This discussion is designed to provide insight into management's assessment of significant trends related to the Company's consolidated financial condition, results of operations, liquidity, capital resources and interest rate sensitivity. It should be read in conjunction with the unaudited interim consolidated financial statements and notes thereto and the other financial information appearing elsewhere in this report.

Forward Looking Statements

This Report on Form 10-Q contains statements that constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Those forward-looking statements include statements regarding the intent, belief or current expectations of the Company and its management. Any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and actual results may differ materially from those projected in the forward-looking statements. The Company does not undertake any obligation to revise or update publicly any forward-looking statements for any reason.

The following discussion should be read in conjunction with the Company's financial statements and the related notes provided under "Item 1-Financial Statements" above.

Overview of Earnings Performance

For the first quarter 2009, net loss was $6,729,000 compared to net income of $997,000 for the first quarter 2008.

The significant factors impacting net income for the first quarter 2009 were:

· During the first quarter 2009, the Company experienced significant deterioration and downgrades to specific loans in its portfolio, including net charge-offs of $6.5 million, resulting in a substantially higher comparable loan loss provision, which reflected the effect of increases in experienced loss frequency and severity on the provision calculation and resulted in an increase from $673,000 for the first quarter 2008 to $12.6 million for the first quarter 2009. The allowance for loan losses increased $6.1 million from $7.3 million at December 31, 2008 to $13.4 million at March 31, 2009.

· The margin continued to be compressed as the rapid reduction in interest rates due to the actions of the Federal Reserve impacted interest earning assets more quickly than rates paid on interest bearing liabilities as the target fed funds rate was reduced from 4.25% at December 31, 2007 to a range of 0% to .25% at December 31, 2008.

· Rates paid on interest bearing liabilities, while responding more slowly to the rate cuts, have begun to decline and were 3.18% for the first quarter 2009 compared to 4.41% for the same period in 2008. If rates remain at current levels, it is possible that the Company will continue to experience sequential margin improvement throughout much of 2009.

· Strategic decision to discontinue SBA lending east of the Rocky Mountains, increasing non-interest expenses by $160,000, including both severance and lease-related costs.

Critical Accounting Policies

A number of critical accounting policies are used in the preparation of the Company's consolidated financial statements. These policies relate to areas of the financial statements that involve estimates and judgments made by management. These include: provision and allowance for loan losses and servicing rights. These critical accounting policies are discussed in the Company's 2008 Form 10-K with a description of how the estimates are determined and an indication of the consequences of an over or under estimate.

Results of Operations-First Quarter Comparison

The following table sets forth for the periods indicated, certain items in the
consolidated statements of income of the Company and the related changes between
those periods:

                                                           Three Months Ended
                                                                March 31,                  Increase
                                                         2009               2008          (Decrease)
                                                     (dollars in thousands, except per share amounts)
Interest income                                      $      10,217       $    12,011     $      (1,794 )
Interest expense                                             4,454             5,850            (1,396 )
Net interest income                                          5,763             6,161              (398 )
Provision for loan losses                                   12,555               673            11,882
Net interest income (loss) after provision for
loan losses                                                 (6,792 )           5,488           (12,280 )
Non-interest income                                          1,168             1,414              (246 )
Non-interest expenses                                        5,807             5,180               627
Income (loss) before provision for income taxes            (11,431 )           1,722           (13,153 )
Provision (benefit) for income taxes                        (4,702 )             725            (5,427 )
Net income (loss)                                    $      (6,729 )     $       997     $      (7,726 )
Preferred stock dividends                                      261                 -               261
Net income (loss) available to common shareholders   $      (6,990 )     $       997     $      (7,987 )
Earnings (loss) per common share:
Basic                                                $       (1.18 )     $       .17     $       (1.35 )
Diluted                                              $       (1.18 )     $       .17     $       (1.35 )
Dividends per common share                           $           -       $      0.06     $       (0.06 )
Comprehensive income (loss)                          $      (6,626 )     $     1,030     $      (7,656 )

The following table sets forth the changes in interest income and expense attributable to changes in rate and volume:

