This discussion presents Management's analysis of the Company's financial condition and results of operations as of, and for each of the years in the three-year period ended December 31, 2008, and includes the statistical disclosures required by SEC Guide 3 ("Statistical Disclosure by Bank Holding Companies"). The discussion should be read in conjunction with the financial statements of the Company and the notes related thereto which appear elsewhere in this Form 10-K Annual Report (See Item 8 below). All share and per share information set forth herein has been adjusted to reflect stock splits and stock dividends declared by the Company from time to time.

Critical Accounting Policies

Accounting estimates and assumptions discussed in this section are those that the Company considers to be the most critical to an understanding of its financial statements because they inherently involve significant judgments and uncertainties. The financial information contained in these statements is, to a significant extent,

based on approximate measures of the financial effects of transactions and events that have already occurred. These critical accounting policies are those that involve subjective decisions and assessments and have the greatest potential impact on the Company's results of operations. Management has identified its most critical accounting policies to be those relating to the following: investment securities, loan sales, allowance for loan losses, interest rate swaps and share-based compensation. The following is a summary of these accounting policies. In each area, the Company has identified the variables most important in the estimation process. The Company has used the best information available to make the estimations necessary to value the related assets and liabilities. Actual performance that differs from the Company's estimates and future changes in the key variables could change future valuations and impact net income.

Investment Securities

Under SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, investment securities generally must be classified as held-to-maturity, available-for-sale or trading. The appropriate classification is based partially on the Company's ability to hold the securities to maturity and largely on management's intentions with respect to either holding or selling the securities. The classification of investment securities is significant since it directly impacts the accounting for unrealized gains and losses on securities. Unrealized gains and losses on trading securities flow directly through earnings during the periods in which they arise, whereas with respect to available-for-sale securities, they are recorded as a separate component of shareholders' equity (accumulated comprehensive other income or loss) and do not affect earnings until realized. The fair values of the Company's investment securities are generally determined by reference to quoted market prices and reliable independent sources. The Company is obligated to assess, at each reporting date, whether there is other-than-temporary impairment ("OTTI") to the Company's investment securities. Such impairment must be recognized in current earnings rather than in other comprehensive income. Investment securities are discussed in more detail in Note 3 to the consolidated financial statements presented elsewhere herein.

Loan Sales

Certain Small Business Administration loans and other loans that the Company has the intent to sell prior to maturity are designated as held for sale typically at origination and recorded at the lower of cost or market value, on an aggregate basis. Upon management's decision, certain loans in the portfolio may be reclassified to the held for sale category prior to any commitment by the Company to sell the loans. Such decision is usually made to rebalance the loan portfolio and to better manage the Company's liquidity and capital resources. A valuation allowance is established if the market value of such loans is lower than their cost, and operations are charged or credited for valuation adjustments. A portion of the premium on sale of loans is recognized as other operating income at the time of the sale. The remaining portion of the premium relating to the portion of the loan retained is deferred and amortized over the remaining life of the loan as an adjustment to yield. Servicing assets or liabilities are recorded when loans are sold with servicing retained, based on the present value of the contractually specified servicing fee, net of servicing costs, over the estimated life of the loan, using a discount rate based on the related note rate plus 1 to 2%. Net servicing assets, or servicing assets net of servicing liabilities, are amortized in proportion to and over the period of estimated future servicing income. Management periodically evaluates the net servicing asset for impairment, which is the carrying amount of the net servicing asset in excess of the related fair value. Impairment, if it occurs, is recognized as a write-down in the period of impairment.

Allowance for Loan Losses

The Company's allowance for loan loss methodologies incorporate a variety of risk considerations, both quantitative and qualitative, in establishing an allowance for loan losses that management believes is appropriate at each reporting date. Quantitative factors include the Company's historical loss experience, delinquency and charge-off trends, collateral values, changes in nonperforming loans, and other factors. Quantitative factors also incorporate known information about individual loans, including borrowers' sensitivity to interest rate

movements and borrowers' sensitivity to quantifiable external factors including commodity and finished good prices as well as acts of nature such as earthquakes, floods, fires, etc. that occur in a particular period. Qualitative factors include the general economic environment in the Company's markets and, in particular, the state of certain industries. Size and complexity of individual credits, loan structure, extent and nature of waivers of existing loan policies and pace of portfolio growth are other qualitative factors that are considered in its methodologies. As the Company adds new products, increases the complexity of the loan portfolio and expands the geographic coverage, the Company will enhance the methodologies to keep pace with the size and complexity of the loan portfolio. Changes in any of the above factors could have significant impact to the loan loss calculation. The Company believes that its methodologies continue to be appropriate given its size and level of complexity. Detailed information concerning the Company's loan loss methodology is contained in "Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations-Allowance for Loan Losses."

