Financial Regulatory Reform  On July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection  Act (the “Dodd-Frank Act”) into law. The Dodd-Frank Act represents a sweeping reform of the supervisory and  regulatory framework applicable to financial institutions and capital markets in the United States, certain aspects of  which are described below in more detail. The Dodd-Frank Act creates new federal governmental entities  responsible for overseeing different aspects of the U.S. financial services industry, including identifying emerging  systemic risks. It also shifts certain authorities and responsibilities among federal financial institution regulators,  including the supervision of holding company affiliates and the regulation of consumer financial services and  products. In particular, and among other things, the Dodd-Frank Act: creates the CFPB, which is authorized to  regulate providers of consumer credit, savings, payment and other consumer financial products and services; narrows  the scope of federal preemption of state consumer laws enjoyed by national banks and federal savings associations  and expands the authority of state attorneys general to bring actions to enforce federal consumer protection  legislation; imposes more stringent capital requirements on bank holding companies and subjects certain activities,  including interstate mergers and acquisitions, to heightened capital conditions; significantly expands underwriting  requirements applicable to loans secured by 1-4 family residential real property; restricts the interchange fees  payable on debit card transactions for issuers with $10 billion in assets or greater; requires the originator of a  securitized loan, or the sponsor of a securitization, to retain at least 5% of the credit risk of securitized exposures  unless the underlying exposures are qualified residential mortgages or meet certain underwriting standards to be  determined by regulation; creates a Financial Stability Oversight Council as part of a regulatory structure for  identifying emerging systemic risks and improving interagency cooperation; provides for enhanced regulation of  advisers to private funds and of the derivatives markets; enhances oversight of credit rating agencies; and prohibits  banking agency requirements tied to credit ratings. Numerous provisions of the Dodd-Frank Act are required to be implemented through rulemaking by the  appropriate federal regulatory agencies. Many of the required regulations have been issued and others have been  released for public comment, but there remain a number that have yet to be released in any form. Furthermore, while  the reforms primarily target systemically important financial service providers, their influence is expected to filter  down in varying degrees to smaller institutions over time. Management of the Company and Bank will continue to  evaluate the effect of the changes; however, in many respects, the ultimate impact of the Dodd-Frank Act will not be  fully known for years, and no current assurance may be given that the Dodd-Frank Act, or any other new legislative  changes, will not have a negative impact on the results of operations and financial condition of the Company and the  Bank.  The Company is subject to various regulatory capital requirements administered by the federal banking  regulators noted above. Failure to meet regulatory capital requirements may result in certain mandatory and possible  additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the  Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for “prompt  corrective action” (described below), the Company must meet specific capital guidelines that involve quantitative  measures of its assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting  policies. The Company’s capital amounts and classifications are also subject to judgments by the regulators  regarding qualitative components, risk weightings and other factors.  While capital has historically been one of the key measures of the financial health of both bank holding  companies and depository institutions, its role is becoming fundamentally more important in the wake of the  financial crisis, as the regulators have recognized that the amount and quality of capital held by banking  organizations was insufficient to absorb losses during periods of severe stress. Certain provisions of the Dodd-Frank  Act and Basel III, discussed below, will ultimately establish strengthened capital standards for banks and bank  holding companies, will require more capital to be held in the form of common stock and will disallow certain funds  from being included in capital determinations. Once fully implemented, these provisions will represent regulatory  capital requirements that are meaningfully more stringent than those in place currently.  Company and Bank Required Capital Levels. Bank holding companies have historically had to comply  with less stringent capital standards than their bank subsidiaries and were able to raise capital with hybrid  instruments such as trust preferred securities. The Dodd-Frank Act mandated the Federal Reserve to establish  minimum capital levels for bank holding companies on a consolidated basis that are as stringent as those required for  16  The Increasing Regulatory Emphasis on Capital 