Under current Federal Reserve Board policy, the Company iswe are expected to act as a source of financial strength for, the Bank and to commit resources to support, the Bank in circumstances where it might not do soBank.  This support may be required at times when, absent such policy.Federal Reserve policy, we may not be inclined to provide such support.  In addition, any capital loans by a bank holding company to a subsidiary bankany of its banking subsidiaries are subordinate in right of payment to deposits and to certain other indebtedness of thesuch subsidiary bank.banks.  In the event of a bank holding company's bankruptcy, any commitment by thea bank holding company to a federal bank regulatory agency to maintain the capital of a banking subsidiary bank at a certain level wouldwill be assumed by the bankruptcy trustee and entitled to a priority of payment.

Signed into law on July 30, 2002,1991 (“FDICIA”) established a system of prompt corrective action to resolve the Sarbanes-Oxley Actproblems of 2002 (“SOX”) addresses many aspects of corporate governanceundercapitalized institutions.  Under this system, the federal banking regulators have established five capital categories (well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and financial accounting and disclosure.  Primarily, it provides a framework for the oversight of public company auditing and for insuring the independence of auditors and audit committees.  Under SOX, audit committees are responsible for the appointment, compensation, and oversight of the work of external and internal auditors.  SOX also provides for enhanced and accelerated financial disclosures, establishes certification requirements for a company’s chief executive and chief financial officers, and imposes new restrictions on and accelerated reporting of certain insider trading activities.  Significant penalties for fraud and other violations are included in SOX.

Financial institutions must maintain anti-money laundering programs that include established internal policies, procedures, and controls; a designated compliance officer; an ongoing employee training program; and testing of the program by an independent audit function. The Company and the Bank are also prohibited from entering into specified financial transactions and account relationships and must meet enhanced standards for due diligence and “knowing your customer” in their dealings with foreign financial institutions and foreign customers. Financial institutions must take reasonable steps to conduct enhanced scrutiny of account relationships to guard against money laundering and to report any suspicious transactions, and recent laws provide the law enforcement authorities with increased access to financial information maintained by banks. Anti-money laundering regulations have been substantially strengthened as a result of the USA PATRIOT Act, enacted in 2001. Bank regulators routinely examine institutions for compliance with these obligationscritically undercapitalized), and are required to consider compliance in connection with the regulatory review of applications. The regulatory authorities have been active in imposing “cease and desist” orders and money penalty sanctions against institutions found in violation of these obligations.take certain mandatory

The Tier 1 Capital ratio and the Total Capital ratio are calculated againstappropriate federal regulatory agency may treat an asset total weighted for risk. Certain assets, such as cash and U.S. Treasury securities, have a zero risk weighting. Others, such as commercial and consumer loans, often have a 100% risk weighting. Assets also include amounts that represent the potential funding of off-balance sheet obligations such as loan commitments and letters of credit. These potential assets are assigned to risk categoriesundercapitalized institution in the same manner as funded assets. The total assets in each categoryit treats a significantly undercapitalized institution if it determines that those actions are multiplied by the appropriate risk weighting to determine risk-adjusted assets for the capital calculations.

To be eligible to be classified as “well-capitalized,”2009, the Bank must generally maintain a Total Capital ratio of 10% or greater, a Tier 1 Capital ratio of 6% or greater, and a leverage ratio of 6% or greater. If an institution failshad the requisite capital level to remain well-capitalized, it will be subject to a series of restrictions that increasequalify as the capital condition worsens. For instance, federal law generally prohibits a depository institution from making any capital distributions, including the payment of a dividend, or paying any management fee to its holding company, if the depository institution would be undercapitalized as a result. Undercapitalized depository institutions may not accept brokered deposits absent a waiver from the Federal Deposit Insurance Corporation (the “FDIC”), are subject to growth limitations, and must submit a capital restoration plan that is guaranteed by the institution's parent holding company. Significantly undercapitalized depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become adequately capitalized, requirements to reduce total assets, and cessation of receipt of deposits from correspondent banks. Critically undercapitalized institutions are subject to the appointment of a receiver or conservator.

As of December 31, 2008, the most recent notification from the FDIC placed the Bank in the “well capitalized” category under the regulatory framework for prompt corrective action.  All three regulatory capital ratios for the Bank exceeded these minimums at December 31, 2008.

On October 3, 2008, the EESA was signed into law by the President of the United States in response to a national economic and financial crisis. The EESA included a provision for an increase in the amount of deposits insured by the FDIC from $100,000 to $250,000 until December 2009.regulators.  In addition, the FDIC announcedcan impose special assessments in certain instances.

There is no precise method of predicting loan losses; therefore, the Company faces the risk that additional increases in the allowance for loan losses will be required.estimates.  Additions to the allowance willALLL could result in a decrease in net earnings and capital and could hinder the Company’sour ability to grow.  Further, if our actual loan losses exceed the amount reserved, it could have a material adverse effect on our financial condition and results of operations.

The Company hasWe have expanded itsour business in part through acquisitions and will continue to look at future acquisitions as a way to further increase our growth.  However, we cannot assure the continuance of this trend or the profitability ofyou that we will be successful in completing any future acquisitions.  The Company’s abilityFurther, failure to implement its strategy for continued growth depends onrealize the ability to continue to identify and integrate profitablepotential expected revenue increases, cost savings, increases in geographic or product presence, and/or other projected benefits from an acquisition targets, to attract and retain customers in a highly competitive market, to increase the deposit base, and the growth of its customers’ businesses.  Many of these growth prerequisites may be affected by circumstances that are beyond the control of the Company’s management and could have a material adverse effect on our business, prospects, financial condition and results of operations.

