| common stock involve risk |
| The following discussion highlights risks management believes are material for our company, but does not necessarily include all risks that we may face |
| Our operations are subject to interest rate risk and variations in interest rates may negatively affect financial performance |
| Our earnings and cash flows are largely dependent upon our net interest income |
| Net interest income is the difference between interest income earned on interest-earning assets such as loans and securities and interest expense paid on interest-bearing liabilities such as deposits and borrowed money |
| Changes in the general level of interest rates may have an adverse effect on our business, financial condition and result of operations |
| Interest rates are highly sensitive to many factors that are beyond our control, including general economic conditions and policies of various governmental and regulatory agencies and, in particular, the FRB Changes in monetary policy, including changes in interest rates, influence the amount of interest income that we receive on loans and securities and the 15 _________________________________________________________________ amount of interest that we pay on deposits and borrowings |
| Changes in monetary policy and interest rates also can adversely affect: • our ability to originate loans and obtain deposits; • the fair value of our financial assets and liabilities; and • the average duration of our securities portfolio |
| If the interest rates paid on deposits and other borrowings increase at a faster rate than the interest rates received on loans and other investments, our net interest income, and therefore earnings, could be adversely affected |
| Earnings could also be adversely affected if the interest rates received on loans and other investments fall more quickly than the interest rates paid on deposits and other borrowings |
| We measure interest rate risk under various rate scenarios using specific criteria and assumptions |
| A summary of this process, along with the results of our net interest income simulations is presented within “Item 7A Quantitative and Qualitative Disclosures About Market Risk” of this Annual Report on Form 10-K We are subject to lending risk and could suffer losses in our loan portfolio despite our underwriting practices |
| There are inherent risks associated with our lending activities |
| There are risks inherent in making any loan, including those related to dealing with individual borrowers, nonpayment, uncertainties as to the future value of collateral and changes in economic and industry conditions |
| We attempt to closely manage our credit risk through prudent loan underwriting and application approval procedures, careful monitoring of concentrations of our loans within specific industries and periodic independent reviews of outstanding loans by our loan management department and third party loan review specialists |
| We cannot assure that such approval and monitoring procedures will reduce these credit risks |
| Increases in interest rates and/or weakening economic conditions could adversely impact the ability of borrowers to repay their outstanding loans |
| In the past, we have focused on providing ARMs to decrease the risk related to changes in the interest rate environment, however, these types of loans also involve other risks |
| As interest rates rise, the customers’ payments on an ARM also increase to the extent permitted by the loan terms thereby increasing the potential for default |
| Also, when interest rates decline substantially, borrowers tend to refinance into fixed-rate loans |
| As of December 31, 2005, approximately 63prca of our loan portfolio consisted of commercial and industrial, construction and land development, and commercial real estate loans |
| These types of loans involve increased risks because the borrower’s ability to repay the loan typically depends primarily on the successful operation of the business or the property securing the loan |
| Additionally, these loans are made to small- or middle-market business customers who may have vulnerability to economic conditions and who may not have experienced a complete business or economic cycle |
| These types of loans are also typically larger than single-family residential mortgage loans or consumer loans |
| Because our loan portfolio contains a significant number of commercial and industrial, construction and land development, and commercial real estate loans with relatively large balances, the deterioration of one or a few of these loans could cause a significant increase in non-performing loans |
| An increase in non-performing loans would result in a reduction in interest income recognized on loans |
| An increase in non-performing loans also could require us to increase the provision for losses on loans and increase loan charge-offs, both of which would reduce our net income |
| All of these could have a material adverse effect on our financial condition and results of operations |
| See further discussion on our commercial loan portfolio in “Loans” within “Item 7 |
| Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Annual Report on Form 10-K Our allowance for losses on loans may be insufficient to cover actual losses on loans |
| We maintain an allowance for losses on loans at a level believed adequate by us to absorb credit losses inherent in the loan portfolio |
| The allowance for losses on loans is a reserve established through a provision for losses on loans charged to expense that represents our estimate of probable incurred losses within the loan portfolio at each statement of condition date and is based on the review of available and relevant information |