                                                Three Months Ended
                                                     March 31,
                                                 2009 versus 2008
                                          Total              Change due to
                                         change            Rate        Volume
                                     (in thousands)
Loans, net                           $        (1,608 )   $ (2,327 )   $    719
Investment securities                           (116 )       (113 )         (3 )
Other                                            (70 )        (73 )          3
Total interest-earning assets                 (1,794 )     (2,513 )        719

Deposits                                      (1,137 )     (1,412 )        275
Other borrowings                                (259 )       (269 )         10
Total interest-bearing liabilities            (1,396 )     (1,681 )        285
Net interest income                  $          (398 )   $   (832 )   $    434

Net Interest Income

The margin continued to be compressed as the rapid reduction in interest rates due to the actions of the Federal Reserve impacted interest earning assets more quickly than rates paid on interest bearing liabilities. The target fed funds rate was reduced from 4.25% at December 31, 2007 to a range of 0% to .25% at December 31, 2008. Rates paid on interest bearing liabilities, while responding more slowly to the rate cuts, have begun to decline. Specifically, rates paid on interest bearing have declined from 4.41% for the first quarter 2008 to 3.18% for the same period in 2009. As deposit and borrowing rates continue to adjust, this margin compression may ease in coming periods.

Net interest income declined by $398,000 for the first quarter 2009 compared to 2008. Total interest income decreased $1.8 million, or 14.9%, for the first quarter 2009 compared to 2008. While average loan balances increased by $46.9 million, the margin on loans declined from 8.27% to 6.60% for the first quarter 2009 compared to 2008. Overall, the yield on interest earning assets declined from 7.95% for the first quarter 2008 to 6.31% for 2009. These declines were partly offset by lower interest expense which was $4.5 million for the first quarter 2009 compared to $5.9 million for the same period in 2008, a reduction of $1.4 million, also primarily due to lower rates paid on deposits and borrowings. The resulting net interest margin was 3.56% for the first quarter 2009 compared to 4.08% for 2008.

Provision for Loan Losses
The provision for loan losses increased $11.9 million to $12.6 million for the first quarter 2009 compared to $673,000 for the first quarter 2008. The substantially higher comparable loan loss provision for the first quarter 2009 reflected the effect of increases in losses on specific credits as well as experienced loss frequency and severity on the provision calculation. During the first quarter 2009, the Company experienced significant deterioration and downgrades to specific loans in its portfolio, including net charge-offs of $6.5 million, generally related to the current economic circumstances. A major component of the allowance calculation relates to historical loan losses. The Company has experienced elevated levels of loan losses over the past four quarters thereby resulting in a significantly higher allowance requirement. The migration of the losses through the loan portfolio has resulted in a calculated increase in the allowance of $7.3 million at December 31, 2008 to $13.4 million at March 31, 2009. This increase is directly related to increased inherent loss in our loan portfolio and the effect of historical loan loss experience on our estimate of losses inherent in the portfolio as of the balance sheet date and does not necessarily reflect expected future losses. Non-performing loans significantly decreased from $16.9 million at December 31, 2008 to $8.7 million at March 31, 2009, due to a combination of charge-offs, upgrades and payoffs. While total past due loans increased from $12.0 million to $18.9 million over the same period, $7.4 million of this increase fell within the less than 60 days past due category.

Non-Interest Income
Total non-interest income declined by $246,000 or 17.4%, for the first quarter 2009 compared to 2008. Non-interest income includes loan document fees, service charges on deposit accounts, gains on sale of loans, loan servicing fees and other revenues not derived from interest on earning assets. Other loan fees declined $279,000 due to lower referral fees on 504 loans and gain on loan sales declined $164,000 as the Bank did not sell SBA loans in the first quarter 2009. Net loan servicing increased by $156,000, primarily due to a valuation adjustment to the interest only strip as the prepayment speeds on SBA loans declined.

