UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K/A

Amendment No. 1

|x |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF SECURITIES EXCHANGE ACT OF 1934
|- |  | --------------------------------------------------------------------------------

For the fiscal year ended December 31, 2010

or

| ̈ |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- |  | ----------------------------------------------------------------------------------------

For the transition period from             to

Commission file number 0-26016

PALMETTO BANCSHARES, INC.

(Exact name of registrant as specified in its charter)

|                                                               |  |                                  
|-------------------------------------------------------------- |  | ---------------------------------
|South Carolina                                                 |  | 74-2235055                       
|(State or other jurisdiction of incorporation or organization) |  | (IRS Employer Identification No.)
|                                                               | 
|306 East North Street, Greenville, South Carolina              |  | 29601                            
|(Address of principal executive offices)                       |  | (Zip Code)                       

|                               
|-------------------------------
|                               
|(800) 725-2265                 
|(Registrants telephone number)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock,
par value $0.01 per share

(Title of class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act.    Yes   ̈    No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act.    Yes   ̈    No  x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90
days.    Yes  x    No   ̈

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files).    Yes   ̈    No   ̈

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will
not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.   ̈

Indicate by check mark whether the registrant is
a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of accelerated filer, large accelerated filer, and smaller reporting company in Rule 12b-2
of the Act.

|                             |  |                               
|---------------------------- |  | ------------------------------
|Large accelerated filer     ̈ |  | Accelerated filer     ̈        
|Non accelerated filer     ̈   |  | Smaller reporting company    x

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Act).    Yes
   ̈    No  x

The aggregate market value of the voting and nonvoting common equity held by nonaffiliates of the registrant (computed by reference to the price at which the stock was most recently sold) was $14,105,595
as of the last business day of the registrants most recently completed second fiscal quarter. See Part II, Item 5.

50,513,722 shares of the registrants common stock were outstanding as of February 22, 2011.

DOCUMENTS INCORPORATED BY REFERENCE

None



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Explanatory Note



This Amendment No. 1 (this Amendment) amends
our Annual Report on Form 10-K for the year ended December 31, 2010, filed with the Securities and Exchange Commission (the Commission) on February 28, 2011 (the Original Form 10-K). On February 28, 2011 we
also filed a Registration Statement on Form S-3 (the Registration Statement). For the Registration Statement to be declared effective, it must include the information required by Part III, Items 10 through 14 of Form 10-K which was not
included in the Original Form 10-K. Accordingly, we are filing this amendment to Form 10-K to include the information required by Part III, Items 10 through 14 of Form 10-K. The information included herein as required by Part III, Items 10 through
14of Form 10-K is more limited that what is required to be included in the definitive proxy statement to be filed in connection with our annual meeting of shareholders. Accordingly, the definitive proxy statement to be filed at a later date will
include additional information related to the topics herein and additional information not required by Part III, Items 10 through 14 of Form 10-K.



The reference on the cover page of the Original Form 10-K to the incorporation by reference of our definitive proxy statement into Part
III of the Original Form 10-K is hereby deleted.



This Amendment also amends the Original Form 10-K to correct an inadvertent typographical error in the Lending
ActivitiesAllowance for Loan Losses subsection of Part IIItem 7 of the Original 10-K Filing. The amount originally disclosed as charge-offs on loans individually evaluated for impairment of $9.9 million was the fourth quarter
2010 amount. The context and intent of the statement was to disclose the amount of charge-offs on loans individually evaluated for impairment for the year ended December 31, 2010, which was $33.7 million. This change had no impact on our
financial position, results of operations, or cash flows.



For purposes of this Amendment, and in accordance with Rule 12b-15 under the Securities Exchange Act of 1934 (the Exchange Act), Items 7, 10 through 14, and 15(a)(3) of the Original Report
have been amended and restated in their entirety. In addition, as required by Rule 12b-15 under the Exchange Act, new certifications by our principal executive officer and principal financial officer are filed as exhibits to this Amendment under
Item 15 of Part IV hereof. Except as stated herein, this Amendment does not reflect events occurring after the filing of the Original Report with the SEC on February 28, 2011 and no attempt has been made in this Amendment to modify or
update other disclosures as presented in the Original 10-K Filing. Accordingly, this Amendment should be read in conjunction with our filings with the SEC subsequent to the filing of the Original 10-K Filing.



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PART II



|ITEM 7. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- | -------------------------------------------------------------------------------------



The following discussion and analysis presents the more
significant factors impacting our financial condition as of December 31, 2010 and 2009 and results of operations and cash flows for the years ended December 31, 2010, 2009, and 2008. This discussion should be read in conjunction with, and
is intended to supplement, all of the other Items presented in this Annual Report on Form 10-K. Percentage calculations contained herein have been calculated based on actual not rounded results.



Critical Accounting Policies and Estimates



General



The Companys accounting and financial reporting
policies are in conformity, in all material respects, to accounting principles generally accepted in the U.S. and to general practices within the financial services industry. The preparation of financial statements in conformity with such principles
requires management to make estimates and assumptions that impact the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities during the reporting period, and the reported amounts of income and expense during
the reporting period. While we base estimates on historical experience, current information, and other factors deemed to be relevant, actual results could differ from those estimates. Management, in conjunction with the Companys independent
registered public accounting firm, has discussed the development and selection of the critical accounting estimates discussed herein with the Audit Committee of our Board of Directors.



We consider accounting policies and estimates to be critical to our financial condition, results of operations,
or cash flows if the accounting policy or estimate requires management to make assumptions about matters that are highly uncertain and for which different estimates that management reasonably could have used for the accounting estimate in
the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, could have a material impact on our financial condition, results of operations, or cash flows.



Our significant accounting policies are discussed in
Item 8. Financial Statements and Supplementary Data, Note 1. Of those significant accounting policies, we have determined that accounting for our allowance for loan losses and the related reserve for unfunded commitments, valuation of loans
held for sale, mortgage-servicing rights, goodwill, foreclosed real estate, the realization of our deferred tax asset, defined benefit pension plan, the valuation of our common stock, and the determination of fair value of financial instruments are
deemed critical because of the valuation techniques used and the sensitivity of the amounts recorded in our Consolidated Financial Statements to the methods, assumptions, and estimates underlying these balances. Accounting for these critical areas
requires subjective and complex judgments and could be subject to revision as new information becomes available.



Allowance for Loan Losses



We consider our accounting policies related to the allowance for loan losses to be critical, as these policies involve considerable
subjective judgment and estimation by management. The allowance for loan losses is a reserve established through a provision for loan losses charged to expense. The allowance for loan losses represents our best estimate of probable inherent losses
that have been incurred within the existing portfolio of loans. The allowance for loan losses is necessary to reserve for estimated probable loan losses inherent in the loan portfolio. Our allowance for loan losses methodology is based on historical
loss experience by loan type, specific homogeneous risk pools, and specific loss allocations. Our process for determining the appropriate level of the allowance for loan losses is designed to account for asset deterioration as it occurs. The
provision for loan losses reflects loan quality trends, including the levels of and trends related to nonaccrual loans, potential problem loans, criticized loans, and loans charged-off or recovered, among other factors.



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The level of the allowance for loan losses reflects our continuing evaluation of specific
lending risks; loan loss experience; current loan portfolio quality; present economic, political, and regulatory conditions; and unidentified losses inherent in the current loan portfolio. Portions of the allowance for loan losses may be allocated
for specific loans. However, the entire allowance for loan losses is available for any loan that, in our judgment, should be charged-off. While we utilize our best judgment and information available, the ultimate adequacy of the allowance for loan
losses is dependent upon a variety of factors beyond our control, including the performance of our loan portfolio, the economy, changes in interest rates, and the view of the regulatory authorities toward loan classifications and collateral
valuation.



We record allowances for loan losses
on specific loans when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan. Specific allowances for loans considered individually significant and
that exhibit probable or observed weaknesses are determined by analyzing, among other things, the borrowers ability to repay amounts owed, guarantor support, collateral deficiencies, the relative risk rating of the loan, and economic
conditions impacting the borrowers industry.



The starting point for the general component of the allowance is the historical loss experience of specific types of loans. We calculate
historical loss ratios for pools of similar loans with similar characteristics based on the proportion of actual loan net charge-offs to the total population of loans in the pool. We use a five-year look-back period when computing historical loss
rates. However, given the increase in loan charge-offs beginning in 2009, we also utilized a three-year look-back period during 2010 for computing historical loss rates as an additional reference point in determining the allowance for loan losses.



We adjust these historical loss percentages for
qualitative environmental factors derived from macroeconomic indicators and other factors. Qualitative factors we considered in the determination of the December 31, 2010 allowance for loan losses include pervasive factors that generally
impact borrowers across the loan portfolio (such as unemployment and consumer price index) and factors that have specific implications to particular loan portfolios (such as residential home sales or commercial development). Factors evaluated may
include, without limitation, changes in delinquent, nonaccrual and troubled debt restructured loan trends, trends in risk ratings and net loans charged-off, concentrations of credit, competition and legal and regulatory requirements, trends in the
nature and volume of the loan portfolio, national and local economic and business conditions, collateral valuations, the experience and depth of lending management, lending policies and procedures, underwriting standards and practices, the quality
of loan review systems and degree of oversight by the Board of Directors, peer comparisons, and other external factors. The general reserve portion of the allowance for loan losses calculated using the historical loss rates and qualitative factors
is then combined with the specific allowance on loans individually evaluated for impairment to determine the total allowance for loan losses.



Loans identified as losses by management, internal loan review, and / or bank examiners are charged-off. We review each impaired loan on a
loan-by-loan basis to determine whether the impairment should be recorded as a charge-off or a reserve based on our assessment of the status of the borrower and the underlying collateral. In general, for collateral dependent loans, the impairment is
recorded as a charge-off unless the fair value was based on an internal valuation pending receipt of a third party appraisal or other extenuating circumstances. Consumer loan accounts are charged-off generally based on pre-defined past due time
periods.



In addition to our portfolio review
process as discussed elsewhere in this item, various regulatory agencies, as part of their examination process, periodically review our allowance for loan losses. Such agencies may require us to recognize additions to the allowance for loan losses
based on their judgments and information available to them at the time of their examination. While we use available information to recognize inherent losses on loans, future adjustments to the allowance for loan losses may be necessary based on
changes in economic conditions and other factors and the impact of such changes on the Banks borrowers.



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We believe that the allowance for loan losses at December 31, 2010 is adequate to cover
probable inherent losses in the loan portfolio. However, underlying assumptions may be impacted in future periods by changes in economic conditions, the impact of regulatory examinations, and the discovery of information with respect to borrowers
which was not known to management at the time of the issuance of the Companys Consolidated Financial Statements. Therefore, our assumptions may or may not prove valid. Thus, there can be no assurance that loan losses in future periods,
including potential incremental losses resulting from the sale of the commercial loans held for sale, will not exceed the current allowance for loan losses amount or that future increases in the allowance for loan losses will not be required.
Additionally, no assurance can be given that our ongoing evaluation of the loan portfolio, in light of changing economic conditions and other relevant factors, will not require significant future additions to the allowance for loan losses, thus
adversely impacting the Companys business, financial condition, results of operations, and cash flows.



See Item 1A. Risk Factors contained herein for discussion regarding the material risks and uncertainties that we believe impact our
allowance for loan losses.



Commercial Loans
Held for Sale



Commercial loans held for sale
are carried at the lower of cost or fair value less estimated selling costs. A valuation allowance is recorded to reflect the excess of the recorded investment in the loan and the fair value less estimated selling costs. Commercial loans held for
sale for which binding sales contracts have been entered into as of the balance sheet date are accounted for at the contract amount. Collateral dependent commercial loans held for sale are valued based on independent collateral appraisals less
estimated selling costs. If quoted market prices, binding sales contracts or appraised collateral values are not available, we consider discounted cash flow analyses with market assumptions.



There can be no assurances that the loans will be sold, or that any bids offered will be at the currently
recorded balances. Accordingly, to the extent that we accept bids for these loans, we may receive significantly less than the current net carrying amount of the loans and incur a corresponding incremental loss on any such loan sales.



Mortgage-Servicing Rights



The value of our mortgage-servicing rights is an accounting
estimate that depends heavily on current economic conditions specifically the interest rate environment and managements judgments. We utilize the expertise of a third party consultant on a quarterly basis to assess the portfolios value
including, but not limited to, capitalization, impairment, and amortization rates. Estimates of the amount and timing of prepayment rates, loan loss experience, costs to service loans, and discount rates are used to estimate the fair value of our
mortgage-servicing rights portfolio. Amortization of the mortgage-servicing rights portfolio is based on the ratio of net servicing income received in the current period to total net servicing income projected to be realized from the
mortgage-servicing rights portfolio. Projected net servicing income is determined based on the estimated future balance of the underlying mortgage loan portfolio that declines over time from prepayments and scheduled loan amortization. Future
prepayment rates are estimated based on current interest rate levels, other economic conditions, market forecasts, and relevant characteristics of the mortgage-servicing rights portfolio such as loan types, interest rate stratification, and recent
prepayment experience. We believe that the modeling techniques and assumptions used are reasonable; however, such assumptions may or may not prove valid. Thus, there can be no assurance that mortgage-servicing rights portfolio capitalization,
amortization, and impairment in future periods will not exceed the current capitalization, amortization, and impairment amounts. Moreover, no assurance can be given that changing economic conditions and other relevant factors impacting our
mortgage-servicing rights portfolio will not cause actual occurrences to differ from underlying assumptions thus adversely impacting our business, financial condition, results of operations, and cash flows.



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Goodwill



In the third quarter 2010, the Company recorded a goodwill
impairment charge of $3.7 million. Goodwill resulted from past business combinations from 1988 through 1999. We perform our annual impairment testing as of June 30 each year. However, due to the overall adverse economic environment and the
negative impact on the banking industry as a whole, including the impact to the Company resulting in net losses and a decline in market capitalization based on our common stock price, we also performed impairment tests of our goodwill quarterly in
2010.



Our common stock is not listed on any
national securities exchange or quoted on the OTC Bulletin Board. Our common stock is, however, quoted on the Pink Sheets under the symbol PLMT.PK. Although our common stock is quoted on the Pink Sheets, there is currently only a limited
public trading market for our common stock. Private trading of our common stock also has been limited and has typically been conducted through the Private Trading System on our website. The Private Trading System is a passive mechanism created to
assist buyers and sellers in facilitating trades in our common stock. In addition, buyers and sellers may privately negotiate transactions in our common stock. Because there is not an established market for our common stock, management may not be
aware of all prices at which our common stock has been traded. Accordingly, we normally determine the value of our common stock based on the last five trades of the stock facilitated by the Company through the Private Trading System.



While there were trades in our common stock in the first and
second quarters of 2010 through the Private Trading System, there were not any trades through the Private Trading System during the three month period ended September 30, 2010. The Private Placement was consummated on October 7, 2010
pursuant to which the Company issued 39,975,980 million shares of common stock at $2.60 per share. This per share issue price was negotiated by the Company at arms length with the investors and was supported by a fairness opinion from the
investment banking firm engaged by the Companys Board of Directors, including a comparison to common stock prices as a percentage of book value for publicly traded banks with similar asset quality and financial condition of the Company, and in
comparison to recent merger and acquisition transactions. Accordingly, we believe it was appropriate to utilize the $2.60 issue price in our goodwill impairment evaluation.



