be reasonable, there can be no assurance thatassumed prepayment rates will approximate actual loan repayment activity.

 

                We regularlyadjust our investments in liquid assets based upon our assessment of:  (1) expected loan demands; (2) expecteddeposit flows; (3) yields available on interest-earning deposits andsecurities; and (4) the objectives of our asset/liability management policy.

 

                Our most liquidassets are cash and cash equivalents. The levels of these assets depend on our operating, financing, lendingand investing activities during any given period.  At September 30, 2007, cash and cashequivalents totaled $3.1 million. Securities classified as available for sale whose market value exceedsour cost, which provide additional sources of liquidity, totaled $27.0 millionat September 30, 2007.  Total securitiesclassified as available for sale were $86.5 million at September 30, 2007.  In addition, at September 30, 2007, we hadthe ability to borrow a total of approximately $170 million from the FederalHome Loan Bank of Atlanta.  On September30, 2007, we had a total of $73.8 million of borrowings outstanding, including$67.3 million borrowed from the Federal Home Loan Bank of Atlanta.  Future growth of our loan portfolio resultingfrom our expansion efforts may require us to borrow additional funds.

 

                At September 30,2007, we had $113.8 million in loan commitments outstanding, which consisted of$18.9 million and $46.8 million in commercial real estate loans andacquisition, development and construction loans, respectively, $11.2 millionand $33.7 million in residential/home equity loans and consumer unused lines ofcredit, respectively, and $3.2 million in standby letters of credit.  Historically, many of the commitments expire withoutbeing fully drawn; therefore, the total commitment amounts do not necessarilyrepresent future cash requirements. Another significant use of our liquidity is the funding of depositwithdrawals.  Certificates of deposit duewithin one year of September 30, 2007 totaled $230.1 million, or 61.8% ofcertificates of deposit.  The largepercentage of certificates of deposit that mature within one year reflectscustomers’ hesitancy to invest their funds for long periods in the recent lowinterest rate environment.  If thesematuring deposits do not remain with us, we will be required to seek othersources of funds, including other certificates of deposit and borrowings.  Depending on market conditions, we may berequired to pay higher rates on such deposits or other borrowings than wecurrently pay on the certificates of deposit due on or before September 30,2008.  We believe, however, based on pastexperience, that a significant portion of our certificates of deposit willremain with us.  We have the ability toattract and retain deposits by adjusting the interest rates offered.

 

***Capital Management.***  We are subjectto various regulatory capital requirements administered by the Federal DepositInsurance Corporation, including a risk-based capital measure. The risk-basedcapital guidelines include both a definition of capital and a framework forcalculating risk-weighted assets by assigning balance sheet assets andoff-balance sheet items to broad risk categories. At September 30, 2007, weexceeded all of the minimum regulatory capital requirements. We are considered “adequatelycapitalized” under regulatory guidelines.

 

                Followingcompletion of the offering, we will manage our capital for maximum stockholderbenefit.  The capital from the offeringwill significantly increase our liquidity and capital resources.  Over time, the initial level of liquiditywill be reduced as net proceeds from the offering are used for generalcorporate purposes, including the funding of lending activities.  Our financial condition and results ofoperations are expected to be enhanced by the capital from the offering,resulting in increased net interest-earning assets and net income.  However, the large increase in equityresulting from the capital raised in the offering will, initially, have anadverse impact on our return on equity. Following the offering, we may use capital management tools such as cashdividends and common share repurchases. However, under Office of Thrift Supervision regulations, we will not beallowed to repurchase any

 

18

----

 

shares during the first year following the offering, except: (1) inextraordinary circumstances, we may make open market repurchases of up to 5% ofour outstanding stock if we receive the prior non-objection of the Office ofThrift Supervision to such repurchases; (2) repurchases of qualifying shares ofa director or if we conduct an Office of Thrift Supervision-approved offer torepurchase made to all stockholders; (3) if we repurchase to fund a restrictedstock award plan that has been approved by stockholders; or (4) if werepurchase stock to fund a tax-qualified employee stock benefit plan.  All repurchases are prohibited, however, ifthe repurchase would reduce Bradford Bank’s regulatory capital below regulatoryrequired levels.