Non-Interest Expenses
Total non-interest expenses increased by $627,000, or 12.1% for the first quarter 2009 compared to 2008. Although salaries and employee benefits and occupancy declined, other non-interest expense increased. These expenses include other loan expense related to the reserve for undisbursed loans, which increased $300,000 due to the increase in migration factors as discussed above in the "Provision for Loan Losses". The FDIC assessment and the loss on the sale of other foreclosed assets increased $157,000 and $66,000, respectively. As part of the decision to discontinue SBA lending east of the Rocky Mountains, the Company expensed severance, included in salaries and employee benefits, and lease commitments of $117,000 and $43,000, respectively. Also contributing to the difference between the first quarter 2009 and 2008 was a recovery of $200,000 of sublease costs in the first quarter 2008 on a former loan which reduced other expenses.

Interest Rates and Differentials

The following table illustrates average yields on our interest-earning assets and average rates on interest-bearing liabilities for the periods indicated. These average yields and rates are derived by dividing interest income by the average balances of interest-earning assets and by dividing interest expense by the average balances of interest-bearing liabilities for the periods indicated. Amounts outstanding are averages of daily balances during the applicable periods.

                                                                      Three Months
                                                                     Ended March 31,
                                                                   2009            2008
Interest-earning assets:                                         (dollars in thousands)
Interest-earning deposits in other financial institutions:
Average balance                                                $      1,115      $   1,026
Interest income                                                           7              9
Average yield                                                          2.84 %         3.43 %
Federal funds sold:
Average balance                                                $     11,052      $   9,105
Interest income                                                           9             77
Average yield                                                          0.33 %         3.40 %
Investment securities:
Average balance                                                $     44,437      $  44,745
Interest income                                                         449            565
Average yield                                                          4.09 %         5.08 %
Gross loans:
Average balance                                                $    599,574      $ 552,684
Interest income                                                       9,752         11,360
Average yield                                                          6.60 %         8.27 %
Total interest-earning assets:
Average balance                                                $    656,178      $ 607,560
Interest income                                                      10,217         12,011
Average yield                                                          6.31 %         7.95 %

Interest-bearing liabilities:
Interest-bearing demand deposits:
Average balance                                                $     67,103      $  70,574
Interest expense                                                        283            408
Average cost of funds                                                  1.71 %         2.32 %
Savings deposits:
Average balance                                                $     15,226      $  14,114
Interest expense                                                        115            130
Average cost of funds                                                  3.05 %         3.71 %
Time certificates of deposit:
Average balance                                                $    367,367      $ 332,358
Interest expense                                                      2,960          3,957
Average cost of funds                                                  3.27 %         4.79 %
Other borrowings:
Average balance                                                $    117,678      $ 116,582
Interest expense                                                      1,096          1,355
Average cost of funds                                                  3.78 %         4.67 %
Total interest-bearing liabilities:
Average balance                                                $    567,374      $ 533,628
Interest expense                                                      4,454          5,850
Average cost of funds                                                  3.18 %         4.41 %

Net interest income                                            $      5,763      $   6,161
Net interest spread                                                    3.13 %         3.55 %
Average net margin                                                     3.56 %         4.08 %

Nonaccrual loans are included in the average balance of loans outstanding.

Net interest income is the difference between the interest and fees earned on loans and investments and the interest expense paid on deposits and other liabilities. The amount by which interest income will exceed interest expense depends on the volume or balance of earning assets compared to the volume or balance of interest-bearing deposits and liabilities and the interest rate earned on those interest-earning assets compared to the interest rate paid on those interest-bearing liabilities.

Net interest margin is net interest income expressed as a percentage of average earning assets. It is used to measure the difference between the average rate of interest earned on assets and the average rate of interest that must be paid on liabilities used to fund those assets. To maintain its net interest margin, the Company must manage the relationship between interest earned and paid.

Financial Condition

Average total assets increased by $50.0 million, or 8.0%, to $672.7 million for the three months ended March 31, 2009 compared to $622.7 million for the comparable period ended March 31, 2008. Average total gross loans increased by $46.9 million, or 8.5%, to $599.6 million for the three months ended March 31, 2009 from $552.7 million for the three months ended March 31, 2008. Average deposits also increased by 7.6% from $450.6 million for the three months ended March 31, 2008 to $484.9 million for the three months ended March 31, 2009.

The book value per common share declined to $7.68 at March 31, 2009 from $8.84 at December 31, 2008.