The first step of the goodwill impairment evaluation was
performed by comparing the fair value of our reporting unit with its carrying amount, including goodwill. Since the carrying amount of the reporting unit exceeded its fair value, the second step of the goodwill impairment test was performed to
measure the amount of impairment loss. The second step of the goodwill impairment test compared the implied fair value of our reporting unit goodwill with the carrying amount of that goodwill. Since the carrying amount of reporting unit goodwill
exceeded the implied fair value of that goodwill, an impairment loss was recognized in an amount equal to that excess. The evaluation at September 30, 2010 indicated that the carrying value of the Companys goodwill exceeded the fair
value and resulted in a third quarter noncash charge of $3.7 million, eliminating the goodwill as an asset on the Companys Consolidated Balance Sheets. This charge had no effect on the liquidity, regulatory capital, or daily operations of
the Company and was recorded as a component of noninterest expense on the Consolidated Statement of Income (Loss).



Foreclosed Real Estate



The value of our foreclosed real estate portfolio represents another accounting estimate that depends heavily on current economic
conditions. Foreclosed real estate is carried at fair value less estimated selling costs, establishing a new cost basis. Fair value of such real estate is reviewed regularly and writedowns are recorded when it is determined that the carrying value
of the real estate exceeds the fair value less estimated costs to sell. Writedowns resulting from the periodic reevaluation of such properties, costs related to holding such properties, and gains and losses on the sale of foreclosed properties are
charged against income. Costs relating to the development and improvement of such properties are capitalized.



The fair value of properties in the foreclosed real estate portfolio is generally determined from appraisals obtained from independent
appraisers. We review the appraisal assumptions for reasonableness and may make



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adjustments when necessary to reflect current market conditions. Such assumptions may not prove to be valid. Moreover, no assurance can be given that changing economic conditions and other
relevant factors impacting our foreclosed real estate portfolio will not cause actual occurrences to differ from underlying assumptions thus adversely impacting our business, financial condition, results of operations, and cash flows.



Realization of Net Deferred Tax Asset



We use certain assumptions and estimates in determining
income taxes payable or refundable, deferred income tax liabilities and assets for events recognized differently in our financial statements and income tax returns, and income tax expense. Determining these amounts requires analysis of certain
transactions and interpretation of tax laws and regulations. We exercise considerable judgment in evaluating the amount and timing of recognition of the resulting income tax liabilities and assets. These judgments and estimates are reevaluated on a
periodic basis as regulatory and business factors change.



We include the current and deferred tax impact of our tax positions in the financial statements only when it is more likely than not (likelihood of greater than 50%) that such positions will be sustained
by taxing authorities, with full knowledge of relevant information, based on the technical merits of the tax position. While we support our tax positions by unambiguous tax law, prior experience with the taxing authority, and analysis that considers
all relevant facts, circumstances and regulations, we must still rely on assumptions and estimates to determine the overall likelihood of success and proper quantification of a given tax position.



As of December 31, 2010, prior to the valuation
allowance, net deferred tax assets totaling $20.5 million were recorded in the Companys Consolidated Balance Sheets. Based on our projections of future operating results over the next several years, cumulative tax losses over the previous
three years, tax loss deductibility limitations as discussed below and available tax planning strategies, we recorded a valuation allowance against the net deferred tax asset at December 31, 2010. The Private Placement that was consummated on
October 7, 2010 is considered to be a change in control under the Internal Revenue Service rules. Accordingly, with the assistance of third party specialists, we were required to determine the fair value of the Company and our assets for the
purpose of evaluating any potential limitation or deferral of our ability to carry forward pre-acquisition net operating losses and to determine the amount of net unrealized built-in losses as of October 7, 2010, which also limits the amount of
net operating losses that may be used in the future. As a result of the valuations and tax analysis, we currently estimate that future utilization of net operating loss carry forwards and built-in losses of $46 million generated prior to
October 7, 2010 will be limited to $1.1 million per year.



Analysis of our ability to realize deferred tax assets requires us to apply significant judgment and is inherently subjective because it requires the future occurrence of circumstances that cannot be
predicted with certainty. While we recorded a valuation allowance against our net deferred tax asset for financial reporting purposes at December 31, 2010, the net operating losses are able to be carried forward for income tax purposes for up
to twenty years. Thus, to the extent we return to profitability and generate sufficient taxable income in the future, we will be able to utilize a portion of the net operating losses for income tax purposes and reverse a portion of the valuation
allowance for financial reporting purposes. The determination of how much of the net operating losses we will be able to utilize and, therefore, how much of the valuation allowance that may be reversed and the timing is based on our future results
of operations and the amount and timing of actual loan charge-offs and asset writedowns.



Additionally, for regulatory capital purposes, deferred tax assets are limited to the assets which can be realized through (i) carryback to prior years or (ii) taxable income in the next twelve
months. At December 31, 2010, all of our net deferred tax asset was excluded from Tier 1 and total capital based on these criteria. We will continue to evaluate the realizability of our deferred tax asset on a quarterly basis for both financial
reporting purposes and regulatory capital purposes. The evaluation may result in the inclusion of a portion of the deferred tax asset in our regulatory capital calculation in future periods.



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Defined Benefit Pension Plan



We account for our defined benefit pension plans on an
actuarial basis. Pension assumptions are significant inputs to the actuarial models that measure pension benefit obligations and related impacts on income. In particular, the assumed discount rate and expected return on assets are important
elements of defined benefit pension plan expense and asset / liability measurement with regard to the plan. We evaluate these critical assumptions annually. Lower discount rates increase present values and subsequent year pension expense, while
higher discount rates decrease present values and subsequent year pension expense. To determine the expected long-term rate of return on defined benefit pension plan assets, we consider asset allocations and historical returns on various categories
of plan assets. Both of these key assumptions are sensitive to changes. In addition, the pension plan includes common stock of the Company, which is not traded on an exchange and the value of which is subject to change based on our financial
results. At December 31, 2010, the fair value of Companys common stock included in the plan was 0.3% of total fair value of assets of the plan. Additionally, we periodically evaluate other assumptions involving demographic factors, such
as retirement age, mortality, and turnover and update such factors to reflect experience and expectations for the future.



Effective 2008, we ceased accruing pension benefits for employees under our noncontributory, defined benefit pension plan. Although no
previously accrued benefits were lost, employees no longer accrue benefits for service subsequent to 2007. Amounts recognized within our Consolidated Financial Statements with regard to this change to our defined benefit pension plan were also
computed on an actuarial basis. Because of the considerable judgment necessary in the determination of all such assumptions, actual results in any given year may differ from actuarial assumptions. In addition, we may decide to terminate the pension
plan which, based on the valuation of the plan assets and actuarial valuation of the accrued benefits to the participants at that time, would require a cash contribution to the plan for any resulting unfunded liability. While not computed on such
basis, the current unfunded liability was $5.2 million at December 31, 2010.



Valuation of Common Stock



On a periodic basis, we utilize the market price of our common stock within various valuations and calculations relating to our defined benefit pension plan assets, our trust department assets under
management, our employee retirement accounts, our impairment analysis of goodwill, our granting of awards under our 2008 Restricted Stock Plan, our calculation of earnings per share on a diluted basis, and our valuation of such stock serving as loan
collateral.



Our common stock is not listed on any
national securities exchange or quoted on the OTC Bulletin Board. Our common stock is, however, quoted on the Pink Sheets under the symbol PLMT.PK. Although our common stock is quoted on the Pink Sheets, there is currently only a limited
public trading market for our common stock. Private trading of our common stock also has been limited and has typically been conducted through the Private Trading System on our website. In addition, buyers and sellers may privately negotiate
transactions in our common stock. Because there is not an established market for our common stock, we may not be aware of all prices at which our common stock has been traded. Additionally, we have not determined whether the trades of which we are
aware were the result of arms-length negotiations between the parties. We normally determine the value of our common stock based on the last five trades of the stock facilitated by the Company through the Private Trading System. The liquidity
of our common stock depends upon the presence in the marketplace of willing buyers and sellers.



One of the requirements of the Private Placement is that the Company will use its reasonable best efforts to list the shares of our common stock on NASDAQ or another national securities exchange within
nine months of the closing date of the Private Placement on October 7, 2010. While it is our intent to seek to list our common stock on NASDAQ, no assurances can be provided at this time that we will meet such listing requirements.



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Fair Value Measurements



We use fair value measurements to record fair value adjustments to certain financial instruments and to
determine fair value disclosures. Additionally, we may be required to record other assets at fair value on a nonrecurring basis. These nonrecurring fair value adjustments typically involve application of lower-of-cost-or-market accounting or
writedowns of individual assets. Further, we include in the Notes to the Consolidated Financial Statements information about the extent to which fair value is used to measure assets and liabilities, the valuation methodologies used, and the related
impact to income. Additionally, for financial instruments not recorded at fair value, we disclose the estimate of their fair value.



Fair value is defined as the price that would be received to sell the asset or paid to transfer the liability in an orderly transaction
between market participants at the measurement date. Accounting standards establish a three-level hierarchy for disclosure of assets and liabilities recorded at fair value. The classification of assets and liabilities within the hierarchy is based
on whether the inputs to the valuation methodology used for measurement are observable or unobservable. Observable inputs reflect market-derived or market-based information obtained from independent sources, while unobservable inputs reflect our
estimates about market data. The three levels of inputs that are used to classify fair value measurements are as follows:



| |  |  | Level 1  Valuation is based upon quoted prices for identical instruments traded in active markets. Level 1 instruments generally include
securities traded on active exchange markets, such as the New York Stock Exchange, as well as securities that are traded by dealers or brokers in active over-the-counter markets. Instruments we classify as Level 1 are instruments that have been
priced directly from dealer trading desks and represent actual prices at which such securities have traded within active markets. Level 1 instruments also include commercial loans held for sale for which binding sales contracts have been entered
into as of the balance sheet date.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Level 2  Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in
markets that are not active, and model-based valuation techniques, such as matrix pricing, for which all significant assumptions are observable in the market. Instruments we classify as Level 2 include securities that are valued based on pricing
models that use relevant observable information generated by transactions that have occurred in the market place that involve similar securities. Level 2 instruments also include mortgage loans held for sale that are valued based on prices for other
mortgage whole loans with similar characteristics and commercial loans held for sale that are based on independent collateral appraisals.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Level 3  Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable
assumptions reflect the Companys estimates of assumptions market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models, and similar techniques.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



We attempt to maximize the use
of observable inputs and minimize the use of unobservable inputs when developing fair value measurements. When available, we use quoted market prices to measure fair value. If market prices are not available, fair value measurement is based upon
models that use primarily market-based or independently-sourced market parameters. Most of our financial instruments use either of the foregoing methodologies, collectively Level 1 and Level 2 measurements, to determine fair value adjustments
recorded to our financial statements. However, in certain cases, when market observable inputs for model-based valuation techniques may not be readily available, we are required to make judgments about assumptions market participants would use in
estimating the fair value of the financial instrument.



The degree of management judgment involved in determining the fair value of an instrument is dependent upon the availability of quoted market prices or observable market parameters. For instruments that
trade actively and have quoted market prices or observable market parameters, there is minimal subjectivity involved in measuring fair value. When observable market prices and parameters are not fully available, management



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judgment is necessary to estimate fair value. In addition, changes in the market conditions may reduce the availability of quoted prices or observable data. For example, reduced liquidity in the
capital markets or changes in secondary market activities could result in observable market inputs becoming unavailable. When significant adjustments are required to available observable inputs, it may be appropriate to utilize an estimate based
primarily on unobservable inputs. When an active market for a security does not exist, the use of management estimates that incorporate current market participant expectations of future cash flows, and include appropriate risk premiums, is
acceptable.



Significant judgment may be required
to determine whether certain assets measured at fair value are included in Level 2 or Level 3. If fair value measurement is based upon recent observable market activity of such assets or comparable assets (other than forced or distressed
transactions) that occur in sufficient volume and do not require significant adjustment using unobservable inputs, those assets are classified as Level 2. If not, they are classified as Level 3. Making this assessment requires significant judgment.



Executive Summary of 2010 Financial Results



Context for 2010 and the Company



The Palmetto Bank has been operating since
1906 and the Banks holding company, Palmetto Bancshares, Inc., was incorporated in 1982. Given the Companys 104 year history, the Company has developed long-standing relationships with customers in the communities in which we operate and
a recognizable name, which has resulted in a well-established branch network and loyal deposit base. As a result, the Company has historically had a lower cost of deposits than its peers due to a higher core deposit mix.



The Company operated under the same executive management team
for more than 30 years until 2009. During that time, the Company grew to become the fifth largest banking institution headquartered in South Carolina and one of the most profitable banking franchises in the Carolinas. From 1999 to 2008, the Company
averaged a return on average assets and return on average equity of 1.25% and 15.2%, respectively, and the Companys net interest margin averaged 4.78%. In addition, over the same time period, noninterest income to average assets averaged
1.60%.



As a result of the challenges that
developed in 2008, the Company accelerated its management succession plan and in early 2009 the board of directors hired a new Chief Executive Officer and Chief Operating Officer. As the impact of the recession worsened, the Companys new
management team quickly developed and implemented a comprehensive Strategic Project Plan to address all areas of the Company with an immediate emphasis on aggressively resolving the Companys asset quality issues, including through the hiring
in July 2009 of a new Chief Credit Officer who brought over 25 years of credit experience to the Company.