 

**Off-BalanceSheet Arrangements**

 

In the normal course of operations, we engage in avariety of financial transactions that, in accordance with U.S. generallyaccepted accounting principles, are not recorded in our financialstatements.  These transactions involve,to varying degrees, elements of credit, interest rate and liquidity risk. Suchtransactions are used primarily to manage customers’ requests for funding andtake the form of loan commitments, letters of credit and lines of credit.  We currently have no plans to engage inhedging activities in the future.

 

For the nine month periods ended September 30, 2007and September 30, 2006, we engaged in no off-balance sheet transactionsreasonably likely to have a material effect on our financial condition, resultsof operations or cash flows.

 

**Item 3.**    **Quantitative and Qualitative Disclosures About Market Risk.**

 

                **Qualitative Aspects of Market Risk.**  Our earnings and the market value of ourassets and liabilities are subject to fluctuations caused by changes in thelevel of interest rates.  We manage theinterest rate sensitivity of our interest-bearing liabilities andinterest-earning assets in an effort to minimize the adverse effects of changesin the interest rate environment. Deposit accounts typically react more quickly to changes in marketinterest rates than mortgage loans because of the shorter maturities ofdeposits.  As a result, sharp increasesin interest rates may adversely affect our earnings while decreases in interestrates may beneficially affect our earnings. To reduce the potential volatility of our earnings, we have sought toimprove the match between asset and liability maturities and rates, whilemaintaining an acceptable interest rate spread.  Our strategy for managing interest rate riskemphasizes originating loans with adjustable interest rates; selling loans on aflow basis; and promoting core deposit products and short-term time deposits.

 

                We have anAsset/Liability Management Committee to coordinate all aspects involvingasset/liability management.  Thecommittee establishes and monitors the volume, maturities, pricing and mix ofassets and funding sources with the objective of managing assets and fundingsources to provide results that are consistent with liquidity, growth, risklimits and profitability goals.

 

                **Quantitative Aspects of Market Risk**.  We use two net portfolio analyses, oneprepared by the Office of Thrift Supervision and the other prepared by us, toreview our level of interest rate risk. These analyses measure interest rate risk by computing changes in netportfolio value of our cash flows from assets, liabilities and off-balancesheet items in the event of a range of assumed changes in market interestrates.  Net portfolio value representsthe market value of portfolio equity and is equal to the market value of assetsminus the market value of liabilities, with adjustments made for off-balancesheet items.  These analyses assess the riskof loss in market risk sensitive instruments in the event of a sudden andsustained 100 to 300 basis point increase or 100 to 200 basis point decrease inmarket interest rates with no effect given to any steps that we might take tocounter the effect of that interest rate movements.  We measure interest rate risk by modeling thechanges in net portfolio value over a variety of interest rate scenarios.

 

19

----

 

                The followingtable, which is based on the sensitivity analysis we perform, presents the changein our net portfolio value at September 30, 2007 that would occur in the eventof an immediate change in interest rates based on our assumptions, with noeffect given to any steps that we might take to counteract that change.

 

