Forward Looking Statements

Certain statements contained in this Form 10-Q, in other filings with the U.S. Securities and Exchange Commission (SEC), and in press releases or other shareholder communications are forward-looking statements, as that term is defined in U.S. federal securities laws. Generally, these statements relate to our business plans or strategies, projections involving anticipated revenues, earnings, profitability or other aspects of operating results or other future developments in our affairs or the industry in which we conduct business. Forward-looking statements may be identified by reference to a future period or periods or by the use of forward-looking terminology such as "anticipate," "believe," "expect," "intend," "plan," "estimate," "would be," "will," "intend to," "project" or similar expressions or the negative thereof.

We wish to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. We also advise readers that various factors, including regional and national economic conditions, changes in levels of market interest rates, credit and other risks which are inherent in our lending and investment activities, legislative changes, changes in the cost of funds, demand for loan products and financial services, changes in accounting principles, ability to realize deferred tax assets, competitive and regulatory factors, and successful execution of our strategy and our Strategic Growth and Diversification Plan could affect our financial performance and could cause actual results for future periods to differ materially from those anticipated or projected. For further discussion of risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements see "Part II. Item 1A. Risk Factors" of this Form 10-Q as well as "Part I. Item 1A. Risk Factors" of the Annual Report on Form 10-K for the year ended December 31, 2008. Such forward-looking statements are not guarantees of future performance. We do not undertake, and specifically disclaim any obligation, to update any forward-looking statements to reflect occurrences or unanticipated events or circumstances after the date of such statements.

Overview

During the third quarter of 2009, we recorded a net loss of $4.7 million, or $(0.44) per share. Rapid declines in real estate collateral values on non-performing assets resulted in a significant increase in our provision for loan losses as well as a $1.3 million increase in the valuation allowances on other real estate owned (OREO). In addition, higher professional fees related to a shareholder derivative demand and higher FDIC insurance premiums negatively impacted earnings. These factors exceeded reductions in controllable overhead costs, increases in non-interest income, and increases in net interest income attributable to higher net interest margins. Our net interest margin continues to benefit from relatively lower interest rates and lower premium amortization on FHLB debt.

The deposit environment has become more favorable with consumer savings rates on the rise and overall pricing within the industry being more rational than in the recent past. We continue to focus on building new and deepening existing client relationships while remaining disciplined in our pricing,

particularly our certificates of deposit. At September 30, 2009, our total core deposits increased $34.3 million, or 7.6%, from December 31, 2008.

Our net loss for the year caused our tangible common equity to decrease to $109.5 million, or 10.27% of tangible assets at September 30, 2009 from $111.8 million or 10.01% of tangible assets at December 31, 2008. Our net loss for the year combined with a $7.8 million increase in the disallowance of deferred tax assets for regulatory capital purposes caused the Bank's risk-based capital ratio to decrease to 12.02% from 13.21% at December 31, 2008. At September 30, 2009, the Bank's risk-based capital ratio exceeded the regulatory limit of 10% to be considered "well-capitalized" by $17.3 million.

Progress on Strategic Growth and Diversification Plan

Our Strategic Growth and Diversification Plan is built around four core objectives: decreasing non-performing loans; ensuring costs are appropriate given our targeted future asset base; growing while diversifying by targeting small and mid-sized business owners for relationship-based banking opportunities; and expanding and deepening our relationships with our clients by meeting a higher percentage of our clients' financial service needs.

Progress on the Strategic Growth and Diversification plan has been negatively impacted by the length and severity of the current recession. The current recession started in December 2007, according to the National Bureau of Economic Research (NBER). Even if it had ended, as some economic observers have indicated, early in the third quarter of 2009, the current contraction would represent the longest period of U.S. economic contraction in the post World War II era. For comparison, the average length of the ten prior postwar contraction periods was ten months.

The decline in the real estate collateral values supporting many of our non-performing loans and OREO led to material increases in impairment reserves on loans, net charge-offs, and valuation allowances on OREO during the quarter. These non-performing assets represent a significant drag on earnings for a number of reasons, and we are committed to addressing these problem credits in an aggressive, yet prudent, manner within the constraints of current and forecasted market conditions.

Our ability to achieve targeted earning asset levels has been hampered by current economic and regulatory conditions. Our efforts to attract new business banking clients and deepen relationships with current clients are progressing; however, our successes in this arena have resulted in slower asset and income growth rates than would be achieved in normal economic times. Growth remains a strategic priority, but expectations of future growth are tempered by the reality of the market. We believe that we will be able to achieve quality, relationship-based loan growth over time and as the economy recovers.