Share-based Compensation

The Company adopted SFAS No. 123R as of January 1, 2006 as discussed in Note 14 to the consolidated financial statements. SFAS No. 123R requires the Company to recognize compensation expense for all share-based payments made to employees and directors based on the fair value of the share-based payment on the date of grant. The Company elected to use the modified prospective method for adoption, which requires compensation expense to be recorded for all unvested stock options beginning in the first quarter of adoption. For all unvested options outstanding as of January 1, 2006, the previously measured but unrecognized compensation expense, based on the fair value at the original grant date, is recognized on a straight-line basis in the Consolidated Statements of Operations over the remaining vesting period. For share-based payments granted subsequent to January 1, 2006, compensation expense, based on the fair value on the date of grant, is recognized in the Consolidated Statements of Operations on a straight-line basis over the vesting period. In determining the fair value of stock options, the Company uses the Black-Scholes option-pricing model that employs the following assumptions:

• Expected volatility-based on the weekly historical volatility of our stock price, over the expected life of the option.

• Expected term of the option-based on historical employee stock option exercise behavior, the vesting terms of the respective option and a contractual life of ten years.

• Risk-free rate-based upon the rate on a zero coupon U.S. Treasury bill, for periods within the contractual life of the option, in effect at the time of grant.

• Dividend yield-calculated as the ratio of historical dividends paid per share of common stock to the stock price on the date of grant.

The Company's stock price volatility and option lives involve management's best estimates at that time, both of which impact the fair value of the option calculated under the Black-Scholes methodology and, ultimately, the expense that will be recognized over the life of the option.

Executive Overview

Consolidated net income for the year ended December 31, 2008 was $220,000, or $0.00 per diluted share compared to $21.9 million or $1.31 per diluted share in 2007. The following were significant factors related to 2008 results as compared to 2007:

• The results of operations in 2008 compared to 2007 were mainly affected by the three major items: provision for loan losses of $26.2 million, OTTI of $9.9 million in securities available for sale, and the KEIC litigation settlement expense of $7.5 million.

• The net interest margin for 2008 declined to 3.80% compared to 4.23% in 2007. The decrease in the net interest margin was mainly attributable to rate reductions in the Federal Funds rate by the Federal Open Market Committee ("FOMC") during the year for a combined 400 basis points, which caused an immediate reduction in the variable rate loan portfolio and a delayed reduction of the Bank's costs of its portfolio of time deposits. To a lesser extent, a change in the loan portfolio mix contributed to the margin compression, as a higher portion of the portfolio was fixed rate in 2008 compared to 2007. In addition, the slight decrease in demand deposits and the increases in time deposits and in other borrowed funds contributed to the decrease in the net interest margin.

• The Company's efficiency ratio for 2008 increased to 72.5% compared to 53.8% for 2007 due to increased operational costs primarily related to OTTI of $9.9 million for an investment held in its securities available for sale portfolio and the KEIC litigation settlement expense of $7.5 million.

• The return on average assets and return on average equity for 2008 decreased to 0.01% and 0.13%, respectively, compared to 1.14% and 14.33% in 2007. Net loan growth contributed $10.8 million in earnings, but was offset by a $23.9 million reduction in the average yield of the loan portfolio, a $6.0 million increase for growth in deposits and borrowings, offset by a $16.4 million decrease in average funding cost during 2008, which resulted in the net interest margin compression of $1.7 million. In addition, the loan loss provision increased by $19.7 million and non-interest expenses increased by $16.2 million offset by a decrease in income tax provision by $15.3 million.

• The 2008 provision for loan losses increased $19.7 million to $26.2 million compared to $6.5 million in 2007, due primarily to charge-offs and the risk assessment of the loan portfolio. Management's assessment of the credit risk inherent in the portfolio is based on a migration, quantitative and qualitative analyses, other historical factors and trends.

The following are important factors in understanding the Company's financial condition and liquidity:

• Net loans declined $110.3 million or 6.2% to $1.68 billion at December 31, 2008 as compared to $1.79 billion at December 31, 2007. The decrease in net loans was primarily due to the strategic reduction of the loan portfolio and the increase in the allowance for loan losses in 2008. The reduction of the loan portfolio was mainly comprised of net decreases in commercial real estate loans of $62.3 million, or 5.2%; SBA loans of $33.5 million, or 47.5%; consumer loans of $10.5 million, or 10.7%; and real estate construction loans of $6.2 million, or 9.0%.

• Total deposits increased $25.8 million, or 1.6%, to $1.60 billion at December 31, 2008 as compared to $1.58 billion at December 31, 2007. Money market accounts grew $203.0 million or 83.1%. While non-jumbo time deposits grew $30.6 million or 27.2%, jumbo time deposits declined $152.3 million or 19.0%. There was a decline in non interest-bearing demand deposit accounts of $53.3 million or 14.7%. The Company borrows funds through the Federal Home Loan Bank, Treasury Tax and Loan Investment Program. Other borrowings decreased $106.6 million or 35.6%.