Both 2009 and 2010 were very challenging years for the Company, the banking industry, and the U.S. economy in general. In relation to the
Company, the overall economic context for our financial condition and results of operations include the following:



| |  |  | Ongoing financial stress in the overall U.S. economy during 2010 that generally started with an economic crisis in August 2008 and continued into 2009,
for which the banking industry and the Company continue to be adversely affected.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Volatile equity markets that declined significantly during the first half of 2009 and have since begun to improve although daily volatility continues.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Significant stress on the banking industry resulting in significant governmental financial assistance to many financial institutions, extensive
regulatory and congressional scrutiny, and new comprehensive reform legislation, including unknown regulations to be adopted as a result.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | General anxiety on the part of our customers and the general public.
| | - |  | --------------------------------------------------------------------



9



---

| |  |  | Uncertainty about the future and when the economy will return to normal and questions about what will be the new normal.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------



| |  |  | Low and uncertain interest rate environment particularly given government intervention in the financial markets, with current expectations of rising
interest rates although the timing is uncertain.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | High levels of unemployment nationally and in our local markets, and uncertainty about when the trend will begin to improve.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------



Additional context specific to
the Company includes the following:



| |  |  | Fast growth from 2004 through the first quarter of 2009, growing total assets 57% during that period which resulted in the Company reaching a natural
maturity/life cycle hump that is typical for banks that reach that asset size. Typical challenges associated with this stage of our life cycle include:
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Stress on our infrastructure requiring investment in the number and expertise of employees and refinement of policies and procedures.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Required investments in technology to invest in the future, and rationalization of the technology investments versus our historical investment in
facilities.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Adapting products and services and related pricing and fees to remain relevant to our current and evolving customer base and competitiveness in the
market place, and developing broader distribution channels for delivery of our products and services.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Application of a more sophisticated risk management approach, including a comprehensive view of risk, processes and procedures, internal and vendor
expertise, and the way we do business.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Executive management succession plan implemented effective July 1, 2009 and resulting organizational changes.
| | - |  | -------------------------------------------------------------------------------------------------------------



| |  |  | In planning for the retirement of the former Chief Executive Officer of the Company and the Chief Executive Officer of the Bank (who also served as the
President, Chief Operating Officer, and Chief Accounting Officer of the Company), effective July 1, 2009 the Company named Samuel L. Erwin as Chief Executive Officer and President of the Bank and Lee S. Dixon as Chief Operating Officer of the
Company and the Bank. Subsequently, Mr. Erwin also assumed the title of Chief Executive Officer of the Company on January 1, 2010, and Mr. Dixon assumed additional responsibilities as Chief Risk Officer of the Company and the Bank in
October 2009 and as the Chief Financial Officer of the Company and the Bank as of July 1, 2010. Messrs. Erwin and Dixon have proven bank turn around and operational capabilities and rapidly developed and implemented the Companys Strategic
Project Plan in June 2009 as summarized below.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | During 2009 and 2010, we realigned our organizational structure and began the process of more specifically delineating our businesses. Additional
organizational and senior management changes included designating an internal executive to be responsible for our Commercial Bank in August 2009 and another internal executive to be responsible for our Wealth Management business in October 2010. In
addition, the Company hired a new Chief Credit Officer in July 2009, new Retail Banking Executive in October 2010, and a new Chief Financial Officer in November 2010.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Significant deterioration in asset quality during 2009 resulting in a net loss for 2009 which was the first annual net loss in the history of the
Company since the Great Depression in the 1930s. Asset quality challenges continued in 2010, and we also incurred a net loss in 2010 driven primarily by credit losses.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Increased regulatory scrutiny given declining asset quality, financial results and capital position, which resulted in the Bank agreeing to the
issuance of a Consent Order with its primary bank regulatory agencies in June 2010.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Strategic repositioning and reduction of the balance sheet to reduce commercial real estate loan concentrations and individually larger and more
complex loans originated during 2004 through 2008, as well as intentional reduction in the amount of federal funds purchased, FHLB advances, and higher
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



10



---

| | priced certificates of deposit used to fund loan growth during that period. Gross loans decreased $362.9 million from March 31, 2009 (peak quarter end loans) to December 31,
2010. Borrowings and certificates of deposits also decreased $145.9 million from June 30, 2009 (peak quarter end borrowings).
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



In light of the above, in 2009, management and the Board of Directors reacted quickly and defined three strategic initiatives, which are
currently summarized as follows:



|                           |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  |                         
|-------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------
|Component                  |  | Primary Emphasis                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  | Time Horizon            
|                           |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|Strategic Project Plan     |  |    Manage through the extended recession and volatile economic
environment 
   Execute the Strategic Project Plan related to credit quality, earnings, liquidity, and
capital (the Strategic Project Plan is described in more detail below), including preparation for a potential formal agreement with the bank regulatory agencies and raising additional capital                                                                                                                                                                                                                                                                                                          |  | June 2009  October 2010
|                           |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|2010 Annual Strategic Plan |  |    Strategic planning at the corporate and department level for calendar
year 2010 in the context of the uncertain economic environment     Acceleration of overcoming the growth hump/life cycle stage of maturity resulting from fast growth reaching a high of $1.5 billion in assets
    Positioning
the Bank to return to profitability in the post-capital raise and post-recession environment  These efforts will continue as part of the execution of our annual strategic plan in 2011.                                                                                                                                                                             |  | Calendar year 2010      
|                           |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|Bank of the Future         |  |    Reinventing the Bank to be the bank of the
future 
   Determining the customer of tomorrow and refining our products, services, and
distributions channels to meet their expectations     Adapting to the rapidly changing financial services landscape, including lower earnings due to the low interest rate environment, potential regulatory restrictions on historical
sources of income, and higher compliance costs     Intended listing of common stock on the NASDAQ stock exchange 
   Preparing for growth through organic growth given banking market disruption in our
geographic markets and the potential for growth through mergers and acquisitions |  | Two to five years       



We believe it is critical to focus on all three strategic initiatives simultaneously to optimize long-term shareholder value. As a result,
management and the Board of Directors focused a tremendous amount of time and effort on addressing all three initiatives in 2009 and 2010 with the overall objectives being: 1) to aggressively deal with our credit quality, earnings and capital issues
as quickly as possible and 2) to accelerate into a much shorter time frame the reinvention of The Palmetto Bank that might otherwise normally take several years to accomplish. While the National Bureau of Economic Research concluded that
the recession officially ended in June 2009, the impact of



11



---

the recession is continuing to be felt by the banking industry and the Company. Accordingly, our focus has been and continues to be centered on managing through the effects of the recession to
position the Company to return to profitability once the economy begins to recover.



The consummation of the Private Placement on October 7, 2010 in which the Company received $103.9 million of gross proceeds is a significant step forward in the implementation of these strategic
initiatives. The Private Placement resulted in the Companys and the Banks capital adequacy ratios exceeding the well-capitalized minimums. In addition, while financial challenges remain, the completion of the Private Placement
repositioned the Company from a defensive posture to a more offensive oriented posture in terms of balance sheet management, market presence, customer retention, and new customer acquisition.



As summarized in more detail below, we are continuing our keen focus on improving credit quality and earnings.
Overall, with the completion of the Private Placement in October 2010, we are in the process of repositioning the balance sheet as part of our balance sheet management efforts to utilize our excess cash more effectively to improve our net interest
margin. This includes investing in higher yielding investment securities until loan growth resumes, as well as paying down higher priced funding such as FHLB advances and maturing CDs. We are also continuing to adapt our organizational structure to
fit the current and future size and scope of our business activities and operations. Such efforts include hiring management personnel with specialized industry experience, more specifically delineating our businesses, and preparing go to
market strategies with relevant products and services and marketing plans by business.



Summary Financial Results and Company Response



The national and local economy and the banking industry continue to deal with the effects of the most pronounced recession in decades. In South Carolina, unemployment rose significantly throughout 2009
and into 2010 and is higher than the national average, and residential and commercial real estate projects are depressed with significant deterioration in values. As a result, the impact in our geographic area and to individual borrowers was severe.
As a result of the extended recession, our financial results in the years ended December 31, 2009 and 2010 were significantly impacted by the following in comparison to our historical financial results in the year ended December 31, 2008:



| |  |  | Provision for loan losses totaling $47.1 million and $73.4 million in 2010 and 2009, respectively, compared to $5.6 million for 2008.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Loss on commercial loans held for sale totaling $7.6 million in 2010 compared to none in 2009 and 2008.
| | - |  | -------------------------------------------------------------------------------------------------------



| |  |  | Net loss from writedowns, expenses, operations, and sales of foreclosed real estate totaling $11.7 million and $3.2 million in 2010 and 2009,
respectively, compared to $516 thousand in 2008.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Foregone interest of $4.7 million and $3.7 million in 2010 and 2009, respectively, compared to none in 2008 on cash invested at the Federal Reserve at
25 basis points to maintain liquidity versus the average yield on our investment securities of 2.75% and 4.75%, respectively.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Higher FDIC deposit insurance assessments totaling $4.5 million and $3.3 million in 2010 and 2009, respectively, compared to $786 thousand in 2008 due
to industry wide increases in general assessment rates, our voluntary participation in the FDICs Transaction Account Guarantee Program, our capital classification being below well-capitalized throughout most of 2010, and an industry-wide
special assessment in 2009.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Goodwill impairment totaling $3.7 million in 2010.
| | - |  | --------------------------------------------------



| |  |  | Higher credit-related expenses for problem asset workout and other expenses to execute the Strategic Project Plan, which were not incurred prior to the
third quarter of 2009.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Valuation allowance of $20.5 million recorded against deferred tax assets in 2010 resulting in the elimination or deferral of tax benefits that would
have otherwise been available to reduce our net loss in 2010.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



12



---

In total, the above events reduced our earnings by approximately $91.9 million and $76.7
million for the years ended December 31, 2010 and 2009, respectively, compared to the year ended December 31, 2008. Accordingly, we believe consummation of the Private Placement and successful completion of the Strategic Project Plan will
result in significant improvement to our earnings going forward.



The credit-related costs for banks associated with the recession are significant. Beginning in the fourth quarter of 2008 and continuing throughout 2010, construction, acquisition and development real
estate projects have slowed down, guarantors are financially stressed, and increasing credit losses have surfaced. During 2009 and 2010, delinquencies over 90 days increased resulting in an increase in nonaccrual loans indicating significant credit
quality deterioration and probable losses. In particular, loans secured by real estate including acquisition, construction and development projects demonstrated stress given reduced cash flows of individual borrowers, limited bank financing and
credit availability, and slow property sales. This deterioration has manifested itself in our borrowers in several ways: decreases in cash flows from underlying properties supporting the loans (e.g., slower property sales for development type
projects or lower occupancy rates or rental rates for operating properties), decreases in cash flows from the borrowers themselves, increased pressure on guarantors due to illiquid and diminished personal balance sheets resulting from investing
additional personal capital in the projects, and declines in fair values of real estate related assets, resulting in lower cash proceeds from sales or fair values declining to the point that borrowers are no longer willing to sell the assets at such
deep discounts.



This resulted in a significant
increase in the level of nonperforming assets through March 31, 2010, with a continued elevated level of such assets through December 31, 2010. While nonperforming assets are still high, we have now experienced three consecutive quarters
of a reduction with an overall reduction of 21.6% since the peak at March 31, 2010.



In addition, many of these loans are collateral dependent real estate loans for which we are required to write down the loans to fair value less estimated selling costs with the fair values determined
primarily based on third party appraisals. During 2009 and 2010, appraised values decreased significantly, even in comparison to appraisals received when the loans were originated in 2006 to 2009, and upon reappraisal since origination. As a result,
our evaluation of our loan portfolio and foreclosed assets in 2010 and 2009 resulted in significant credit losses.



Recent Regulatory Developments



As a result of these circumstances and the examination of the Supervisory Authorities in November 2009, the Bank agreed to the issuance of
the Consent Order with the Supervisory Authorities effective on June 10, 2010. A summary of the requirements of the Consent Order and the Banks status on complying with the Consent Order is as follows:



|                                                                                                                                                                                                                    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Requirements of the Consent Order                                                                                                                                                                                   |  | Banks Compliance Status                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                    | 
|Achieve and maintain, within 120 days from the effective
date of the Consent Order, Total Risk Based capital at least equal to 10% of risk-weighted assets and Tier 1 capital at least equal to 8% of total assets. |  | On October 7, 2010, the Company consummated the Private Placement pursuant to which the
Company received gross proceeds of $103.9 million from the issuance of shares of the Companys common stock. Substantially all of the net proceeds of the Private Placement were contributed to the Bank as a capital contribution, resulting in the
Companys and the Banks capital levels being above the amounts specified in the Consent Order and to be categorized as well-capitalized.



13



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|                                                                                                                                                                                                                                                                                                                                                  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Requirements of the Consent Order                                                                                                                                                                                                                                                                                                                 |  | Banks Compliance Status                                                                                                                                                                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                                                                                                  | 
|Determine, within 30 days of the last day of the calendar
quarter, its capital ratios. If any capital measure falls below the established minimum, within 30 days provide a written plan to the supervisory authorities describing the means and timing by which the Bank shall increase such ratios to or in
excess of the established minimums. |  | At December 31, 2010, as a result of the Private Placement consummated on October 7, 2010,
as noted above, the Company received gross proceeds of $103.9 million from the issuance of shares of the Companys common stock. Substantially all of the net proceeds of the Private Placement were contributed to the Bank as a capital
contribution, resulting in the Banks capital levels being above the amounts specified in the Consent Order.
|                                                                                                                                                                                                                                                                                                                                                  | 
|Establish, within 30 days from the effective date of the
Consent Order, a plan to monitor compliance with the Consent Order, which shall be monitored by the Banks Board of Directors.                                                                                                                                                           |  | We have implemented a plan to monitor compliance with the Consent Order.                                                                                                                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                                                                                                  | 
|Develop, within 60 days from the effective date of the
Consent Order, a written analysis and assessment of the Banks management and staffing needs.                                                                                                                                                                                              |  | We prepared a written analysis and assessment of the Banks management and staffing
needs and submitted the plan to the Supervisory Authorities in August 2010.                                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                                                                                                  | 
|Notify the supervisory authorities in writing of the
resignation or termination of any of the Banks directors or senior executive officers.                                                                                                                                                                                                      |  | We believe we have complied with this provision of the Consent Order.                                                                                                                                                                                                                                                                                                                                                                            
|                                                                                                                                                                                                                                                                                                                                                  | 
|Eliminate, within 10 days from the effective date of the
Consent Order, by charge-off or collection, all assets or portions of assets classified Loss and 50% of those assets classified Doubtful.                                                                                                                                            |  | We believe we have complied with this provision of the Consent Order.                                                                                                                                                                                                                                                                                                                                                                            
|                                                                                                                                                                                                                                                                                                                                                  | 
|Review and update, within 60 days from the effective date of
the Consent Order, its policy to ensure the adequacy of the Banks allowance for loan and lease losses, which must provide for a review of the Banks allowance for loan and lease losses at least once each calendar quarter.                                                       |  | We believe we have complied with this provision of the Consent Order. We submitted our
revised policy to the Supervisory Authorities in July 2010.                                                                                                                                                                                                                                                                                               
|                                                                                                                                                                                                                                                                                                                                                  | 
|Submit, within 60 days from the effective date of the
Consent Order, a written plan to reduce classified assets, which shall include, among other things, a reduction of the Banks risk exposure in relationships with assets in excess of $1,000,000 which are criticized as Substandard,
Doubtful, or Special Mention.                   |  | As part of our Strategic Project Plan summarized below, we have developed written loan
workout plans to reduce classified assets, and we submitted our plans to the Supervisory Authorities in July 2010. The Supervisory Authorities may also amend the requirements of the Consent Order based on the results of their ongoing
examinations.                                                                                                   
|                                                                                                                                                                                                                                                                                                                                                  | 
|Revise, within 60 days from the effective date of the
Consent Order, its policies and procedures for managing the Banks Adversely Classified Other Real Estate Owned.                                                                                                                                                                            |  | As part of our Strategic Project Plan summarized below, we have revised our policies and
procedures for managing our real estate acquired in foreclosure, and we submitted our policies and procedures to the Supervisory Authorities in July 2010.                                                                                                                                                                                              



14



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|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                       
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Requirements of the Consent Order                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |  | Banks Compliance Status                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | 
|Not extend any additional credit to any borrower who has a
loan or other extension of credit from the Bank that has been charged off or classified, in whole or in part, Loss or Doubtful and is uncollected. In addition, the Bank may not extend any additional credit to any borrower who
has a loan or other extension of credit from the Bank that has been criticized, in whole or in part, Substandard or Special Mention and is uncollected, unless the Banks board of directors determines that failure to
extend further credit to a particular borrower would be detrimental to the best interests of the Bank. |  | We believe we have complied with this provision of the Consent Order.                                                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | 
|Perform, within 90 days from the effective date of the
Consent Order, a risk segmentation analysis with respect to the Banks Concentrations of Credit and develop a written plan to systematically reduce any segment of the portfolio that is an undue concentration of credit.                                                                                                                                                                                                                                                                                                                                                   |  | As part of our Strategic Project Plan summarized below, we have performed a risk
segmentation analysis of our concentrations of credit and developed a plan to reduce our concentration in commercial real estate. We continue to monitor our concentrations and, in particular, are working aggressively to reduce our concentrations in
commercial real estate. We submitted our plan to the Supervisory Authorities in August 2010.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | 
|Review, within 60 days from the effective date of the
Consent Order and annually thereafter, the Banks loan policies and procedures for adequacy and, based upon this review, make all appropriate revisions to the policies and procedures necessary to enhance the Banks lending functions and
ensure their implementation.                                                                                                                                                                                                                                                                                                     |  | As part of our Strategic Project Plan summarized below, in 2009 and 2010 we reviewed our
loan policies and procedures for adequacy and made appropriate revisions to enhance our lending and credit administration functions. We have continued to refine our policies and procedures in 2010. We submitted the revised policy to the Supervisory
Authorities in July 2010.                                                           
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | 
|Adopt, within 60 days from the effective date of the Consent
Order, an effective internal loan review and grading system to provide for the periodic review of the Banks loan portfolio in order to identify and categorize the Banks loans, and other extensions of credit which are carried on the
Banks books as loans, on the basis of credit quality.                                                                                                                                                                                                                                                                       |  | As part of our Strategic Project Plan summarized below, in 2009 and 2010 we reviewed our
loan review and grading system to provide for the periodic review of our loan portfolio to review and categorize our loans. As described in more detail elsewhere in this report, we have conducted internal and external loan reviews in 2009 and 2010.
We submitted the revised policy to the Supervisory Authorities in July 2010.        