| ** **                                        | ** ** | **Net Portfolio Value  (Dollars in thousands)** | ** ** | **Net Portfolio Value as % of  Portfolio Value of Assets** | ** ** |
|---------------------------------------------------|------------|-------------------------------------------------|------------|------------------------------------------------------------|------------|
| **Basis Point (“bp”)  Change in Rates** | ** ** | **$ Amount**                               | ** ** | **$ Change**                                          | ** ** | **% Change** | ** ** | **NPV Ratio** | ** ** | **Change** | ** ** |
|                                              |       |                                            |       |                                                       |       |   |   |   |   |   |   |
| 300                                               |       | $                                               | 13,333     |                                                       | $          | (25,227 | ) | (65.00 | )% | 2.52 | % | (425 | ) bp |
| 200                                               |       | 21,831                                          |       | (16,729                                                    | )          | (43.00 | ) | 4.03 |   | (274 | ) bp |
| 100                                               |       | 30,431                                          |       | (8,129                                                     | )          | (21.00 | ) | 5.47 |   | (130 | ) bp |
| 0                                                 |       | 38,560                                          |       | —                                                     |       | — |   | 6.77 |   |   |   |
| (100)                                             |       | 43,198                                          |       | 4,638                                                      |       | 12.00 |   | 7.44 |   | 67 |   bp |
| (200)                                             |       | 44,022                                          |       | 5,462                                                      |       | 14.00 |   | 7.48 |   | 71 |   bp |
|                                                   |            |                                                 |            |                                                            |            |  |  |  |  |  |  |  |  |

 

The following table, which is based on the informationthat we provide to the Office of Thrift Supervision, presents the change in ournet portfolio value at September 30, 2007 that would occur in the event of animmediate change in interest rates based on Office of Thrift Supervisionassumptions, with no effect given to any steps that we might take to counteractthat change.

 

| ** **                                        | ** ** | **Net Portfolio Value  (Dollars in thousands)** | ** ** | **Net Portfolio Value as % of  Portfolio Value of Assets** | ** ** |
|---------------------------------------------------|------------|-------------------------------------------------|------------|------------------------------------------------------------|------------|
| **Basis Point (“bp”)  Change in Rates** | ** ** | **$ Amount**                               | ** ** | **$ Change**                                          | ** ** | **% Change** | ** ** | **NPV Ratio** | ** ** | **Change** | ** ** |
|                                              |       |                                            |       |                                                       |       |   |   |   |   |   |   |
| 300                                               |       | $                                               | 13,709     |                                                       | $          | (24,683 | ) | (64.00% | ) | 2.55 | % | (417 | ) bp |
| 200                                               |       | 22,088                                          |       | (16,304                                                    | )          | (42.00 | ) | 4.03 |   | (269 | ) bp |
| 100                                               |       | 30,624                                          |       | (7,768                                                     | )          | (20.00 | ) | 5.47 |   | (125 | ) bp |
| 0                                                 |       | 38,392                                          |       | —                                                     |       | — |   | 6.72 |   |   |   |
| (100)                                             |       | 42,923                                          |       | 4,531                                                      |       | 12.00 |   | 7.41 |   | 68 |   bp |
| (200)                                             |       | 44,959                                          |       | 6,567                                                      |       | 17.00 |   | 7.66 |   | 94 |   bp |
|                                                   |            |                                                 |            |                                                            |            |  |  |  |  |  |  |  |  |

 

Historically, the differences between our netportfolio analysis and the analysis calculated by the Office of ThriftSupervision is primarily due to the more specific assumptions built into our model,including more specificity in our cash flow projection assumptions (such asmaturity dates, amortization schedules and prepayment rates).  We and the Office of Thrift Supervision usecertain assumptions in assessing the interest rate risk of savings institutions.  These assumptions relate to interest rates,loan prepayment rates, deposit decay rates, and the market values of certainassets under differing interest rate scenarios, among others.  As with any method of measuring interest raterisk, certain shortcomings are inherent in the method of analysis presented inthe foregoing table.  For example,although certain assets and liabilities may have similar maturities or periodsto repricing, they may react in different degrees to changes in market interestrates.  Also, the interest rates oncertain types of assets and liabilities may fluctuate in advance of changes inmarket interest rates, while interest rates on other types may lag behindchanges in market rates.  Additionally,certain assets, such as adjustable-rate mortgage loans, have features thatrestrict changes in interest rates on a short-term basis and over the life ofthe asset.  Further, in the event of achange in interest rates, expected rates of prepayments on loans and earlywithdrawals from certificates could deviate significantly from those assumed incalculating the table.