Critical Accounting Policies

The consolidated financial statements are prepared in accordance with U.S. GAAP which requires us to establish various accounting policies. Certain of these accounting policies require us to make estimates, judgments or assumptions that could have a material effect on the carrying value of certain assets and liabilities. The estimates, judgments, and assumptions used by us are based on historical experience, projected results, internal cash flow modeling techniques and other factors which we believe are reasonable under the circumstances.

Significant accounting policies are presented in Note 1 to the consolidated financial statements included in "Item 8. Financial Statements and Supplementary Data" of the Annual Report on Form 10-K for December 31, 2008. These policies, along with the disclosures presented in other financial statement notes and in this management's discussion and analysis, provide information on the methodology used for the valuation of significant assets and liabilities in our financial statements. We view critical accounting policies to be those that are highly dependent on subjective or complex judgments, estimates, and assumptions, and where changes in those estimates and assumptions could have a significant impact on the financial statements. We currently view the determination of the allowance for losses on loans, valuations and impairments of securities, and the accounting for income taxes to be critical accounting policies.

Allowance for Losses on Loans. We maintain our allowance for losses on loans at a level we believe is sufficient to absorb credit losses inherent in our loan portfolio. The allowance for losses on loans represents our estimate of probable incurred losses in our loan portfolio at each statement of condition date and is based on our review of available and relevant information.

One component of our allowance for losses on loans contains allocations for probable inherent but undetected losses within various pools of loans with similar characteristics pursuant to ASC 450-10, Contingencies. This component is based in part on certain loss factors applied to various loan pools as stratified by us. In determining the appropriate loss factors for these loan pools, we consider historical charge-offs and recoveries; levels of and trends in delinquencies, impaired loans and other classified loans; concentrations of credit within the commercial loan portfolios; volume and type of lending; and current and anticipated economic conditions.

The second component of our allowance for losses on loans contains allocations for probable losses that we have identified relating to specific borrowing relationships pursuant to ASC 310-10, Receivables. This component consists of expected losses resulting in specific credit allocations for individual loans not considered within the above mentioned loan pools. The analysis of each loan involves a high degree of judgment in estimating the amount of the loss associated with the loan, including the estimation of the amount and timing of future cash flows and collateral values.

Loan losses are charged off against the allowance when the loan balance or a portion of the loan balance is no longer covered by the paying capacity of the borrower based on an evaluation of available cash resources and collateral value, while recoveries of amounts previously charged off are credited to the allowance. We assess the adequacy of the allowance for losses on loans on a quarterly basis and adjust the allowance for losses on loans by recording a provision for losses on loans in an amount sufficient to maintain the allowance at a level we deem appropriate. Our evaluation of the adequacy of the allowance for losses on loans is inherently subjective as it requires estimates that are susceptible to significant revision as additional information becomes available or as future events occur. To the extent that actual outcomes differ from our estimates, an additional provision for losses on loans could be required which could adversely affect earnings or our financial position in future periods. In addition, various regulatory agencies, as an integral part of their examination processes, periodically review our allowance for losses on loans and the carrying value of our other non-performing loans, based on information available to them at the time of their examinations. Any of these agencies could require us to make additional provisions for losses on loans.

Securities. Under ASC 320-10, Investments - Debt and Equity Securities, investment securities must be classified as held-to-maturity, available-for-sale or trading. We determine the appropriate classification at the time of purchase. The classification of securities is significant since it directly impacts the accounting for unrealized gains and losses on securities. Debt securities are classified as held-to-maturity and carried at amortized cost when we have the positive intent and we have the ability to hold the securities to maturity. Securities not classified as held-to-maturity are classified as available-for-sale and are carried at fair value, with the unrealized holding gains and losses, net of tax, reported in other comprehensive income and do not affect earnings until realized.

The fair values of our securities are generally determined by reference to quoted prices from reliable independent sources utilizing observable inputs. Certain of the fair values of securities are determined using models whose significant value drivers or assumptions are unobservable and are significant to the fair value of the securities. These models are utilized when quoted prices are not available for certain securities or in markets where trading activity has slowed or ceased. When quoted prices are not available and are not provided by third party pricing services, our judgment is necessary to determine fair value. As such, fair value is determined using discounted cash flow analysis models, incorporating default rates, estimation of prepayment characteristics and implied volatilities.

We evaluate all securities on a quarterly basis, and more frequently when economic conditions warrant additional evaluations, for determining if an other-than-temporary impairment (OTTI) exists pursuant to guidelines established in ASC 320-10, Investments - Debt and Equity Securities. In evaluating the possible impairment of securities, consideration is given to the length of time and the extent to which the fair value has been less than cost, the financial conditions and near-term prospects of the issuer, and our ability and intent to retain our investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. In analyzing an issuer's financial condition, we may consider whether the securities are issued by the federal government or its agencies or government sponsored agencies, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer's financial condition.