15



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|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Requirements of the Consent Order                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |  | Banks Compliance Status                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | 
|Review and update, within 60 days from the effective date of
the Consent Order, its written profit plan to ensure the Bank has a realistic, comprehensive budget for all categories of income and expense, which must address, at minimum, goals and strategies for improving and sustaining the earnings of the Bank,
the major areas in and means by which the Bank will seek to improve the Banks operating performance, realistic and comprehensive budgets, a budget review process to monitor income and expenses of the Bank to compare actual figure with
budgetary projections, the operating assumptions that form the basis for and adequately support major projected income and expense components of the plan, and coordination of the Banks loan, investment, and operating policies and budget and
profit planning with the funds management policy. |  | We have prepared annual budgets for 2010 and 2011 that were approved by the Banks
Board of Directors. We submitted the budgets to the Supervisory Authorities in August 2010.                                                                                                                                                                                                                                                                                                     
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | 
|Review and update, within 60 days from the effective date of
the Consent Order, its written plan addressing liquidity, contingent funding, and asset liability management.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |  | As part of our Strategic Project Plan summarized below, in 2009 and 2010 we reviewed and
updated our written Asset Liability and Investments Plan, and we submitted the plan to the Supervisory Authorities in July 2010.                                                                                                                                                                                                                                                          
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | 
|Eliminate, within 30 days from the effective date of the
Consent Order, all violations of law and regulation or contraventions of policy set forth in the FDICs safety and soundness examination of the Bank in November 2009.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |  | At June 30, 2010, we had eliminated all matters set forth in the FDICs safety and
soundness examination of the Bank in November 2009.                                                                                                                                                                                                                                                                                                                                             
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | 
|Not accept, renew, or rollover any brokered deposits unless
it is in compliance with the requirements of 12 C.F.R. § 337.6(b).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  | Prior to and at December 31, 2010, the Bank did not have any brokered
deposits.                                                                                                                                                                                                                                                                                                                                                                                                    
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | 
|Limit asset growth to 10% per annum.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |  | We believe we have complied with this provision of the Consent Order.                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | 
|Not declare or pay any dividends or bonuses or make any
distributions of interest, principal, or other sums on subordinated debentures without the prior approval of the Supervisory Authorities.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |  | We believe we have complied with this provision of the Consent Order.                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | 
|Not offer an effective yield on deposits of more than 75
basis points over the national rates published by the FDIC weekly on its website unless otherwise specifically permitted by the FDIC.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  | We believe we have complied with this provision of the Consent Order. On April 1, 2010, we
were notified by the FDIC that it had determined that the geographic areas in which we operate were considered high-rate areas. Accordingly, the Bank is able to offer interest rates on deposits up to 75 basis points over the prevailing interest
rates in our geographic areas. The FDIC has informed us that this high-rate determination is also effective for calendar year 2011.



16



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|                                                                                                                                                                                                                                                                                          |  |                                                                                                                                                          
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------
|Requirements of the Consent Order                                                                                                                                                                                                                                                         |  | Banks Compliance Status                                                                                                                                 
|                                                                                                                                                                                                                                                                                          | 
|Furnish, by within 30 days from the effective date of the
Consent Order and within 30 days of the end of each quarter thereafter, written progress reports to the supervisory authorities detailing the form and manner of any actions taken to secure compliance with the Consent Order. |  | We believe we have complied with this provision of the Consent Order, and we have
submitted the required progress reports to the Supervisory Authorities.



We intend to take all actions necessary to enable the Bank to comply with the requirements of the Consent Order, and as of the date hereof we have submitted all documentation required thus far to the
Supervisory Authorities. There can be no assurance that the Bank will be able to comply fully with the provisions of the Consent Order, and the determination of our compliance will be made by the Supervisory Authorities. However, we believe we are
currently in compliance with all provisions of the Consent Order except for the requirement to reduce the total amount of our criticized assets at September 30, 2009 by a total of 75% by May 30, 2012. The Consent Order requires a reduction
in criticized assets by specified percentages by certain dates, with the first date being December 7, 2010 when a 25% ($56.7 million) reduction in criticized assets was required. We reduced our criticized assets by more than the amount
necessary to meet the December 6, 2010 deadline. Our next incremental deadline, June 7, 2011, stipulates a 45% ($102.0 million) reduction in criticized assets from the September 30, 2009 balances. As of February 22, 2011, we have
reduced our criticized assets by 53.2% ($114.9 million). Failure to meet the requirements of the Consent Order could result in additional regulatory requirements, which could ultimately lead to the Bank being taken into receivership by the FDIC. In
addition, the Supervisory Authorities may amend the Consent Order based on the results of their ongoing examinations.



Strategic Project Plan



In response to the challenging economic environment and our negative financial results and in preparation for a potential formal agreement
from the banking regulatory agencies, in June 2009 the Board of Directors and management adopted and began executing a proactive and aggressive Strategic Project Plan (the Plan) to address the issues related to credit quality, liquidity,
earnings, and capital. Execution of the Plan is being overseen by the special Regulatory Oversight Committee of the Board of Directors, and we have engaged external expertise to assist with its implementation. The Plan contemplated substantially all
of the requirements of the Consent Order and therefore we believe we have already made substantial progress towards complying with the requirements of the Consent Order. However, certain provision of the Consent Order required us to submit written
plans to the Supervisory Authorities for their review and / or approval, and all provisions of the Consent Order are subject to examination by the Supervisory Authorities in subsequent examinations.



Since June 2009, we have been, and continue to be, keenly
focused on executing the Plan which now also reflects the requirements of the Consent Order. No one can predict the ongoing impact of the recession given its length and severity. However, it is our expectation that our hard work, the eventual
improvement in the economy and the real estate markets, and raising additional capital, will help our borrowers and us weather this storm and continue our road to recovery and return to profitability.



Credit Quality.    Given the
negative asset quality trends within our loan portfolio, which began in 2008, accelerated during 2009, and continued throughout 2010, we have worked aggressively to identify and quantify potential losses and execute plans to reduce problem assets.
The credit quality plan includes, among other things:



| |  |  | Performing detailed loan reviews of our loan portfolio in 2009 and 2010. The loan reviews were performed by management as well as by an independent
loan review firm that reported their results directly to the Board of Directors. These internal and independent loan reviews will continue in 2011.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | For problem loans identified, we prepared written workout plans that are borrower specific to determine how best to resolve the loans which could
include restructuring the loans, requesting additional collateral, demanding payment from guarantors, sale of the loans, or foreclosure and sale of the collateral.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



17



---

| |  |  | We also increased our monitoring of borrower and industry sector concentrations and are limiting additional credit exposure to these concentrations.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In July 2009, we hired a new Chief Credit Officer and reevaluated our lending policies and procedures and credit administration function and
implemented significant enhancements. Among other changes, we reorganized our credit administration function, hired additional internal resources and external consulting assistance, and reorganized our line of business lending roles and
responsibilities including separate designation of a commercial lending business with more direct oversight and clearer accountability.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In 2010, we hired additional personnel with expertise in problem asset workout and disposition, and in June 2010 we hired a seasoned department manager
for our Special Assets Department which is now comprised of five individuals.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We are actively marketing problem assets for sale. Nonperforming assets declined $13.5 million (10.8%) during 2010, and by 21.6% since the peak at
March 31, 2010. The decline during the fourth quarter 2010 was the third consecutive quarterly decline in nonperforming assets.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In September 2010, we decided to market for sale commercial loans totaling $90.9 million at September 30, 2010. During the fourth quarter of 2010,
we sold five loans, representing two relationships, with a gross book value of $10.4 million, and we are continuing our efforts to sell the remaining loans held for sale. At December 31, 2010, we had commercial loans held for sale aggregating
$66.2 million, of which $2.0 million were under contract for sale and expected to close in the first quarter 2011.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Liquidity.    In June 2009, we implemented a forward-looking liquidity plan and increased our liquidity
monitoring. The liquidity plan includes, among other things:



| |  |  | Implementing proactive customer deposit retention initiatives specific to large deposit customers and our deposit customers in general.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Executing targeted deposit growth and retention campaigns which resulted in retained and new certificates of deposit through June 30, 2010. Since
June 30, 2010, our deposits have remained stable through our normal growth and retention efforts, and therefore we have not utilized any special campaigns. In addition, given our cash position, in the fourth quarter 2010 continuing into the
first quarter 2011, we are not pursuing special CD campaigns and have reduced our deposit pricing to allow our higher priced CDs to roll off as they mature.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Evaluating our sources of available financing and identifying additional collateral for pledging for FHLB and Federal Reserve borrowings.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Accelerating the filing of our 2009 income tax refund claims resulting in refunds received totaling $20.9 million, all of which were received during
the three month period ended March 31, 2010, reduced by $661 thousand as a result of the filing of an amended 2009 federal income tax return in June 2010.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Anticipated filing of our 2008 income tax refund claims for the carryback of net operating losses generated in 2010. The carryback of these losses is
expected to result in the refund of $7.4 million of income taxes previously paid for the 2008 tax year. The refund is expected to be received in 2011.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | During 2009 and most of 2010, maintaining cash received primarily from loan and security repayments invested in cash rather than being reinvested in
other earning assets. Maintaining this cash balance has reduced our interest income by $4.7 million for the year ended December 31, 2010 when compared with investing these funds at the average yield of 2.75% on our investment securities.
Following the consummation of our Private Placement on October 7, 2010, we have redeployed, through February 22, 2011, $96.0 million of this cash into investment securities and prepaid $91 million of FHLB advances which were scheduled to
mature in January through April 2011.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



18



---

At February 22, 2011, funding sources included cash invested at the Federal Reserve
totaling $156.4 million, approximately $4.1 million in available repurchase agreement capacity, $82.8 million from the FHLB, and our correspondent bank line of credit totaling $5 million.



Capital.    At December 31, 2010, as a result of the consummation of the
Private Placement on October 7, 2010, all of our capital ratios exceeded the well-capitalized regulatory minimum thresholds and the requirements of the Consent Order. In addition, to preserve our capital, we have:



| |  |  | Not paid a dividend on our common stock since the first quarter of 2009.
| | - |  | ------------------------------------------------------------------------



| |  |  | Reduced our loan portfolio by $362.9 million and total assets by $48.3 million since March 31, 2009.
| | - |  | ----------------------------------------------------------------------------------------------------



| |  |  | Evaluated other capital saving alternatives such as asset sales and reducing outstanding credit commitments.
| | - |  | ------------------------------------------------------------------------------------------------------------



| |  |  | Issued unsecured convertible debt from the Company in March 2010 of $380 thousand, the proceeds of which were contributed to the Bank as a capital
contribution. On October 7, 2010, as a result of the Private Placement, these notes were converted into common stock of the Company.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | As a condition of the Private Placement, conducted a $10 million follow-on common stock offering to our legacy shareholders as of October 6, 2010
and institutional investors in the Private Placement. The follow-on offering was fully subscribed resulting in the issuance of common stock for gross proceeds of $10.0 million in December 2010 and the first quarter 2011. The net proceeds of the
offering were invested in the Bank.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Earnings.    We have been implementing an earnings plan that is focused on improvement through a combination of revenue increases and expense reductions, including assistance
from external consulting firms to review our current and potential new products and services and related rates and fees, and to identify process and efficiency improvements.



| |  |  | With respect to net interest income, we implemented risk-based loan pricing and interest rate floors on renewed and new loans meeting certain criteria.
At December 31, 2010, loans aggregating $214.6 million had interest rate floors, of which $196.1 million had floors greater than or equal to 5%. In June and July 2010, we began loan specials intended to generate additional loan volume for
residential mortgage, auto, credit card, consumer, and commercial loans. In light of the current low interest rate environment, we have also reduced the interest rates paid on our deposit accounts. Given expectations for rising interest rates,
during 2010 we also borrowed longer-term advances from the FHLB, and extended maturities on certain CD specials to lock in the low interest rates at the time of the specials. In December 2010 and January 2011, we used excess cash earning 0.25 basis
points to prepay $91.0 million of FHLB advances bearing interest at an average rate of 1.58%.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We are evaluating additional sources of noninterest income. For example, in March 2010, we introduced a new checking account, MyPal checking, and a new
savings account, Smart Savings, both of which provide noninterest income resulting from service charges or debit card transactions. We also evaluated the profitability of all of our pre-existing checking accounts and in October 2010 upgraded a large
number of unprofitable checking accounts to the MyPal account. In addition, we revised our existing fees and implemented new fees, with various implementation dates generally between October 1, 2010 and March 31, 2011.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We identified specific opportunities for noninterest expense reductions, which were realized in 2009 and 2010, and are continuing to review other
expense areas for additional reductions. These expense reductions have been and will continue to be partially offset by the higher level of credit-related costs incurred due to legal, consulting, and carrying costs related to our higher level of
nonperforming assets.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We continue to critically evaluate each of our businesses to determine their contribution to our financial performance and their relative risk / return
relationship. Based on the evaluation to date, we sold two product lines during 2010. In March 2010, we sold our merchant services business and entered into a
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



19



---

| | referral and services agreement with Global Direct Payments, Inc. (Global Direct) related to our merchant services business which resulted in a net gain of $587 thousand. Similarly,
in December 2010, we sold our credit card portfolio and entered into a joint marketing agreement with Elan Financial Services, Inc., which resulted in a net gain of $1.2 million.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Summary



In summary, during the year ended December 31, 2010, we
continued to be impacted by the negative financial conditions of our borrowers and the economy in general, but we have also made substantial progress on the execution of the Strategic Project Plan adopted in June 2009. We completed a significant
component of the Plan by consummation of the Private Placement on October 7, 2010. We believe that raising capital, combined with an improving economy and our continued focus on credit quality and earnings improvements, will accelerate our road
to recovery and return to profitability in the post-recession environment. We believe that we may return to profitability, on a quarterly basis, at some point during 2012. However, as discussed in this report, our performance is subject to numerous
risks and uncertainties, many of which are beyond our control, and we can provide no assurances regarding when or if we will return to profitability.



Financial Condition



During 2009 and 2010, we realigned our organizational structure and began the process of more specifically delineating our businesses.
However, at this time we do not yet have in place a reporting structure to separately report and evaluate our various lines of businesses. Our organization structure delineation and more granular line of business management reporting efforts will
continue in 2011. Accordingly, the discussion and analysis of our financial condition and results of operations herein is provided on a consolidated basis, with commentary on business specific implications if more granular information is available.