 

20

----

 

**Item4.    Controls and Procedures**

 

                (a)           Disclosure Controls and Procedures

 

The Company’s management, including the Company’sprincipal executive officer and principal financial officer, have evaluated theeffectiveness of the Company’s “disclosure controls and procedures,” as suchterm is defined in Rule 13a-15(e) promulgated under the Securities Exchange Actof 1934, as amended (the “Exchange Act”). Based upon their evaluation, the principal executive officer andprincipal financial officer concluded that, as of the end of the period coveredby this report, the Company’s disclosure controls and procedures were effectivefor the purpose of ensuring that the information required to be disclosed inthe reports that the Company files or submits under the Exchange Act with theSecurities and Exchange Commission (the “SEC”) (1) is recorded, processed,summarized and reported within the time periods specified in the SEC’s rulesand forms and (2) is accumulated and communicated to the Company’s management,including its principal executive and principal financial officers, asappropriate to allow timely decisions regarding required disclosure.

 

(b)                                 Internal Control over Financial Reporting

 

There have not been any changes in the Company’sinternal control over financial reporting (as such term is defined in Rules13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter towhich this report relates that have materially affected, or are reasonablylikely to materially affect, the Company’s internal control over financialreporting.

 

 

## **PART II.  OTHERINFORMATION**

 

**Item 1.    Legal Proceedings**

 

Bradford Bancorp is not involved in any pending legalproceedings other than routine legal proceedings occurring in the ordinarycourse of business.  Such routine legalproceedings, in the aggregate, are believed by management to be immaterial toits financial condition and results of operations.

 

**Item1A.     Risk Factors**

 

For information regarding the Company’s risk factors,see “Risk Factors,” in Bradford Bancorp’s prospectus which was filed with theSEC on November 1, 2007, and is available through the SEC’s website at www.sec.gov.  As of September 30, 2007, the risk factors ofBradford Bancorp have not changed materially from those reported in theprospectus.  The risks described inBradford Bancorp’s prospectus are not the only risks that weface.  Additional risks and uncertainties not currently known to usor that we currently deem to be immaterial also may materially adversely affectour business, financial condition and/or operating results.

 

**Item 2.    Unregistered Sales of Equity Securities andUse of Proceeds**

 

                Not applicable.

 

**Item 3.    Defaults upon Senior Securities**

 

                Not applicable.

 

**Item 4.    Submission of Matters to a Vote of SecurityHolders**

 

                Not applicable.

 

**Item 5.    Other Information**

 

                Not applicable.

 

21

----

 

**Item6.    Exhibits**

3.1                                 Articles of Organization of BradfordBancorp, Inc. (1)

3.2                                 Bylaws of Bradford Bancorp, Inc. (1)

4.0                                 Stock Certificate of Bradford Bancorp,Inc. (1)

31.1                           Rule 13a-14(a)/15d-14(a) Certification ofChief Executive Officer

31.2                           Rule 13a-14(a)/15d-14(a) Certification ofChief Financial Officer

32.0                           Section 1350 Certification

----

(1)                      Incorporated byreference into this document from the Exhibits filed with the Securities andExchange Commission on the Registration Statement on Form S-1 (File No. 333-143696), as amended, initially filed with the Securities andExchange Commission on June 13, 2007.

 

22

----

 

**SIGNATURES**

 

In accordance withthe requirements of the Exchange Act, the registrant caused this report to besigned on its behalf by the undersigned thereunto duly authorized.

 

 
|                     | BRADFORD BANCORP, INC. |
|--------------------------|------------------------|
|                     |                   |   |
|                     |                   |   |
| Dated: November 30, 2007 | By:                    | /s/ Dallas R. Arthur |
|                     |                   | Dallas R. Arthur |
|                     |                   | President and Chief Executive Officer |
|                     |                   | (principal executive officer) |
|                     |                   |   |
|                     |                   |   |
| Dated: November 30, 2007 | By:                    | /s/ David L. Costello III |
|                     |                   | David L. Costello, III |
|                     |                   | Executive Vice President and Chief Financial |
|                     |                   | Officer |
|                     |                   | (principal financial and chief accounting officer) |

 

23

----