If we determine that an investment experienced an OTTI, we must then determine the amount of the OTTI to be recognized in earnings. If we do not intend to sell the security and it is more likely than not that we will not be required to sell the security before recovery of its amortized cost basis less any current period loss, the OTTI will be separated into the amount representing the credit loss and the amount related to all other factors. The amount of the OTTI related to the credit loss is determined based on the present value of cash flows expected to be collected and is recognized in earnings. The amount of the OTTI related to other factors will be recognized in other comprehensive income, net of applicable taxes. The previous amortized cost basis less the OTTI recognized in earnings will become the new amortized cost basis of the investment. If we intend to sell the security or it is more likely than not we will be required to sell the security before recovery of its amortized cost basis less any current period credit loss, the OTTI will be recognized in earnings equal to the entire difference between the investment's amortized cost basis and its fair value at the balance sheet date. Any recoveries related to the value of these securities are recorded as an unrealized gain (as other comprehensive income (loss) in shareholders' equity) and not recognized in income until the security is ultimately sold. From time to time we may dispose of an impaired security in response to asset/liability management decisions, future market movements, business plan changes, or if the net proceeds can be reinvested at a rate of return that is expected to recover the loss within a reasonable period of time.

Income Tax Accounting. We file a consolidated federal income tax return. The provision for income taxes is based upon income in our consolidated financial statements, rather than amounts reported on our income tax return. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on our deferred tax assets and liabilities is recognized as income or expense in the period that includes the enactment date.

Under U.S. GAAP, a valuation allowance is required to be recognized if it is "more likely than not" that a deferred tax asset will not be realized. The determination of the realizability of the deferred tax assets is highly subjective and dependent upon judgment concerning our evaluation of both positive and negative evidence, our forecasts of future income, applicable tax planning strategies, and assessments of current and future economic and business conditions. Positive evidence includes the existence of taxes paid in available carry-back years as well as the probability that taxable income will be generated in future periods, while negative evidence includes any cumulative losses in the current year and prior two years and general business and economic trends. At September 30, 2009 and December 31, 2008, we determined that valuation allowances were not necessary, largely based on available tax planning strategies and our projections of future taxable income. Any reduction in estimated future taxable income may require us to record a valuation allowance against our deferred tax assets. Any required valuation allowance would result in additional income tax expense in the period and could have a significant impact on our future earnings.

Positions taken in our tax returns may be subject to challenge by the taxing authorities upon examination. The benefit of an uncertain tax position is initially recognized in the financial statements only when it is more likely than not the position will be sustained upon examination by the tax authorities. Such tax positions are both initially and subsequently measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon settlement with the tax authority, assuming full knowledge of the position and all relevant facts. Differences between our position and the position of tax authorities could result in a reduction of a tax benefit or an increase to a tax liability, which could adversely affect our future income tax expense.

We believe our tax policies and practices are critical accounting policies because the determination of our tax provision and current and deferred tax assets and liabilities have a material impact on our net income and the carrying value of our assets. We believe our tax liabilities and assets are adequate and are properly recorded in the consolidated financial statements at September 30, 2009.

Average Balances, Net Interest Income, Yields Earned and Rates Paid

The following tables provide information regarding (i) interest income
recognized from interest-earning assets and their related average yields; (ii)
the amount of interest expense realized on interest-bearing liabilities and
their related average rates; (iii) net interest income; (iv) interest rate
spread; and (v) net interest margin. Information is based on average daily
balances during the periods indicated.

                                                                     Three Months Ended September 30,
                                                           2009                                             2008
                                         Average                         Average          Average                         Average
                                         Balance        Interest        Yield/Cost        Balance        Interest        Yield/Cost
                                                                          (Dollars in thousands)
Interest-earning assets:
Loans receivable
(1)                                    $   747,491     $     9,648             5.12 %   $   728,312     $    10,739             5.87 %
Securities
(2)                                        222,025           2,742             4.83         261,574           3,278             4.90
Other interest-earning assets (3)           26,529             195             2.92          31,143             347             4.43
Total interest-earning assets              996,045          12,585             5.01       1,021,029          14,364             5.60

Non-interest earning
assets                                      93,065                                           82,098
Total
assets                                 $ 1,089,110                                      $ 1,103,127