20



---

Overview



PALMETTO BANCSHARES, INC. AND SUBSIDIARY



Consolidated Balance Sheets

(dollars in thousands)



|                                                        |  |              |           |   |                |   |           |                 |  |   |          |   |  |  |         |   
|------------------------------------------------------- |  | ------------ | --------- | - | -------------- | - | --------- | --------------- |  | - | -------- | - |  |  | ------- | --
|                                                        |  | December 31, |           |   | Dollarvariance |   |           | Percentvariance | 
|                                                        |  | 2010         |           |   | 2009           |   |           |                
|Assets                                                  |  |              |           |   |                |   |           |                 |  |   |          |   |  |  |         |   
|Cash and cash equivalents                               |  |              |           |   |                |   |           |                 |  |   |          |   |  |  |         |   
|Cash and due from banks                                 |  | $            | 223,017   |   |                | $ | 188,084   |                 |  | $ | 34,933   |   |  |  | 18.6    | % 
|                                                        |  |              |           |   |                |   |           |                 |  |   |          |   |  |  |         |   
|Total cash and cash equivalents                         |  |              | 223,017   |   |                |   | 188,084   |                 |  |   | 34,933   |   |  |  | 18.6    |   
|FHLB stock, at cost                                     |  |              | 6,785     |   |                |   | 7,010     |                 |  |   | (225     | ) |  |  | (3.2    | ) 
|Investment securities available for sale, at fair value |  |              | 218,775   |   |                |   | 119,986   |                 |  |   | 98,789   |   |  |  | 82.3    |   
|Mortgage loans held for sale                            |  |              | 4,793     |   |                |   | 3,884     |                 |  |   | 909      |   |  |  | 23.4    |   
|Commercial loans held for sale                          |  |              | 66,157    |   |                |   |          |                 |  |   | 66,157   |   |  |  | 100.0   |   
|Loans, gross                                            |  |              | 793,426   |   |                |   | 1,040,312 |                 |  |   | (246,886 | ) |  |  | (23.7   | ) 
|Less: allowance for loan losses                         |  |              | (26,934   | ) |                |   | (24,079   | )               |  |   | (2,855   | ) |  |  | 11.9    |   
|                                                        |  |              |           |   |                |   |           |                 |  |   |          |   |  |  |         |   
|Loans, net                                              |  |              | 766,492   |   |                |   | 1,016,233 |                 |  |   | (249,741 | ) |  |  | (24.6   | ) 
|Premises and equipment, net                             |  |              | 28,109    |   |                |   | 29,605    |                 |  |   | (1,496   | ) |  |  | (5.1    | ) 
|Goodwill                                                |  |              |          |   |                |   | 3,691     |                 |  |   | (3,691   | ) |  |  | (100.0  | ) 
|Accrued interest receivable                             |  |              | 4,702     |   |                |   | 4,322     |                 |  |   | 380      |   |  |  | 8.8     |   
|Foreclosed real estate                                  |  |              | 19,983    |   |                |   | 27,826    |                 |  |   | (7,843   | ) |  |  | (28.2   | ) 
|Income tax refund receivable                            |  |              | 7,436     |   |                |   | 20,869    |                 |  |   | (13,433  | ) |  |  | (64.4   | ) 
|Deferred tax asset                                      |  |              |          |   |                |   | 5,799     |                 |  |   | (5,799   | ) |  |  | (100.0  | ) 
|Other                                                   |  |              | 8,998     |   |                |   | 8,454     |                 |  |   | 544      |   |  |  | 6.4     |   
|                                                        |  |              |           |   |                |   |           |                 |  |   |          |   |  |  |         |   
|Total assets                                            |  | $            | 1,355,247 |   |                | $ | 1,435,763 |                 |  | $ | (80,516  | ) |  |  | (5.6    | )%
|                                                        |  |              |           |   |                |   |           |                 |  |   |          |   |  |  |         |   
|Liabilities and shareholders equity                    |  |              |           |   |                |   |           |                 |  |   |          |   |  |  |         |   
|Liabilities                                             |  |              |           |   |                |   |           |                 |  |   |          |   |  |  |         |   
|Deposits                                                |  |              |           |   |                |   |           |                 |  |   |          |   |  |  |         |   
|Noninterest-bearing                                     |  | $            | 141,281   |   |                | $ | 142,609   |                 |  | $ | (1,328   | ) |  |  | (0.9    | )%
|Interest-bearing                                        |  |              | 1,032,081 |   |                |   | 1,072,305 |                 |  |   | (40,224  | ) |  |  | (3.8    | ) 
|                                                        |  |              |           |   |                |   |           |                 |  |   |          |   |  |  |         |   
|Total deposits                                          |  |              | 1,173,362 |   |                |   | 1,214,914 |                 |  |   | (41,552  | ) |  |  | (3.4    | ) 
|Retail repurchase agreements                            |  |              | 20,720    |   |                |   | 15,545    |                 |  |   | 5,175    |   |  |  | 33.3    |   
|Commercial paper (Master notes)                         |  |              |          |   |                |   | 19,061    |                 |  |   | (19,061  | ) |  |  | (100.0  | ) 
|FHLB borrowings                                         |  |              | 35,000    |   |                |   | 101,000   |                 |  |   | (66,000  | ) |  |  | (65.3   | ) 
|Accrued interest payable                                |  |              | 1,187     |   |                |   | 2,020     |                 |  |   | (833     | ) |  |  | (41.2   | ) 
|Other                                                   |  |              | 11,079    |   |                |   | 8,208     |                 |  |   | 2,871    |   |  |  | 35.0    |   
|                                                        |  |              |           |   |                |   |           |                 |  |   |          |   |  |  |         |   
|Total liabilities                                       |  |              | 1,241,348 |   |                |   | 1,360,748 |                 |  |   | (119,400 | ) |  |  | (8.8    | ) 
|                                                        |  |              |           |   |                |   |           |                 |  |   |          |   |  |  |         |   
|Shareholders equity                                    |  |              |           |   |                |   |           |                 |  |   |          |   |  |  |         |   
|Preferred stock                                         |  |              |          |   |                |   |          |                 |  |   |         |   |  |  |        |   
|Common stock                                            |  |              | 474       |   |                |   | 32,282    |                 |  |   | (31,808  | ) |  |  | (98.5   | ) 
|Capital surplus                                         |  |              | 133,112   |   |                |   | 2,599     |                 |  |   | 130,513  |   |  |  | 5,021.7 |   
|Retained earnings (deficit)                             |  |              | (13,108   | ) |                |   | 47,094    |                 |  |   | (60,202  | ) |  |  | (127.8  | ) 
|Accumulated other comprehensive loss, net of tax        |  |              | (6,579    | ) |                |   | (6,960    | )               |  |   | 381      |   |  |  | (5.5    | ) 
|                                                        |  |              |           |   |                |   |           |                 |  |   |          |   |  |  |         |   
|Total shareholders equity                              |  |              | 113,899   |   |                |   | 75,015    |                 |  |   | 38,884   |   |  |  | 51.8    |   
|                                                        |  |              |           |   |                |   |           |                 |  |   |          |   |  |  |         |   
|Total liabilities and shareholders equity              |  | $            | 1,355,247 |   |                | $ | 1,435,763 |                 |  | $ | (80,516  | ) |  |  | (5.6    | )%
|                                                        |  |              |           |   |                |   |           |                 |  |   |          |   |  |  |         |   



21



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Cash and Cash Equivalents



Cash and cash equivalents increased $34.9 million at December 31, 2010 over December 31, 2009 due
primarily as a result of maintaining our excess cash with the Federal Reserve to provide liquidity, notwithstanding the negative impact to our interest income since we only earn 25 basis points on our deposits with the Federal Reserve versus
investing this cash in higher earning assets. For the year ended December 31, 2010, the difference between the interest earned on the cash at the Federal Reserve at 25 basis points and the interest that could have been earned by investing this
cash in the securities portfolio at the average yield on the portfolio of 2.75% was $4.7 million. Upon consummation of the Private Placement in October 2010, we began redeploying this cash balance by investing $100 million in investment securities
in the fourth quarter 2010 and prepaying $91.0 million of FHLB advances in December 2010 and January 2011. We also plan to redeploy an additional $55 million into investment securities in the first quarter 2011. We believe that redeploying our
excess cash will improve our net interest margin going forward.



Concentrations and Restrictions.    In an effort to manage counterparty risk, we generally do not sell federal funds to other financial institutions because they are essentially
uncollateralized loans. We regularly evaluate the risk associated with the counterparties to these potential transactions to ensure that we would not be exposed to any significant risks with regard to our cash and cash equivalent balances.



The following table summarizes cash and cash
equivalents pledged as collateral and therefore restricted at the dates indicated (in thousands).



|                                |  |                  |     |  |                  |   |       | 
|------------------------------- |  | ---------------- | --- |  | ---------------- | - | ----- | 
|                                |  | December 31,2010 |     |  | December 31,2009 |  
|Secure a letter of credit       |  | $                |    |  |                  | $ | 512   | 
|Merchant credit card agreements |  |                  | 451 |  |                  |   | 836   | 
|                                |  |                  |     |  |                  |   |       | 
|Total                           |  | $                | 451 |  |                  | $ | 1,348 | 
|                                |  |                  |     |  |                  |   |       | 



FHLB Stock



We are a member of the FHLB of Atlanta, which is one of
twelve regional FHLBs that administer home financing credit for depository institutions. Each FHLB serves as a reserve or central bank for its members within its assigned region. It is funded primarily from proceeds derived from the sale
of consolidated obligations of the FHLB System. It makes loans or advances to members in accordance with policies and procedures, established by the Board of Directors of the FHLB, which are subject to the oversight of the Federal Housing
Finance Board. All advances from the FHLB are required to be fully secured by sufficient collateral as determined by the FHLB. At December 31, 2010, we had $35.0 million of outstanding advances from the FHLB under an available
credit facility of 10% of assets, which is limited to available collateral. We have the capacity to borrow an additional $53.3 million from the FHLB based on available collateral as of December 31, 2010.



As an FHLB member, the Company is required to purchase and
maintain stock in the FHLB. At December 31, 2010, we had $6.8 million in FHLB stock, which was in compliance with this requirement. No ready market exists for this stock, and it has no quoted market value. Purchases and redemptions
are normally transacted each quarter to adjust our investment to the required amount based on the FHLB requirements, and requests for redemptions are met at the discretion of the FHLB. We have experienced no interruption in such redemptions.
Historically, redemption of this stock has been at par value. Dividends are paid on this stock also at the discretion of the FHLB. We have received dividends on our FHLB stock and the average dividend yield for 2010 was 0.33%; however, there can be
no guarantee of future dividends. The carrying value of FHLB stock approximates fair value. The carrying value of this stock was $7.0 million at December 31, 2009.



22



---

Investment Activities



General.    Our primary objective in managing the investment portfolio is to
maintain a portfolio of high quality, highly liquid investments yielding competitive returns. We are required under federal regulations to maintain adequate liquidity to ensure safe and sound operations. We maintain investment balances based on a
continuing assessment of cash flows, the level of loan production, current interest rate risk strategies, and the assessment of the potential future direction of market interest rate changes. Investment securities differ in terms of default,
interest rate, liquidity, and expected rate of return risk.



Composition.    The following table summarizes the composition of our investment securities available for sale portfolio at the dates indicated (dollars in thousands).



|                                               |  |                   |         |  |                   |  |       |                   |  |   |            |  |  |       |       |   |            |   |         |  |  |  |       |  
|---------------------------------------------- |  | ----------------- | ------- |  | ----------------- |  | ----- | ----------------- |  | - | ---------- |  |  | ----- | ----- | - | ---------- | - | ------- |  |  |  | ----- | -
|                                               |  | December 31, 2010 |         |  | December 31, 2009 |  |       | December 31, 2008 | 
|                                               |  | Total             |         |  | % of total        |  |       | Total             |  |   | % of total |  |  | Total |       |   | % of total |  
|U.S. Treasury and federal agencies             |  | $                 | 37,426  |  |                   |  | 17.1  | %                 |  | $ | 16,297     |  |  |       | 13.6  | % |            | $ |        |  |  |  |      | %
|State and municipal                            |  |                   | 52,462  |  |                   |  | 24.0  |                   |  |   | 46,785     |  |  |       | 39.0  |   |            |   | 50,830  |  |  |  | 40.5  |  
|Collateralized mortgage obligations            |  |                   | 108,171 |  |                   |  | 49.4  |                   |  |   | 40,318     |  |  |       | 33.6  |   |            |   | 54,639  |  |  |  | 43.5  |  
|Other mortgage-backed (federal agencies)       |  |                   | 20,716  |  |                   |  | 9.5   |                   |  |   | 16,586     |  |  |       | 13.8  |   |            |   | 20,127  |  |  |  | 16.0  |  
|                                               |  |                   |         |  |                   |  |       |                   |  |   |            |  |  |       |       |   |            |   |         |  |  |  |       |  
|Total investment securities available for sale |  | $                 | 218,775 |  |                   |  | 100.0 | %                 |  | $ | 119,986    |  |  |       | 100.0 | % |            | $ | 125,596 |  |  |  | 100.0 | %
|                                               |  |                   |         |  |                   |  |       |                   |  |   |            |  |  |       |       |   |            |   |         |  |  |  |       |  



Average balances of investment
securities available for sale increased to $135.4 million during the year ended December 31, 2010 from $119.2 million during the same period of 2009. This increase was the result of purchases in July 2010 of U.S. Treasury and federal agencies
purchased to acquire additional securities to pledge as collateral for FHLB borrowings, as well as reinvestment of our excess cash into securities in the fourth quarter 2010.



The fair value of the investment securities available for
sale portfolio represented 16.1% of total assets at December 31, 2010 and 8.4% of total assets at December 31, 2009.



Through February 22, 2011, we purchased additional state and municipal, collateralized mortgage obligations, and other
mortgage-backed investment securities aggregating approximately $53.3 million.



Unrealized Position.    The following table summarizes the amortized cost and fair value composition of our investment securities available for sale portfolio at the dates
indicated (dollars in thousands).



|                                               |  |                   |         |  |                   |   |         |                   |  |   |           |  |  |               |         |  |           |   |         |  |  |   |         | 
|---------------------------------------------- |  | ----------------- | ------- |  | ----------------- | - | ------- | ----------------- |  | - | --------- |  |  | ------------- | ------- |  | --------- | - | ------- |  |  | - | ------- | 
|                                               |  | December 31, 2010 |         |  | December 31, 2009 |   |         | December 31, 2008 | 
|                                               |  | Amortizedcost     |         |  | Fairvalue         |   |         | Amortizedcost     |  |   | Fairvalue |  |  | Amortizedcost |         |  | Fairvalue |  
|U.S. Treasury and federal agencies             |  | $                 | 37,430  |  |                   | $ | 37,426  |                   |  | $ | 16,294    |  |  | $             | 16,297  |  |           | $ |        |  |  | $ |        | 
|State and municipal                            |  |                   | 51,243  |  |                   |   | 52,462  |                   |  |   | 44,908    |  |  |               | 46,785  |  |           |   | 50,297  |  |  |   | 50,830  | 
|Collateralized mortgage obligations            |  |                   | 107,876 |  |                   |   | 108,171 |                   |  |   | 42,508    |  |  |               | 40,318  |  |           |   | 58,033  |  |  |   | 54,639  | 
|Other mortgage-backed (federal agencies)       |  |                   | 20,189  |  |                   |   | 20,716  |                   |  |   | 15,783    |  |  |               | 16,586  |  |           |   | 19,876  |  |  |   | 20,127  | 
|                                               |  |                   |         |  |                   |   |         |                   |  |   |           |  |  |               |         |  |           |   |         |  |  |   |         | 
|Total investment securities available for sale |  | $                 | 216,738 |  |                   | $ | 218,775 |                   |  | $ | 119,493   |  |  | $             | 119,986 |  |           | $ | 128,206 |  |  | $ | 125,596 | 
|                                               |  |                   |         |  |                   |   |         |                   |  |   |           |  |  |               |         |  |           |   |         |  |  |   |         | 



U.S. Treasury and federal agency
securities are government debts issued by the U.S. Treasury through the Bureau of the Public Debt. U.S. Treasury and federal agency securities are the debt financing instruments of the U.S. federal government. Our U.S. Treasury and federal agency
securities are very liquid and are heavily traded.