Congress recently enacted the EESA in anrequirements that may, among other things, require increasing amounts of our time, effort and resources to stabilize the financial markets.  The initiative provided funding of up to $700 billion to purchase troubled assets and loans from financial institutions pursuant to the Troubled Asset Relief Program (“TARP”) and created the CPP directed by the Treasury.  On January 9, 2009, the Company completed a CPP transaction and received $20 million in capital from the Treasury.  Pursuant to terms and conditions of the CPP transaction, which is described in the Company’s 8-K filing dated January 14, 2009, the Company faces certain restrictions and limitations that could adversely affect its ability to support the value of the common stock.ensure compliance.

The Company’sOur profitability is dependent to a large extent on net interest income, which is the difference between itsour interest income on interest-earning assets, such as loans and investment securities, and interest expense on interest-bearing liabilities, such as deposits and borrowings.  When interest-bearing liabilities mature or reprice more quickly than interest-earning assets in a given period, a significant increase in market rates of interest could adversely affect net interest income.  Conversely, when interest-earning assets mature or reprice more quickly than interest-bearing liabilities, falling interest rates could result in a decrease in net interest income.  For example, as securities in our investment portfolio have matured, they have been replaced by securities paying a lower yield.   We expec t this trend to continue during 2010.  These changes in our investment portfolio have negatively impacted, and are expected to continue to negatively impact, our net interest margin.  Furthermore, some of our variable interest rate loans have minimum fixed interest rates (“floors”) that are currently above the contractual variable interest rate.  If interest rates rise, the interest income from our variable interest rate loans with floors may not increase as quickly as interest expense on our liabilities, which would negatively impact our net interest income.

The Company operatesWe operate within a highly regulated environment.  The regulations to which the Company iswe are subject will continue to have a significant impact on itsour operations and the degree to which itwe can grow and be profitable.  Certain regulators, to which the Company iswe are subject, have significant power in reviewing the Company’sour operations and approving itsour business practices.  In recent years the Company’s bank,Bank, as well as other financial institutions, has experienced increased regulation and regulatory scrutiny, often requiring additional resources.  In addition, investigations or proceedings brought by regulatory agencies may result in judgments, settlements, fines, penalties, or other results adverse to the Company.us.  There is no assurance that any change to the regulatory requirements to which the Company iswe are subject, or the way in which such regulatory requirements are interpretedi nterpreted or enforced, will not have a negative effect on the Company’sour ability to conduct itsour business and itsour results of operations.

The Company’sOur ability to compete depends on theour ability to continue to adapt and deliver technology on a timely and cost-effective basis to meet customers’ demands for financial services.  We currently provide our customers the ability to bank online and many customers now remotely submit deposits to us through remote-capture systems.  The secure transmission of confidential information over the Internet is a critical element of these services.  Our network could be vulnerable to unauthorized access, computer viruses, phishing schemes and other security problems.  We may be required to spend significant capital and other resources to protect against the threat of security breaches and computer viruses, or to alleviate problems caused by security breaches or viruses.  To the extent that our activities or the activities of our customers involve the storage and transmission of confidential information, security breaches and viruses could expose us to claims, litigation and other possible liabilities.  Any inability to prevent security breaches or computer viruses could also cause existing customers to lose confidence in our systems and could adversely affect our reputation and our ability to generate deposits.

The Company’sOur stock incentive plan provides for the granting of stock incentives to directors, officers, and employees.  As of December 31, 2008,2009, there were 83,99661,368 shares issued under options granted under that plan.  Likewise, a numbersubject to the availability of shares equalof our common stock, up to 8% of outstandingapproximately 586,000 shares, including existing shares issuable under currentcurrently outstanding options, are reserved formay be issued in the future issuance to directors, officers, and employees.

On January 9, 2009,  Excluding shares reserved for issuance upon the Companyexercise of outstanding stock options and the warrant issued $20.0 million in preferred stock to the Treasury, underwe currently have less than 111,000 shares, including treasury shares, that remain available for issuance by us.  As a result, we expect to seek approval to amend our articles of incorporation to increase the CPP.  As partnumber of shares of stock that we are authorized to issue.  Any such amendment would require approval by an affirmative vote of the CPP transaction, the Company also issued the Treasuryholders of a 10-year warrant for the purchase of 208,768 shares of its common stock.  The warrant has an aggregate market price equal to 15%majority of the amountshares present and entitled to vote at such meeting.  There can be no assurance that we will seek such an amendment or, if such an amendment is submitted to a vote of Treasury’s investment in the senior preferred stock and an initial exercise price of $14.37 per share.our shareholders, that it would be approved by our shareholders.

The Company’sOur directors and executive officers beneficially own approximately 2,519,4032.6 million shares, or 38.1%26.4%, of our outstanding common stock.stock as of December 31, 2009.  As a result, in addition to their day-to-day management roles, they will be able to exercise significant influence on the Company’sour business as shareholders, including influence over election of the Board and the authorization of other corporate actions requiring shareholder approval. In deciding on how to vote on certain proposals, our shareholders should be aware that our directors and executive officers may have interests that are different from, or in addition to, the interests of our shareholders generally.

The Company’sOur articles of incorporation and bylawsby-laws could delay, defer, or prevent a third party takeover, despite possible benefit to the shareholders, or otherwise adversely affect the price of theour common stock. The Company’sOur governing documents:

An investment in the Company’sour common stock is not a bank deposit and is not insured or guaranteed by the FDIC or any other government agency.  A shareholder’sYour investment in our common stock will be subject to investment risk and the shareholder must be capableyou may lose all or part of affording the loss of the entireyour investment.