• As a result of the aforementioned decline in loans and increase in deposits, the ratio of net loans to total deposits decreased to 104.7% at December 31, 2008 as compared to 113.4% at December 31, 2007.

• Non-performing assets increased to $20.5 million at December 31, 2008 from $6.6 million at December 31, 2007, an increase of $13.8 million or 208%. The largest component of this increase was non-performing commercial real estate and construction loans representing $15.1 million of the increase. Although there was an increase in non-performing assets, the ratio of non-performing assets as a percent of total loans and other real estate owned of 1.19% at December 31, 2008 reflects the Company's strong underwriting policies and continued efforts to monitor and address potential credit issues effectively.

• The Company issued and sold 55,000 shares of the Company's fixed-rate cumulative perpetual preferred stock and a 10-year warrant to purchase 864,780 shares of the Company's common stock to the U.S. Treasury Department at an exercise price of $9.54 per share. The Company will pay the Treasury Department a five percent dividend annually for each of the first five years of the investment and a nine percent dividend thereafter until the shares are redeemed. The cumulative dividend for the preferred stock is accrued for and payable on February 15, May 15, August 15 and November 15 of each year.

• The most recent notification from the FDIC in June 2008 categorized the Bank as well capitalized under the regulatory framework for prompt corrective action.

• The Company declared its quarterly cash dividend of $0.05 per share in March, June, September and December 2008 or $0.20 for the year ended December 31, 2008. On March 25, 2009, the Company's board of directors suspended its quarterly cash dividend of $0.05 from the first quarter of 2009 based on adverse economic conditions and reduction in earnings of the Company.

• All liquidity measures at December 31, 2008 met or exceeded the same measures at December 31, 2007.

Results of Operations

Net Interest Income

The Company's earnings depend largely upon its net interest income, which is the difference between the income received from its loan portfolio and other interest-earning assets and the interest paid on its deposits and other funding liabilities. The Company's net interest income is affected by the change in the level and the mix of interest-earning assets and interest-bearing liabilities, referred to as volume changes. The Company's net interest income is also affected by changes in the yields earned on assets and rates paid on liabilities, referred to as rate changes. Interest rates charged on loans are affected principally by the demand for such loans, the supply of money available for lending purposes and competitive factors. Those factors are, in turn, affected by general economic conditions and other factors beyond the Company's control, such as federal economic policies, the general supply of money in the economy, legislative tax policies, governmental budgetary matters and the actions of the Federal Reserve Board. Interest rates on deposits are affected primarily by rates charged by competitors.

The following table sets forth, for the periods indicated, the dollar amount of changes in interest earned and interest paid for interest-earning assets and interest-bearing liabilities and the amount of change attributable to
(i) changes in average daily balances (volume) and (ii) changes in interest rates (rate):

                                            Year Ended December 31, 2008 vs. 2007                  Year Ended December 31, 2007 vs. 2006
                                             Increase (Decrease) Due to Change In                  Increase (Decrease) Due to Change In
                                          Volume              Rate             Total            Volume              Rate              Total
Earning assets:
Interest income:
Loans(10)                              $     10,820       $     (23,685 )    $  (12,865 )    $     24,562       $     (3,510 )     $    21,052
Federal funds sold                               66                (216 )          (150 )          (1,549 )              229            (1,320 )
Investments(11)                                 954                  27             981            (2,332 )            1,112            (1,220 )

Total earning assets                         11,840             (23,874 )       (12,034 )          20,681             (2,169 )          18,512

Interest expense:
Deposits and borrowed funds:
Money market and super NOW accounts           4,204              (2,727 )         1,477               963              2,155             3,118
Savings deposits                               (385 )                40            (345 )            (539 )             (328 )            (867 )
Time Certificates of deposits                   715              (9,916 )        (9,201 )           2,307              2,234             4,541
Other borrowings                              1,510              (3,514 )        (2,004 )           7,067               (230 )           6,837
Long-term subordinated debentures                -                 (306 )          (306 )              -                  38                38

Total interest-bearing liabilities            6,044             (16,423 )       (10,379 )           9,798              3,869            13,667

Net interest income                    $      5,796       $      (7,451 )    $   (1,655 )    $     10,883       $     (6,038 )     $     4,845

10 Loans are net of the allowance for loan losses, deferred fees and discount on SBA loans retained. Loan fees included in loan income were approximately $1.4 million, $2.1 million and $1.3 million for the years ended December 31, 2008, 2007 and 2006, respectively. Amortized loan fees have been included in the calculation of net interest income. Non-accrual loans have been included in the table for computation purposes, but the foregone interest of such loans is excluded.