| The level of the 16 _________________________________________________________________ allowance for losses on loans reflects our consideration of historical charge-offs and recoveries; levels of and trends in delinquencies, impaired loans and other classified loans; concentrations of credit within the commercial loan portfolio; volume and type of lending; and current and anticipated economic conditions |
| The determination of the appropriate level of the allowance for losses on loans inherently involves a high degree of subjectivity and requires us to make significant estimates of current credit risks and future trends, all of which may undergo material changes |
| Changes in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans and other factors, both within and outside of our control, may require an increase in the allowance for losses on loans |
| In addition, bank regulatory agencies periodically review our allowance for losses on loans and may require an increase in the provision for losses on loans or the recognition of further loan charge-offs, based on judgments different from ours |
| Also, if charge-offs in future periods exceed the allowance for losses on loans, we will need additional provisions to increase our allowance for losses on loans |
| Any increases in the allowance for losses on loans will result in a decrease in net income and possibly capital, and may have a material adverse effect on our financial condition and results of operations |
| For further discussion related to our process for determining the appropriate level of the allowance for losses on loans see “Critical Accounting Policies” and “Allowance for Losses on Loans” within “Item 7 |
| Management’s Discussion and Analysis of Financial Results and Operations” of this Annual Report on Form 10-K We operate in a highly competitive industry and market area with other financial institutions offering products and services similar to those we offer |
| We compete with savings associations, national banks, regional banks and other community banks in making loans, attracting deposits and recruiting and retaining talented employees |
| We also compete with securities and brokerage companies, mortgage companies, insurance companies, finance companies, money market mutual funds, credit unions and other non-bank financial service providers |
| Many of these competitors are not subject to the same regulatory restrictions we are subject to and therefore are able to provide customers with a feasible alternative to traditional banking services |
| The competition in our market for making commercial and construction loans has resulted in more competitive pricing and credit structure as well as intense competition for skilled commercial lending officers |
| Significant discounting of interest rates offered on loans negatively impacts interest income and can therefore adversely impact net interest income |
| If increased competition causes us to modify our underwriting standards, we could be exposed to higher losses from lending activities |
| An inability to recruit and retain skilled commercial lending officers poses a significant barrier to retaining and growing our customer base |
| The competition in our market for attracting deposits also has resulted in more competitive pricing |
| To successfully compete in our market area, we have at times offered higher deposit rates within the same market area |
| Increasing rates paid on deposits in response to competitive pressure could decrease our net interest margin |
| While management believes it can and does successfully compete with other financial institutions in our market, we may face a competitive disadvantage as a result of our smaller size and lack of geographic diversification |
| The trading volume in our common stock is less than that of larger public companies which can cause price volatility |
| The trading history of our common stock has been characterized by relatively low trading volume |
| The value of a shareholder’s investment may be subject to sudden decreases due to the volatility of the price of our common stock which trades on the NASDAQ National Market |
| The market price of our common stock may be volatile and subject to fluctuations in response to numerous factors, including, but not limited to, the factors discussed in other risk factors and the following: • actual or anticipated fluctuation in our operating results; • changes in interest rates; 17 _________________________________________________________________ • changes in the legal or regulatory environment in which we operate; • press releases, announcements or publicity relating to us or our competitors or relating to trends in our industry; • changes in expectations as to our future financial performance, including financial estimates or recommendations by securities analysts and investors; • future sales of our common stock; • changes in economic conditions in our market, general conditions in the US economy, financial markets or the banking industry; and • other developments affecting us or our competitors |
| These factors may adversely affect the trading price of our common stock, regardless of our actual operating performance, and could prevent a shareholder from selling common stock at or above the current market price |
| We may experience difficulties in managing our growth, and our growth strategy involves risks that may negatively impact our net income |
| We may expand into additional communities or attempt to strengthen our position in our current market and in surrounding areas by opening new branches and acquiring existing branches of other financial institutions |
| To the extent that we undertake additional branch openings and acquisitions, we are likely to continue to experience the effects of higher operating expenses relative to operating income from the new operations, which may have an adverse effect on our levels of reported net income, return on average equity and return on average assets |