State and municipal investment securities are debt investment securities issued by a state, municipality, or county in order to finance
its capital expenditures. The most substantial risk associated with buying state and



23



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municipal investment securities is the financial risk associated with the municipality from which the securities are purchased. Although municipal bonds in smaller municipalities can sometimes be
difficult to sell quickly, we do not currently anticipate that we will liquidate this portfolio in the near term.



Collateralized mortgage obligations are a mortgage-backed security sub-type in which the mortgages are ordered into tranches by some
quality (such as repayment time) with each tranche sold as a separate security. These mortgage-backed securities separate the mortgage pools into short, medium, and long-term tranches. Our collateralized mortgage obligations are all fixed rate and
are paid a fixed rate of interest at regular intervals. Monthly fluctuations in income occur only as there are changes in amortization or accretions due to changes in prepayment speeds.



Other mortgage-backed investment securities include investment instruments that represent ownership of an
undivided interest in a group of mortgages. Principal and interest from the individual mortgages are used to pay principal and interest on the mortgage-backed investment security. Monthly income from other mortgage-backed investment securities may
fluctuate as interest rates change due to the volume of mortgage prepayments.



We use prices from third party pricing services and, to a lesser extent, indicative (non-binding) quotes from third party brokers, to measure fair value of our investment securities. We utilize multiple
third party pricing services and brokers to obtain fair values; however, we generally obtain one price / quote for each individual security. For securities priced by third party pricing services, we determine the most appropriate and relevant
pricing service for each security class and have that vendor provide the price for each security in the class. We record the unadjusted value provided by the third party pricing service / broker in our Consolidated Financial Statements, subject to
our internal price verification procedures.



Pledged.    Public depositors from state and local municipalities typically require that the Bank pledge
investment grade securities to the accounts to ensure repayment. Although the funds are usually a low cost, relatively stable source of funding for the Bank, availability depends on the particular governments fiscal policies and cash flow
needs.



Investments securities were pledged as
collateral for the following at the dates indicated (in thousands).



|                                       |  |                  |         |  |                  |   |         | 
|-------------------------------------- |  | ---------------- | ------- |  | ---------------- | - | ------- | 
|                                       |  | December 31,2010 |         |  | December 31,2009 |  
|Public funds deposits                  |  | $                | 67,260  |  |                  | $ | 73,185  | 
|Federal funds from correspondent banks |  |                  |        |  |                  |   | 6,300   | 
|FHLB advances and line of credit       |  |                  | 48,344  |  |                  |   | 29,767  | 
|                                       |  |                  |         |  |                  |   |         | 
|Total                                  |  | $                | 115,604 |  |                  | $ | 109,252 | 
|                                       |  |                  |         |  |                  |   |         | 



24



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Other-Than-Temporary Impairment.    The following tables
summarize the number of securities in each category of investment securities available for sale, the fair value, and the gross unrealized losses, aggregated by investment category and length of time that individual securities have been in a
continuous unrealized loss position, at the dates indicated (dollars in thousands).



|                                               |  |                     |    |  |                     |   |        |                       |  |   |     |  |  |            |   |  |                       |   |        |   |  |   |            |  |  |                       |    |  |  |   |        |  |  |   |       | 
|---------------------------------------------- |  | ------------------- | -- |  | ------------------- | - | ------ | --------------------- |  | - | --- |  |  | ---------- | - |  | --------------------- | - | ------ | - |  | - | ---------- |  |  | --------------------- | -- |  |  | - | ------ |  |  | - | ----- | 
|                                               |  | December 31, 2010   |   
|                                               |  | Less than 12 months |    |  | 12 months or longer |   |        | Total                 | 
|                                               |  | #                   |    |  | Fair value          |   |        | Grossunrealizedlosses |  |   | #   |  |  | Fair value |   |  | Grossunrealizedlosses |   |        | # |  |   | Fair value |  |  | Grossunrealizedlosses |   
|U.S. Treasury and federal agencies             |  |                     | 2  |  |                     | $ | 21,428 |                       |  | $ | 6   |  |  |            |  |  |                       | $ |       |   |  | $ |           |  |  |                       | 2  |  |  | $ | 21,428 |  |  | $ | 6     | 
|State and municipal                            |  |                     | 12 |  |                     |   | 7,211  |                       |  |   | 468 |  |  |            |  |  |                       |   |       |   |  |   |           |  |  |                       | 12 |  |  |   | 7,211  |  |  |   | 468   | 
|Collateralized mortgage obligations            |  |                     | 10 |  |                     |   | 38,295 |                       |  |   | 376 |  |  |            |  |  |                       |   |       |   |  |   |           |  |  |                       | 10 |  |  |   | 38,295 |  |  |   | 376   | 
|Other mortgage-backed (federal agencies)       |  |                     | 3  |  |                     |   | 6,861  |                       |  |   | 120 |  |  |            |  |  |                       |   |       |   |  |   |           |  |  |                       | 3  |  |  |   | 6,861  |  |  |   | 120   | 
|                                               |  |                     |    |  |                     |   |        |                       |  |   |     |  |  |            |   |  |                       |   |        |   |  |   |            |  |  |                       |    |  |  |   |        |  |  |   |       | 
|Total investment securities available for sale |  |                     | 27 |  |                     | $ | 73,795 |                       |  | $ | 970 |  |  |            |  |  |                       | $ |       |   |  | $ |           |  |  |                       | 27 |  |  | $ | 73,795 |  |  | $ | 970   | 
|                                               |  |                     |    |  |                     |   |        |                       |  |   |     |  |  |            |   |  |                       |   |        |   |  |   |            |  |  |                       |    |  |  |   |        |  |  |   |       | 
|                                               | 
|                                               |  | December 31, 2009   |   
|                                               |  | Less than 12 months |    |  | 12 months or longer |   |        | Total                 | 
|                                               |  | #                   |    |  | Fair value          |   |        | Grossunrealizedlosses |  |   | #   |  |  | Fair value |   |  | Grossunrealizedlosses |   |        | # |  |   | Fair value |  |  | Grossunrealizedlosses |   
|U.S. Treasury and federal agencies             |  |                     | 1  |  |                     | $ | 300    |                       |  | $ |    |  |  |            |  |  |                       | $ |       |   |  | $ |           |  |  |                       | 1  |  |  | $ | 300    |  |  | $ |      | 
|State and municipal                            |  |                     | 2  |  |                     |   | 662    |                       |  |   | 3   |  |  |            |  |  |                       |   |       |   |  |   |           |  |  |                       | 2  |  |  |   | 662    |  |  |   | 3     | 
|Collateralized mortgage obligations            |  |                     | 3  |  |                     |   | 10,323 |                       |  |   | 412 |  |  |            | 6 |  |                       |   | 16,624 |   |  |   | 1,946      |  |  |                       | 9  |  |  |   | 26,947 |  |  |   | 2,358 | 
|Other mortgage-backed (federal agencies)       |  |                     | 2  |  |                     |   | 1,444  |                       |  |   | 35  |  |  |            |  |  |                       |   |       |   |  |   |           |  |  |                       | 2  |  |  |   | 1,444  |  |  |   | 35    | 
|                                               |  |                     |    |  |                     |   |        |                       |  |   |     |  |  |            |   |  |                       |   |        |   |  |   |            |  |  |                       |    |  |  |   |        |  |  |   |       | 
|Total investment securities available for sale |  |                     | 8  |  |                     | $ | 12,729 |                       |  | $ | 450 |  |  |            | 6 |  |                       | $ | 16,624 |   |  | $ | 1,946      |  |  |                       | 14 |  |  | $ | 29,353 |  |  | $ | 2,396 | 
|                                               |  |                     |    |  |                     |   |        |                       |  |   |     |  |  |            |   |  |                       |   |        |   |  |   |            |  |  |                       |    |  |  |   |        |  |  |   |       | 



Gross unrealized losses
decreased $1.4 million from December 31, 2009 to December 31, 2010, primarily within the collateralized mortgage obligation sector of the investment securities portfolio. Eleven collateralized mortgage obligations were sold during the year
ended December 31, 2010. The gross unrealized losses on the sold collateralized mortgage obligations totaled $2.0 million at December 31, 2009.



Based on our other-than-temporary impairment analysis at December 31, 2010, we concluded that gross unrealized losses detailed in the
preceding table were not other-than-temporarily impaired as of that date.



Based on our other-than-temporary impairment analysis at December 31, 2009, one collateralized mortgage obligation with a fair value of $2.3 million and amortized cost of $3.3 million was
other-than-temporarily impaired. We reached this conclusion based on the fair value of the security being below the amortized cost and our analysis of broker-provided fair values as verified by other external sources. Due to the fact that
at the time of the analysis we did not intend to sell this security nor was it more likely than not that we would have to sell the security prior to the recovery of its amortized cost basis less any current period credit loss, the amount of
impairment related to credit loss was recognized in earnings and the amount of impairment related to other matters was recognized in other comprehensive income. For the year ended December 31, 2009, a $49 thousand other-than-temporary
credit impairment was recognized in Other noninterest expense in the Consolidated Statements of Income (Loss).



25



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Fair values of the investment securities portfolio could decline in the future if the
underlying performance of the collateral for collateralized mortgage obligations or other securities deteriorates and the levels do not provide sufficient protection for contractual principal and interest. As a result, there is risk that additional
other-than-temporary impairments may occur in the future particularly in light of the current economic environment.



Ratings.    The following table summarizes Moodys Investors Services (Moodys)
ratings, by segment, of the investment securities available for sale based on fair value, at December 31, 2010. An Aaa rating is based not only on the credit of the issuer, but may also include consideration of the structure of the securities
and the credit quality of the collateral.



|                              |  |                                   |     |   |                    |  |     |                                    |  |  |                                         |   |  |  |     |  
|----------------------------- |  | --------------------------------- | --- | - | ------------------ |  | --- | ---------------------------------- |  |  | --------------------------------------- | - |  |  | --- | -
|                              |  | U.S. Treasury andfederal agencies |     |   | State andmunicipal |  |     | Collateralizedmortgage obligations |  |  | Other mortgage-backed(federal agencies) |  
|Aaa                           |  |                                   | 100 | % |                    |  | 8   | %                                  |  |  | 100                                     | % |  |  | 100 | %
|Aa1-A1                        |  |                                   |    |   |                    |  | 64  |                                    |  |  |                                        |   |  |  |    |  
|Baa1                          |  |                                   |    |   |                    |  | 10  |                                    |  |  |                                        |   |  |  |    |  
|Not rated or withdrawn rating |  |                                   |    |   |                    |  | 18  |                                    |  |  |                                        |   |  |  |    |  
|                              |  |                                   |     |   |                    |  |     |                                    |  |  |                                         |   |  |  |     |  
|Total                         |  |                                   | 100 | % |                    |  | 100 | %                                  |  |  | 100                                     | % |  |  | 100 | %
|                              |  |                                   |     |   |                    |  |     |                                    |  |  |                                         |   |  |  |     |  



Of the state and municipal
investment securities not rated or with withdrawn ratings by Moodys at December 31, 2010, 24% were rated AAA by Standard and Poors, 47% were rated AA+, 22% were rated AA, 5% were rated AA-, and 2%, or $204 thousand, were not rated
by Standard and Poors.



26



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Maturities.    The following table summarizes the maturity
distribution schedule with corresponding weighted-average yields of amortized cost of investment securities available for sale at and for the period ended December 31, 2010 (dollars in thousands). Weighted-average yields have not been computed
on a fully taxable-equivalent basis. Collateralized mortgage obligations and other mortgage-backed securities are included in maturity categories based on their stated maturity date. Expected maturities may differ from contractual maturities because
issuers may have the right to call or prepay obligations.



|                                               |  |               |         |  |           |  |     |  
|---------------------------------------------- |  | ------------- | ------- |  | --------- |  | --- | -
|                                               |  | Amortizedcost |         |  | Bookyield | 
|U.S. Treasury and federal agencies             |  |               |         |  |           |  |     |  
|In one year or less                            |  | $             | 37,430  |  |           |  | 0.2 | %
|After 1 through 5 years                        |  |               |        |  |           |  |    |  
|After 5 through 10 years                       |  |               |        |  |           |  |    |  
|After 10 years                                 |  |               |        |  |           |  |    |  
|                                               |  |               |         |  |           |  |     |  
|Total U.S. Treasury and federal agencies       |  |               | 37,430  |  |           |  | 0.2 |  
|State and municipal                            |  |               |         |  |           |  |     |  
|In one year or less                            |  |               | 3,389   |  |           |  | 3.3 |  
|After 1 through 5 years                        |  |               | 24,924  |  |           |  | 3.5 |  
|After 5 through 10 years                       |  |               | 13,220  |  |           |  | 3.5 |  
|After 10 years                                 |  |               | 9,710   |  |           |  | 3.1 |  
|                                               |  |               |         |  |           |  |     |  
|Total state and municipal                      |  |               | 51,243  |  |           |  | 3.4 |  
|Collateralized mortgage obligations            |  |               |         |  |           |  |     |  
|In one year or less                            |  |               |        |  |           |  |    |  
|After 1 through 5 years                        |  |               |        |  |           |  |    |  
|After 5 through 10 years                       |  |               | 12,564  |  |           |  | 1.5 | %
|After 10 years                                 |  |               | 95,312  |  |           |  | 1.7 | %
|                                               |  |               |         |  |           |  |     |  
|Total collateralized mortgage obligations      |  |               | 107,876 |  |           |  | 1.6 | %
|Other mortgage-backed (federal agencies)       |  |               |         |  |           |  |     |  
|In one year or less                            |  |               |        |  |           |  |    |  
|After 1 through 5 years                        |  |               | 49      |  |           |  | 4.0 |  
|After 5 through 10 years                       |  |               | 2,639   |  |           |  | 5.2 |  
|After 10 years                                 |  |               | 17,501  |  |           |  | 4.1 |  
|                                               |  |               |         |  |           |  |     |  
|Total other mortgage-backed (federal agencies) |  |               | 20,189  |  |           |  | 4.2 |  
|                                               |  |               |         |  |           |  |     |  
|Total investment securities available for sale |  | $             | 216,738 |  |           |  | 1.2 | %
|                                               |  |               |         |  |           |  |     |  



The weighted average life of
investment securities available for sale was 3.0 years, based on expected prepayment activity, at December 31, 2010. Since 59% of the portfolio, based on amortized cost, is collateralized mortgage obligations or other mortgage-backed
securities, the expected remaining maturity may differ from contractual maturity because borrowers generally have the right to prepay obligations before the underlying mortgages mature. Given the general expectation of a rising interest rate
environment, we are intentionally investing in shorter-term duration securities to minimize our interest rate risk if interest rates begin to rise.