11 Interest income on a tax equivalent basis for tax-advantaged investments was not included in the computation of yields. Such income amounted to $85,000, $87,000 and $97,000 for the years ended December 31, 2008, 2007 and 2006, respectively.

Net interest income was $74.6 million, $76.3 million and $71.4 million for the years ended December 31, 2008, 2007 and 2006, respectively. The 2008 decrease in net interest income of $1.7 million, or 2.2% was principally due to compression of our net interest margin primarily resulting from a series of rate decrease by FOMC, which caused an immediate reduction in the variable rate loan portfolio and a delayed reduction of the Company's costs of its portfolio of time deposits. The 2007 increase in net interest income of $4.8 million, or 6.8% was principally due to increases in the Company's average gross loans which was $254.1 million in 2007 and offset by compression of our net interest margin primarily resulting from a 100 basis point decrease by FOMC in its lending rates, which caused an immediate reduction in the variable rate loan portfolio and a delayed reduction of the Company's costs of its portfolio of time deposits.

Net Interest Margin

The following table shows the Company's average balances of assets, liabilities and shareholders' equity; the amount of interest income and interest expense; the average yield or rate for each category of interest-earning assets and interest-bearing liabilities; and the net interest spread and the net interest margin for the periods indicated:

                                                                                      For the Year Ended December 31,
                                                        2008                                        2007                                        2006
                                                      Interest     Annualized                     Interest     Annualized                     Interest     Annualized
                                         Average       Income/      Average          Average       Income/      Average          Average       Income/      Average
                                         Balance       Expense     Rate/Yield        Balance       Expense     Rate/Yield        Balance       Expense     Rate/Yield
                                                                                           (Dollars in thousands)
              Assets:
Interest-earning assets:
Loans(12)                              $ 1,779,420    $ 122,424          6.88 %    $ 1,640,425    $ 135,290          8.25 %    $ 1,340,959    $ 114,238          8.52 %
Federal funds sold                           6,144          105          1.71            4,609          255          5.53           33,286        1,575          4.73
Investments(13)                            179,066        8,678          4.85          159,364        7,696          4.83          203,453        8,916          4.38

Total interest-earning assets            1,964,630      131,207          6.68 %      1,804,398      143,241          7.94 %      1,577,698      124,729          7.91 %

Noninterest-earning assets:
Cash and due from banks                     52,851                                      67,373                                      76,934
Bank premises and equipment, net            14,509                                      13,534                                      13,714
Customers' acceptances outstanding           4,156                                       3,580                                       5,017
Accrued interest receivables                 7,651                                       7,955                                       7,011
Other assets                                40,675                                      33,394                                      31,502

Total noninterest-earning assets           119,842                                     125,836                                     134,178

Total assets                           $ 2,084,472                                 $ 1,930,234                                 $ 1,711,876

Liabilities and Shareholders'
Equity:
Interest-bearing liabilities:
Deposits:
Money market and NOW accounts          $   363,356    $  10,674          2.94 %    $   233,984    $   9,197          3.93 %    $   204,535    $   6,081          2.97 %
Savings                                     53,601        1,832          3.42           64,906        2,177          3.35           80,219        3,044          3.79
Time certificate of deposits over
$100,000                                   724,384       28,805          3.98          731,034       38,127          5.22          687,181       34,136          4.97
Other time certificate of deposits         124,741        4,815          3.86           99,624        4,694          4.71           98,077        4,142          4.22

                                         1,266,082       46,126          3.64        1,129,548       54,195          4.80        1,070,012       47,403          4.43
Other borrowed funds                       258,151        9,294          3.60          224,860       11,298          5.02           83,941        4,461          5.31
Long-term subordinated debentures           18,557        1,187          6.40           18,557        1,493          8.05           18,557        1,455          7.84

Total interest-bearing liabilities       1,542,790       56,607          3.67        1,372,965       66,986          4.88        1,172,510       53,319          4.55

                                                                                        For the Year Ended December 31,
                                                             2008                                     2007                                     2006
                                                           Interest    Annualized                   Interest    Annualized                   Interest    Annualized
                                               Average      Income/     Average         Average      Income/     Average         Average      Income/     Average
                                               Balance      Expense    Rate/Yield       Balance      Expense    Rate/Yield       Balance      Expense    Rate/Yield
                                                                                             (Dollars in thousands)
Noninterest-bearing liabilities:
Demand deposits                                  349,902                                  382,071                                  390,675

Total funding liabilities                      1,892,692                     2.99 %     1,755,036                     3.82 %     1,563,185                     3.41 %

Other liabilities                                 24,020                                   22,080                                   22,050

Shareholders' equity                             167,760                                  153,118                                  126,641

Total liabilities and shareholders' equity   $ 2,084,472                              $ 1,930,234                              $ 1,711,876

Net interest income                                        $  74,600                                $  76,255                                $  71,410

. . .