| Other effects of engaging in such growth strategies may include potential diversion of our time and attention and general disruption to our business |
| We are subject to extensive government regulation and supervision which could adversely affect our operations |
| We are subject to extensive federal and state regulations and supervision |
| Banking regulations are primarily intended to protect depositors’ funds, federal deposit insurance funds and the banking system as a whole, not shareholders |
| These regulations affect our lending practices, capital structure, investment practices, dividend policy and growth, among other things |
| Congress and federal agencies continually review banking laws, regulations and policies for possible changes |
| Changes to statutes, regulations or regulatory policies, including changes in interpretation or implementation of statutes, regulations or policies, could affect us in substantial and unpredictable ways |
| Such changes could subject us to additional costs, limit the types of financial services and products we may offer and/or increase the ability of non-banks to offer competing financial services and products, among other things |
| Failure to comply with law, regulations or policies could result in sanctions by regulatory agencies, civil money penalties and/or reputation damage, which could have a material adverse effect on our business, financial condition and results of operations |
| While we have policies and procedures designed to prevent any such violations, there can be no assurance that such violations will not occur |
| For further discussion related to these regulations see “Regulation” within “Item 1 |
| Stockholders’ Equity and Regulatory Capital” in the notes to consolidated financial statements included in “Item 8 |
| Financial Statements and Supplementary Data” of this Annual Report on Form 10-K We may be subject to examinations by taxing authorities which could adversely affect our results of operations |
| In the normal course of business, we may be subject to examinations from federal and state taxing authorities regarding the amount of taxes due in connection with investments we have made and the businesses in which we are engaged |
| Recently, federal and state taxing authorities have become increasingly aggressive in challenging tax positions taken by financial institutions |
| The challenges made by taxing authorities may result in adjustments to the timing or amount of taxable income or deductions or the allocation of income among tax jurisdictions |
| If any such 18 _________________________________________________________________ challenges are made and are not resolved in our favor, they could have an adverse effect on our financial condition and results of operations |
| We may not be able to attract and retain the skilled employees necessary for our business |
| Our success depends, in large part, on our ability to attract and retain key employees |
| Competition for the best employees in most of our business lines can be intense, and we may not be able to hire or retain the necessary employees for meeting our business goals |
| The unexpected loss of services of one or more of our key personnel could have a material adverse impact on our business because of their skills, knowledge of our market, years of industry experience and the difficulty of promptly finding qualified replacement personnel |
| Our information systems may experience an interruption or breach in security that could impact our operational capabilities |
| We rely heavily on communications and information systems to conduct our business |
| Any failure, interruption or breach in security of these systems could result in failures or disruptions in our customer relationship management, general ledger, deposit, loan and other systems |
| While we have policies and procedures designed to prevent or limit the effect of the failure, interruption or security breach of our information systems, there can be no assurance that any such failures, interruptions or security breaches will not occur or, if they do occur, that they will be adequately addressed |
| The occurrences of any failures, interruptions or security breaches of our information systems could damage our reputation, result in a loss of customer business, subject us to additional regulatory scrutiny, or expose us to civil litigation and possible financial liability, any of which could have a material adverse effect on our financial condition and results of operations |
| Our ability to pay dividends is subject to regulatory limitations and may be restricted |
| Although we have been paying quarterly dividends regularly since 1998, our ability to pay dividends to shareholders depends to a large extent upon the dividends we receive from the Bank |
| Dividends paid by the Bank are subject to restrictions under various federal and state banking laws |
| Currently, the Bank must submit an application to the OTS and receive OTS approval prior to paying any dividends to us |
| In addition, the Bank must maintain certain capital levels, which may restrict the ability of the Bank to pay dividends to us |
| The Bank’s regulators have the authority to prohibit the Bank or us from engaging in unsafe or unsound practices in conducting our business |
| As a consequence, bank regulators could deem the payment of dividends by the Bank to be an unsafe or unsound practice, depending on the Bank’s financial condition or otherwise, and prohibit such payments |
| If the Bank were unable to pay dividends to us, the Board of Directors might cease paying or reduce the rate or frequency at which we pay dividends to shareholders |