Concentrations.    The following table summarizes issuer concentrations of collateralized mortgage obligations
whose aggregate book values exceed 10% of shareholders equity at December 31, 2010 (dollars in thousands).



|            |  |                     |        |  |                         |   |        |                                              |  |  |      |  
|----------- |  | ------------------- | ------ |  | ----------------------- | - | ------ | -------------------------------------------- |  |  | ---- | -
|Issuer      |  | Aggregatefair value |        |  | Aggregateamortized cost |   |        | Amortized cost as a % ofshareholders equity | 
|Freddie Mac |  | $                   | 30,226 |  |                         | $ | 30,112 |                                              |  |  | 26.4 | %
|Fannie Mae  |  |                     | 24,930 |  |                         |   | 24,934 |                                              |  |  | 21.9 | %
|Ginnie Mae  |  |                     | 50,387 |  |                         |   | 50,394 |                                              |  |  | 44.2 | %



27



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The following table summarizes issuer concentrations of other mortgage-backed investment
securities whose book values exceed 10% of shareholders equity at December 31, 2010 (dollars in thousands).



|           |  |                     |        |  |                         |   |        |                                              |  |  |      |  
|---------- |  | ------------------- | ------ |  | ----------------------- | - | ------ | -------------------------------------------- |  |  | ---- | -
|Issuer     |  | Aggregatefair value |        |  | Aggregateamortized cost |   |        | Amortized cost as a % ofshareholders equity | 
|Fannie Mae |  | $                   | 15,523 |  |                         | $ | 15,014 |                                              |  |  | 13.2 | %



Realized Gains and Losses.    The following table summarizes the gross realized gains and losses on investment securities available for sale for the periods indicated (in
thousands).



|                   |  |                                 |        |   |      |   |   |      |  |   |   | 
|------------------ |  | ------------------------------- | ------ | - | ---- | - | - | ---- |  | - | - | 
|                   |  | For the years endedDecember 31, |       
|                   |  | 2010                            |        |   | 2009 |   |   | 2008 | 
|Realized gains     |  | $                               | 1,149  |   |      | $ | 2 |      |  | $ | 1 | 
|Realized losses    |  |                                 | (1,139 | ) |      |   |  |      |  |   |  | 
|                   |  |                                 |        |   |      |   |   |      |  |   |   | 
|Net realized gains |  | $                               | 10     |   |      | $ | 2 |      |  | $ | 1 | 
|                   |  |                                 |        |   |      |   |   |      |  |   |   | 



Lending Activities



General.    Loans
continue to be the largest component of our assets. During the year ended December 31, 2010, gross loans declined approximately $246.9 million (23.7%), including the net transfer of $84.9 million commercial real estate loans to the held for
sale portfolio in 2010, as we actively seek to reduce our commercial real estate loan portfolio to improve our credit quality and preserve capital. Based on our risk assessment of borrowers, we also implemented risk-based loan pricing and interest
rate floors, or minimum interest rates, both at origination and renewal. In addition, we are proactively addressing the reduction of our nonperforming assets through restructurings, charge-offs, and sales.



Commercial Loans Held for
Sale.    In September 2010, we decided to market for sale commercial loans totaling $90.9 million at September 30, 2010, and we are evaluating the bids received on a loan by loan basis. In general, we believe potential
buyers are making bids at heavily discounted prices given the need for the banking industry in general and our Company in particular to deleverage commercial real estate assets. We believe this was particularly true in the fourth quarter of 2010 as
banks sought to rid themselves of problem assets prior to year end. In many cases, we have not accepted such discounted bids. In certain cases, however, we are making the strategic decision to sell certain assets at amounts less than their recorded
book values to continue to reduce our criticized assets and concentration in commercial real estate as required by the Consent Order.



During the fourth quarter of 2010, we entered into contracts to sell loans with a gross book value of $13.9 million, of which $10.4
million closed in the fourth quarter. During the fourth quarter of 2010, we transferred $6.0 million of commercial loans held for sale back to loans held for investment, as our intentions with respect to these loans had changed. We are continuing
our efforts to sell the remaining loans held for sale. At December 31, 2010, we had commercial loans held for sale aggregating $66.2 million, of which $2.0 million were under contract for sale and expected to close in the first quarter 2011.
Writedowns of $1.1 million were recorded in the fourth quarter 2010 to reduce the value of these assets to fair value, some of which were based on the contract values, less estimated costs to sell.



The loans held for sale were marketed for sale by loan sale
advisory firms and through our own efforts, and we made the strategic decision in the fourth quarter to accept bids on certain loans that were lower than their appraised values which were the basis for their initial carrying amounts in loans held
for sale. In making this decision, we attempted to balance the negative capital impact of selling loans at a loss with the positive impact of reducing our nonperforming assets, with the reduction in nonperforming assets also a requirement of the
Consent Order.



28



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At December 31, 2010, commercial loans held for sale are carried at the lower of cost
or fair value, and a valuation allowance of $2.3 million is recorded against the loans held for sale resulting in a net carrying amount in the Consolidated Balance Sheets of $66.2 million. Of the aggregate balance of commercial loans held for sale,
98.6% are commercial real estate loans based on FDIC code.



Loans Composition.    Disclosure guidance related to a companys allowance for loan losses and the credit quality of its financing receivables require the loans and
allowance for loan losses disclosures to be provided on a disaggregated basis. This disaggregated basis has been defined as portfolio segments, the level at which we develop and document our methodology to determine our allowance for loan losses,
and classes, a level of information below the portfolio segment that provides an understanding as to the nature and extent of exposure in our loan portfolio. For reporting purposes, loan classes are based on FDIC code, and portfolio segments are an
aggregation of those classes based on the way we develop and document our allowance for loan losses. FDIC codes are based on the underlying loan collateral.



The following table summarizes gross loans, categorized by portfolio segment, at the dates indicated (dollars in thousands).



|                                     |  |                  |         |   |                  |  |       |                  |  |   |                  |  |  |                  |       |   |           |   |           |       |  |  |           |   |  |       |           |  |           |  |       |   |  |   |         |  |  |  |       |  
|------------------------------------ |  | ---------------- | ------- | - | ---------------- |  | ----- | ---------------- |  | - | ---------------- |  |  | ---------------- | ----- | - | --------- | - | --------- | ----- |  |  | --------- | - |  | ----- | --------- |  | --------- |  | ----- | - |  | - | ------- |  |  |  | ----- | -
|                                     |  | December 31,2010 |         |   | December 31,2009 |  |       | December 31,2008 |  |   | December 31,2007 |  |  | December 31,2006 |      
|                                     |  | Total            |         |   | % oftotal        |  |       | Total            |  |   | % oftotal        |  |  | Total            |       |   | % oftotal |   |           | Total |  |  | % oftotal |   |  | Total |           |  | % oftotal | 
|Commercial real estate               |  | $                | 573,822 |   |                  |  | 66.8  | %                |  | $ | 695,263          |  |  |                  | 66.8  | % |           | $ | 781,745   |       |  |  | 67.5      | % |  | $     | 659,615   |  |           |  | 63.2  | % |  | $ | 559,748 |  |  |  | 59.2  | %
|Single-family residential            |  |                  | 178,980 |   |                  |  | 20.8  |                  |  |   | 203,330          |  |  |                  | 19.6  |   |           |   | 217,734   |       |  |  | 18.8      |   |  |       | 209,274   |  |           |  | 20.0  |   |  |   | 156,238 |  |  |  | 16.5  |  
|Commercial and industrial            |  |                  | 47,812  |   |                  |  | 5.6   |                  |  |   | 61,788           |  |  |                  | 5.9   |   |           |   | 73,609    |       |  |  | 6.4       |   |  |       | 77,555    |  |           |  | 7.4   |   |  |   | 126,742 |  |  |  | 13.4  |  
|Consumer                             |  |                  | 52,652  |   |                  |  | 6.1   |                  |  |   | 76,296           |  |  |                  | 7.3   |   |           |   | 79,295    |       |  |  | 6.8       |   |  |       | 93,983    |  |           |  | 9.0   |   |  |   | 101,098 |  |  |  | 10.7  |  
|Other                                |  |                  | 6,317   |   |                  |  | 0.7   |                  |  |   | 3,635            |  |  |                  | 0.4   |   |           |   | 6,097     |       |  |  | 0.5       |   |  |       | 4,343     |  |           |  | 0.4   |   |  |   | 2,087   |  |  |  | 0.2   |  
|                                     |  |                  |         |   |                  |  |       |                  |  |   |                  |  |  |                  |       |   |           |   |           |       |  |  |           |   |  |       |           |  |           |  |       |   |  |   |         |  |  |  |       |  
|Total loans                          |  | $                | 859,583 |   |                  |  | 100.0 | %                |  | $ | 1,040,312        |  |  |                  | 100.0 | % |           | $ | 1,158,480 |       |  |  | 100.0     | % |  | $     | 1,044,770 |  |           |  | 100.0 | % |  | $ | 945,913 |  |  |  | 100.0 | %
|                                     |  |                  |         |   |                  |  |       |                  |  |   |                  |  |  |                  |       |   |           |   |           |       |  |  |           |   |  |       |           |  |           |  |       |   |  |   |         |  |  |  |       |  
|Less: Commercial loans held for sale |  |                  | (66,157 | ) |                  |  |       |                  |  |   |                 |  |  |                  |       |   |           |   |          |       |  |  |           |   |  |       |          |  |           |  |       |   |  |   |        |  |  |  |       |  
|                                     |  |                  |         |   |                  |  |       |                  |  |   |                  |  |  |                  |       |   |           |   |           |       |  |  |           |   |  |       |           |  |           |  |       |   |  |   |         |  |  |  |       |  
|Loans, gross                         |  | $                | 793,426 |   |                  |  |       |                  |  | $ | 1,040,312        |  |  |                  |       |   |           | $ | 1,158,480 |       |  |  |           |   |  | $     | 1,044,770 |  |           |  |       |   |  | $ | 945,913 |  |  |  |       |  
|                                     |  |                  |         |   |                  |  |       |                  |  |   |                  |  |  |                  |       |   |           |   |           |       |  |  |           |   |  |       |           |  |           |  |       |   |  |   |         |  |  |  |       |  



Loans included in the
preceding loan composition table are net of participations sold. Participations sold totaled $12.5 million (2 loans) at both December 31, 2010 and 2009, respectively. With regard to participations sold, we serve as the lead bank and are
therefore responsible for certain administration and other management functions as agent to the participating banks. We are in active discussions with the participating banks to keep them informed of the status of these loans and determine loan
workout plans.



Mortgage loans serviced for the
benefit of others amounted to $423.6 million and $426.6 million at December 31, 2010 and December 31, 2009, respectively, and are not included in our Consolidated Balance Sheets.



Underwriting.    General. There are inherent risks associated with our lending
activities. Prudent risk taking requires sound policies intended to manage the risk within the portfolio and control processes intended to ensure compliance with those policies. We continue to review our lending policies and procedures and credit
administration function. During 2009 and 2010, we implemented several enhancements, including centralized controls over construction draws, reduction of lending limit approval authorities, prohibition of out-of-market loans to borrowers for which we
do not have a previously existing relationship, hiring and reassignment of personnel with expertise in credit administration and special assets management, and internal and external training in areas of negotiation and financial statement analysis.



We do not generally originate loan in excess of
100% of collateral value, offer loan payment arrangements resulting in negative amortization, engage in lending practices subjecting borrowers to substantial payment increases (e.g. principal deferral periods, loans with initial interest-only
periods, etc.), nor do we offer loan payment arrangements with minimum payments that are less than accrued interest.



29



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Loan Scoring and Approval. We have established and follow guidelines with regard to the
scoring and approval of loans. Our loan approval process is multi-layered and incorporates a computer-based scoring analysis for all consumer loans and all commercial loans whereby the total corporate exposure is less than $500 thousand. All
commercial loans with total corporate exposure greater than or equal to $500 thousand are reviewed and approved by individuals with the process and our officers credit committee if greater than $5.0 million, and, if over certain higher limits,
by the Board of Directors.



Monitoring and
Validation. Compliance with our underwriting policies and procedures is monitored through a loan approval and documentation review process and the resulting exception reports.



We perform, internally and through the use of an independent
third party, independent loan reviews to validate our loan risk program on a periodic basis. Although all of the loans within our loan portfolio are included in the population from which to select loans subject to review, commercial real estate
loans are given more weight in the loan review selection process as a result of their risk characteristics and their concentration within our loan portfolio. Loan review reports are submitted to the management Credit Committee and the Board of
Directors, and the third party loan review firm meets independently with the Credit Committee of the Board of Directors. The loan review process complements and reinforces our risk identification and assessment decisions.



Given our significant credit losses in 2009 and 2010, we
implemented several enhancements including detailed loan reviews, written workout plans for problem loans, increased monitoring of borrower and industry sectors, hiring and reassignment of personnel with expertise in credit administration and
special assets management, and active marketing and reduction of problem assets from our portfolio. During 2009 and 2010, we also significantly enhanced our internal loan reporting and reporting to the Board of Directors.



Commercial Real Estate. Commercial real estate loans are
subject to underwriting standards and processes similar to commercial business loans with additional standards with regard to real estate collateral. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real
estate. We monitor and evaluate commercial real estate loans based on collateral type. In addition, we analyze the loans based on owner occupied commercial real estate loans versus nonowner occupied loans.



We make commercial real estate loans to businesses within
varying industry sectors. Interest rates charged on these real estate loans are determined by market conditions existing at the time of the loan commitment. Generally, loans have adjustable rates, although the rate may be fixed, generally for three
to five years, for the term of the loan depending on market conditions, collateral, and our relationship with the borrower. Amortization of commercial and installment real estate loans varies but typically does not exceed 20 years. Normally, we have
collateral securing real estate loans appraised by independent third party appraisers prior to originating the loan.



We originate loans to developers and builders that are secured by nonowner occupied properties. Such loans are typically approved based on
predetermined loan-to-collateral values. Construction loans are underwritten utilizing feasibility studies, independent appraisal reviews, sensitivity analysis of absorption and lease rates, and / or financial analysis of the developers and property
owners. Construction loans are generally based upon estimates of costs and values associated with the complete projects and often involve the disbursement of funds with repayment dependent on the success of the ultimate project. Sources of repayment
for these types of loans may be precommitted permanent loans from approved long-term lenders, sales of developed property, or an interim loan commitment from us until permanent financing is obtained. We monitor these loans by conducting onsite
inspections. During 2009 and 2010, we centralized the oversight and disbursement of construction draws to contractors working for borrowers, and we hired a construction draw manager to review advance requests before funds are advanced to borrowers.
We believe that these loans have higher risks than other real estate loans because their repayment is sensitive to interest rate changes, governmental regulation of real property, general economic and market conditions, and the availability of
long-term financing particularly in the current economic environment. During 2009 and 2010, the higher risk nature of these loans was evidenced by the higher concentration of charge-offs of these types of loans.