Interest-bearing liabilities:
Deposits:
Checking
accounts                               $   133,719              74             0.22     $   104,159             141             0.54
Money market
accounts                                   154,347             263             0.68         181,771             887             1.94
Savings
accounts                                   118,134              98             0.33         122,037             140             0.46
Certificates of
deposit                                    364,876           1,996             2.17         367,993           2,890             3.12
Total deposits                             771,076           2,431             1.25         775,960           4,058             2.08

Borrowed money:
Other short-term borrowed money (4)         11,969              24             0.80          29,140             129             1.76
FHLB borrowed money (5)(6)                 104,253             734             2.76          94,118           1,270             5.28
Total borrowed
money                                      116,222             758             2.55         123,258           1,399             4.44
Total interest-bearing liabilities         887,298           3,189             1.43         899,218           5,457             2.41
Non-interest bearing
deposits                                    69,341                                           63,418
Non-interest bearing
liabilities                                 17,060                                           17,298
Total
liabilities                                973,699                                          979,934
Shareholders'
equity                                     115,411                                          123,193
Total liabilities and shareholders'
equity                                 $ 1,089,110                                      $ 1,103,127
Net interest-earning
assets                                 $   108,747                                      $   121,811
Net interest income / interest rate
spread                                                 $     9,396             3.58 %                   $     8,907             3.19 %
Net interest
margin                                                                         3.74 %                                           3.47 %
Ratio of average interest-earning
assets
to average interest-bearing
liabilities                                                                  112.26 %                                         113.55 %

(1) The average balance of loans receivable includes non-performing loans, interest on which is recognized on a cash basis.

(2) Average balances of securities are based on amortized cost.

(3) Includes Federal Home Loan Bank (FHLB) stock, money market accounts, federal funds sold, and interest-earning bank deposits.

(4) Includes federal funds purchased, overnight borrowings from the Federal Reserve Bank discount window and repurchase agreements (Repo Sweeps).

(5) The 2009 period includes an average of $104.3 million of contractual FHLB borrowed money reduced by an average of $31,000 of unamortized deferred premium on the early extinguishment of debt. Interest expense on borrowed money includes $24,000 of amortization of the deferred premium on the early extinguishment of debt. The amortization of the deferred premium increased the average cost of borrowed money as reported to 2.55% compared to the average rate for the period of 2.47%.

(6) The 2008 period includes an average of $94.6 million of contractual FHLB borrowed money reduced by an average of $531,000 of unamortized deferred premium on the early extinguishment of debt. Interest expense on borrowed money

includes $270,000 of amortization of the deferred premium on the early extinguishment of debt. The amortization of the deferred premium increased the average cost of borrowed money as reported to 4.44% compared to the average rate for the period of 3.58%.

                                                                       Nine Months Ended September 30,
                                                           2009                                              2008
                                         Average                          Average          Average                          Average
                                         Balance         Interest        Yield/Cost        Balance         Interest        Yield/Cost
                                                                           (Dollars in thousands)
Interest-earning assets:
Loans receivable (1)                   $   750,071     $     29,400             5.24 %   $   752,672     $     34,823             6.18 %
Securities (2)                             232,953            8,805             4.98         251,608            9,529             4.98
Other interest-earning assets (3)           29,903              575             2.57          50,492            1,358             3.59
Total interest-earning assets            1,012,927           38,780             5.12       1,054,772           45,710             5.79

Non-interest earning
assets                                      88,101                                            85,156
Total
assets                                 $ 1,101,028                                       $ 1,139,928

Interest-bearing liabilities:
Deposits:
Checking
accounts                               $   127,032              281             0.30     $   105,791              498             0.63
Money market
accounts                                   158,125              881             0.74         187,363            3,152             2.25
Savings
accounts                                   118,216              304             0.34         123,822              465             0.50
Certificates of
deposit                                    367,274            6,810             2.48         374,514           10,185             3.63
Total deposits                             770,647            8,276             1.44         791,490           14,300             2.41

  Borrowed money:
    Other short-term borrowed money
(4)                                         13,412               77             0.77          25,323              367             1.94
    FHLB borrowed money (5)(6)             122,727            2,521             2.71         115,575            4,874             5.54
    Total borrowed
money                                      136,139            2,598             2.52         140,898            5,241             4.89
Total interest-bearing liabilities         906,786           10,874             1.60         932,388           19,541             2.80
Non-interest bearing deposits               65,919                                            62,357
Non-interest bearing liabilities            15,168                                            16,597
Total
liabilities                                987,873                                         1,011,342
Shareholders'
equity                                     113,155                                           128,586
Total liabilities and shareholders'
equity                                 $ 1,101,028                                       $ 1,139,928
Net interest-earning
assets                                 $   106,141                                       $   122,384
Net interest income / interest rate
spread                                                 $     27,906             3.52 %                   $     26,169             2.99 %
. . .