Loan applicants are notified promptly of the decision of the Bank. Prior to closing any long-term loan, the  borrower must provide proof of fire and casualty insurance on the property serving as collateral, and such insurance  must be maintained during the full term of the loan. Title insurance is required on loans collateralized by real  property.  The Bank is focusing on the generation of commercial and commercial real estate loans to grow and  diversify the loan portfolio. However, the difficult economic environment has materially impacted commercial and  commercial real estate loan origination as a result of decreased demand for loans that meet the Bank’s credit  standards. In several of the Bank’s markets there is an oversupply of newly constructed, speculative residential real  estate properties and developed vacant lots. As a result of these issues, the Bank has curtailed land development and  construction lending and does not expect this type of lending to increase significantly until the economic outlook  improves and the supply and demand of residential housing and vacant developed lots is in balance. Economic  conditions in recent years have also caused the Bank to increase underwriting requirements on other types of loans to  insure borrowers can meet repayment requirements. SUPERVISION AND REGULATION  General  Financial institutions, their holding companies and their affiliates are extensively regulated under federal  and state law. As a result, the growth and earnings performance of the Company may be affected not only by  management decisions and general economic conditions, but also by requirements of federal and state statutes and by  the regulations and policies of various bank regulatory authorities, including the OCC, the Federal Reserve, the  FDIC, and the newly-created Bureau of Consumer Financial Protection (the “CFPB”). Furthermore, taxation laws  administered by the Internal Revenue Service and state taxing authorities, accounting rules developed by the  Financial Accounting Standards Board (the “FASB”) and securities laws administered by the SEC and state  securities authorities have an impact on the business of the Company. The effect of these statutes, regulations,  regulatory policies and accounting rules are significant to the operations and results of the Company and Bank, and  the nature and extent of future legislative, regulatory or other changes affecting financial institutions are impossible  to predict with any certainty.  Federal and state banking laws impose a comprehensive system of supervision, regulation and enforcement  on the operations of financial institutions, their holding companies and affiliates that is intended primarily for the  protection of the FDIC-insured deposits and depositors of banks, rather than stockholders. These federal and state  laws, and the regulations of the bank regulatory authorities issued under them, affect, among other things, the scope  of business, the kinds and amounts of investments banks may make, reserve requirements, capital levels relative to  operations, the nature and amount of collateral for loans, the establishment of branches, the ability to merge,  consolidate and acquire, dealings with insiders and affiliates and the payment of dividends. In addition, turmoil in  the credit markets in recent years prompted the enactment of unprecedented legislation that has allowed the U.S.  Department of the Treasury (the “Treasury”) to make equity capital available to qualifying financial institutions to  help restore confidence and stability in the U.S. financial markets, which imposes additional requirements on  institutions in which the Treasury invests.  In addition, the Company and Bank are subject to regular examination by their respective regulatory  authorities, which results in examination reports and ratings that are not publicly available and that can impact the  conduct and growth of business. These examinations consider not only compliance with applicable laws and  regulations, but also capital levels, asset quality and risk, management ability and performance, earnings, liquidity,  and various other factors. The regulatory agencies generally have broad discretion to impose restrictions and  limitations on the operations of a regulated entity where the agencies determine, among other things, that such  operations are unsafe or unsound, fail to comply with applicable law or are otherwise inconsistent with laws and  regulations or with the supervisory policies of these agencies. The following is a summary of the material elements of the supervisory and regulatory framework  applicable to the Company and the Bank. It does not describe all of the statutes, regulations and regulatory policies  that apply, nor does it restate all of the requirements of those that are described. The descriptions are qualified in  their entirety by reference to the particular statutory or regulatory provision.  15 