30



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Commercial and Industrial. Commercial and industrial loans are underwritten after
evaluating and understanding the borrowers ability to operate profitably while prudently expanding the borrowers business. Underwriting standards are designed to promote relationship banking rather than transactional banking. If we
believe that the borrowers management possesses sound ethics and solid business acumen, we examine current and projected cash flows to determine the likelihood that the borrower will repay its obligations as agreed. Commercial and industrial
loans are primarily made based on the projected cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The actual cash flows of borrowers, however, may not be as expected, and the collateral securing loans
may fluctuate in value. Most commercial and industrial loans are secured by the assets being financed or other business assets, such as accounts receivable or inventory, and generally incorporate a personal guarantee. However, we make some
short-term loans on an unsecured basis. In the case of loans secured by accounts receivable or inventory, the availability of funds for the repayment of these loans may depend substantially on the ability of the borrower to collect amounts due from
its customers or to liquidate inventory at sufficient prices. During 2009 and 2010, we increased our procedures for monitoring loans secured by commercial and industrial collateral by centralizing the monitoring of all accounts receivable and
inventory lines under Credit Underwriting, which monitors and tests the collateral. Also, as each loan matures and is considered for renewal, we place a defined monitoring schedule in the approval package and track it centrally for adherence to our
policy. Results are reported to the management Credit Committee on a quarterly basis.



Our commercial and industrial loans are generally made with terms that do not exceed five years. Such loans may have fixed or variable interest rates with variable rates that change at periods ranging
from one day to one year based on the prime lending rate as the interest rate index.



Single-family Residential. Underwriting standards for single-family real estate purpose loans are heavily regulated by statutory requirements, which include, but are not limited to, maximum loan-to-value
percentages.



Our mortgage lenders make both
fixed-rate and adjustable-rate single-family mortgage loans with terms generally ranging from 10 to 30 years. We may offer loans that have interest rates that adjust annually or adjust annually after being fixed for a period of several years in
accordance with a designated index.



Adjustable-rate mortgage loans may be originated with a limit on any increase or decrease in the interest rate per year further limited by
the amount by which the interest rate can increase or decrease over the life of the loan. In order to encourage the origination of adjustable-rate mortgage loans with interest rates that adjust annually, we generally offer a more attractive rate of
interest on such loans than on fixed-rate mortgage loans.



Effective January 1, 2010, to better manage our regulatory compliance and provide more consistent underwriting and loan pricing, we began originating all new single-family first mortgage and
closed-end second mortgage loans through our Mortgage department rather than through our branch network.



A large percentage of our originated single-family mortgage loans are underwritten pursuant to guidelines that permit the sale of these
loans in the secondary market to government or private agencies. We participate in secondary market activities by selling whole loans and participations in loans primarily to the FHLB under its Mortgage Partnership Program and Freddie Mac. This
practice enables us to satisfy demand for these loans in our local communities, to meet our asset and liability objectives and to develop a source of fee income through the servicing of these loans. We may sell fixed-rate, adjustable-rate, and
balloon-term loans. Based on current interest rates as well as other factors, we normally sell most of our originations of conforming residential mortgage loans to Freddie Mac and retain the servicing of the underlying loans. Recently, there has
been extensive media reporting related to potential recourse relating to residential mortgage loan sales. In certain loan sales, we provide recourse whereby we are required to repurchase loans on the occurrence of certain specific events. In 2009
and 2010, we repurchased three loans associated with our mortgage loan sales, and at December 31, 2010 we do not believe we have any outstanding obligations to repurchase mortgage loans previously sold.



31



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To protect against declines in collateral value, when we originate and underwrite
single-family mortgage loans to be retained in our residential mortgage portfolio, if the loan exceeds 80% of the collateral value, we generally require private mortgage insurance that protects us against losses of at least 20% of the mortgage loan
amount.



Consumer. Our loan scoring and approval
policies and procedures, as outlined previously, coupled with relatively small loan amounts that are spread across many individual borrowers, minimize risk within the consumer sectors of our loan portfolio.



Pledged.    To borrow from the
FHLB, members must pledge collateral. Acceptable collateral includes, among other types of collateral, a variety of residential, multifamily, home equity lines and second mortgages, and commercial loans. At December 31, 2010 and 2009, $346.3
million and $407.0 million of gross loans were pledged to collateralize FHLB advances and letters of credit, respectively, of which $92.5 million and $162.0 million, respectively, was available as lendable collateral.



At December 31, 2010 and December 31, 2009, $10.9
million and $ 108.8 million, respectively, of loans were pledged as collateral to cover the various Federal Reserve System services that we utilize.



Concentrations.    General. During 2009 and continuing into 2010, we increased our monitoring of borrower and
industry sector concentrations and are limiting additional credit exposure to these concentrations, in particular the segments of our loan portfolio secured by commercial real estate. In addition, we are proactively executing loan workout plans with
a particular focus on reducing our concentrations in these segments. In addition, we are evaluating the potential sale, individually or in bulk, of performing and nonperforming commercial loans. In September 2010, we decided to market for sale
commercial loans to reduce our nonperforming assets and concentration in commercial real estate. During the fourth quarter of 2010, we sold five loans, representing two relationships, with a gross book value of $10.4 million and we are continuing
our efforts to sell the remaining commercial loans held for sale. At December 31, 2010, commercial loans held for sale aggregated $66.2 million, of which $2.0 million were under contract for sale and expected to close in the first quarter 2011.
Sale of these loans is reducing our commercial real estate concentration.



Loan Type/Industry Concentration. The following table summarizes loans secured by commercial real estate, categorized by FDIC code, at December 31, 2010 (dollars in thousands).



|                                                     |  |                                              |         |  |                                                                |   |        |                                   |  |   |                                                  |  |  |                                    |      |   |  |  |       |  
|---------------------------------------------------- |  | -------------------------------------------- | ------- |  | -------------------------------------------------------------- | - | ------ | --------------------------------- |  | - | ------------------------------------------------ |  |  | ---------------------------------- | ---- | - |  |  | ----- | -
|                                                     |  | Commercial realestate included ingross loans |         |  | Commercial realestate included incommercial loansheld for
sale |   |        | Total commercialreal estate loans |  |   | % of gross loansand commercialloans held forsale |  |  | % of Bankstotal regulatorycapital |     
|Secured by commercial real estate                    |  |                                              |         |  |                                                                |   |        |                                   |  |   |                                                  |  |  |                                    |      |   |  |  |       |  
|Construction, land development, and other land loans |  | $                                            | 125,331 |  |                                                                | $ | 11,122 |                                   |  | $ | 136,453                                          |  |  |                                    | 15.9 | % |  |  | 104.5 | %
|Multifamily residential                              |  |                                              | 18,327  |  |                                                                |   | 7,943  |                                   |  |   | 26,270                                           |  |  |                                    | 3.1  |   |  |  | 20.1  |  
|Nonfarm nonresidential                               |  |                                              | 364,939 |  |                                                                |   | 46,160 |                                   |  |   | 411,099                                          |  |  |                                    | 47.8 |   |  |  | 314.7 |  
|                                                     |  |                                              |         |  |                                                                |   |        |                                   |  |   |                                                  |  |  |                                    |      |   |  |  |       |  
|Total loans secured by commercial real estate        |  | $                                            | 508,597 |  |                                                                | $ | 65,225 |                                   |  | $ | 573,822                                          |  |  |                                    | 66.8 | % |  |  | 439.3 | %
|                                                     |  |                                              |         |  |                                                                |   |        |                                   |  |   |                                                  |  |  |                                    |      |   |  |  |       |  



32



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The following table further categorizes loans secured by commercial real estate at
December 31, 2010 (dollars in thousands).



|                                                                  |  |                                              |         |  |                                                                |   |        |                                   |  |   |                                                  |  |  |                                    |      |   |  |  |       |  
|----------------------------------------------------------------- |  | -------------------------------------------- | ------- |  | -------------------------------------------------------------- | - | ------ | --------------------------------- |  | - | ------------------------------------------------ |  |  | ---------------------------------- | ---- | - |  |  | ----- | -
|                                                                  |  | Commercial realestate included ingross loans |         |  | Commercial realestate included incommercial loansheld for
sale |   |        | Total commercialreal estate loans |  |   | % of gross loansand commercialloans held forsale |  |  | % of Bankstotal regulatorycapital |     
|Development commercial real estate loans                          |  |                                              |         |  |                                                                |   |        |                                   |  |   |                                                  |  |  |                                    |      |   |  |  |       |  
|Secured by:                                                       |  |                                              |         |  |                                                                |   |        |                                   |  |   |                                                  |  |  |                                    |      |   |  |  |       |  
|Landunimproved (commercial or residential)                       |  | $                                            | 46,286  |  |                                                                | $ | 2,174  |                                   |  | $ | 48,460                                           |  |  |                                    | 5.7  | % |  |  | 37.1  | %
|Land developmentcommercial                                       |  |                                              | 12,676  |  |                                                                |   | 463    |                                   |  |   | 13,139                                           |  |  |                                    | 1.5  |   |  |  | 10.1  |  
|Land developmentresidential                                      |  |                                              | 45,858  |  |                                                                |   | 7,939  |                                   |  |   | 53,797                                           |  |  |                                    | 6.3  |   |  |  | 41.2  |  
|Commercial construction:                                          |  |                                              |         |  |                                                                |   |        |                                   |  |   |                                                  |  |  |                                    |      |   |  |  |       |  
|Retail                                                            |  |                                              | 4,425   |  |                                                                |   |       |                                   |  |   | 4,425                                            |  |  |                                    | 0.5  |   |  |  | 3.4   |  
|Office                                                            |  |                                              | 241     |  |                                                                |   |       |                                   |  |   | 241                                              |  |  |                                    |     |   |  |  | 0.2   |  
|Multifamily                                                       |  |                                              | 1,693   |  |                                                                |   |       |                                   |  |   | 1,693                                            |  |  |                                    | 0.2  |   |  |  | 1.3   |  
|Industrial and warehouse                                          |  |                                              | 947     |  |                                                                |   |       |                                   |  |   | 947                                              |  |  |                                    | 0.1  |   |  |  | 0.7   |  
|Miscellaneous commercial                                          |  |                                              | 3,275   |  |                                                                |   |       |                                   |  |   | 3,275                                            |  |  |                                    | 0.4  |   |  |  | 2.4   |  
|                                                                  |  |                                              |         |  |                                                                |   |        |                                   |  |   |                                                  |  |  |                                    |      |   |  |  |       |  
|Total development commercial real estate loans                    |  |                                              | 115,401 |  |                                                                |   | 10,576 |                                   |  |   | 125,977                                          |  |  |                                    | 14.7 |   |  |  | 96.4  |  
|Existing and other commercial real estate loans                   |  |                                              |         |  |                                                                |   |        |                                   |  |   |                                                  |  |  |                                    |      |   |  |  |       |  
|Secured by:                                                       |  |                                              |         |  |                                                                |   |        |                                   |  |   |                                                  |  |  |                                    |      |   |  |  |       |  
|Hotel / motel                                                     |  |                                              | 62,036  |  |                                                                |   | 33,533 |                                   |  |   | 95,569                                           |  |  |                                    | 11.1 |   |  |  | 73.2  |  
|Retail                                                            |  |                                              | 17,650  |  |                                                                |   | 6,375  |                                   |  |   | 24,025                                           |  |  |                                    | 2.8  |   |  |  | 18.4  |  
|Office                                                            |  |                                              | 23,469  |  |                                                                |   | 1,656  |                                   |  |   | 25,125                                           |  |  |                                    | 2.9  |   |  |  | 19.2  |  
|Multifamily                                                       |  |                                              | 18,327  |  |                                                                |   | 7,943  |                                   |  |   | 26,270                                           |  |  |                                    | 3.1  |   |  |  | 20.1  |  
|Industrial and warehouse                                          |  |                                              | 11,538  |  |                                                                |   | 1,488  |                                   |  |   | 13,026                                           |  |  |                                    | 1.5  |   |  |  | 10.0  |  
|Healthcare                                                        |  |                                              | 13,008  |  |                                                                |   |       |                                   |  |   | 13,008                                           |  |  |                                    | 1.5  |   |  |  | 10.0  |  
|Miscellaneous commercial                                          |  |                                              | 119,191 |  |                                                                |   | 2,637  |                                   |  |   | 121,828                                          |  |  |                                    | 14.2 |   |  |  | 93.3  |  
|Residential constructionspeculative                              |  |                                              | 820     |  |                                                                |   | 546    |                                   |  |   | 1,366                                            |  |  |                                    | 0.2  |   |  |  | 1.0   |  
|                                                                  |  |                                              |         |  |                                                                |   |        |                                   |  |   |                                                  |  |  |                                    |      |   |  |  |       |  
|Total existing and other commercial real estate loans             |  |                                              | 266,039 |  |                                                                |   | 54,178 |                                   |  |   | 320,217                                          |  |  |                                    | 37.3 |   |  |  | 245.2 |  
|Commercial real estate owner occupied and residential loans       |  |                                              |         |  |                                                                |   |        |                                   |  |   |                                                  |  |  |                                    |      |   |  |  |       |  
|Secured by:                                                       |  |                                              |         |  |                                                                |   |        |                                   |  |   |                                                  |  |  |                                    |      |   |  |  |       |  
|Commercialowner occupied                                         |  |                                              | 118,046 |  |                                                                |   | 471    |                                   |  |   | 118,517                                          |  |  |                                    | 13.8 |   |  |  | 90.7  |  
|Commercial constructionowner occupied                            |  |                                              | 3,525   |  |                                                                |   |       |                                   |  |   | 3,525                                            |  |  |                                    | 0.4  |   |  |  | 2.7   |  
|Residential constructioncontract                                 |  |                                              | 5,586   |  |                                                                |   |       |                                   |  |   | 5,586                                            |  |  |                                    | 0.6  |   |  |  | 4.3   |  
|                                                                  |  |                                              |         |  |                                                                |   |        |                                   |  |   |                                                  |  |  |                                    |      |   |  |  |       |  
|Total commercial real estate owner occupied and residential loans |  |                                              | 127,157 |  |                                                                |   | 471    |                                   |  |   | 127,628                                          |  |  |                                    | 14.8 |   |  |  | 97.7  |  
|                                                                  |  |                                              |         |  |                                                                |   |        |                                   |  |   |                                                  |  |  |                                    |      |   |  |  |       |  
|Total loans secured by commercial real estate                     |  | $                                            | 508,597 |  |                                                                | $ | 65,225 |                                   |  | $ | 573,822                                          |  |  |                                    | 66.8 | % |  |  | 439.3 | %
|                                                                  |  |                                              |         |  |                                                                |   |        |                                   |  |   |                                                  |  |  |                                    |      |   |  |  |       |  



Geographic Concentration. Unlike
larger national or regional banks that are more geographically diversified, we primarily provide our services to customers within our market area. Deterioration in local economic conditions could result in declines in asset quality, loan collateral
values, or the demand for our products and services, among other things. In addition, during 2006 to 2008, we originated out-of-market loans, purchased participation loans from other banks, and / or obtained brokered loans brought to us by loan
brokers, which were generally to non-customers for whom we had no pre-existing banking relationship. In connection with our 2009 and 2010 loan portfolio and lending practices reviews, we determined that out-of-market loans were a significant
contributing factor to our increased credit losses and, as such, no longer originate such loans.



33



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Although our geographic concentration limits us to the economic risks within our market
area, our lack of geographic diversification may make it particularly sensitive to adverse impacts of negative economic conditions that impact our market area.



Maturities and Sensitivities of Loans to Changes in Interest Rates.    The following table summarizes our total
loan portfolio, including mortgage and commercial loans held for sale, by portfolio segment, at December 31, 2010 that, based on contractual terms, were due during the periods noted. Loans having no stated maturity and no stated schedule of
repayment, except for equity lines of credit, are reported as due in one year or less. Equity lines of credit are mortgage loans intended to be long-term real estate consumer products and are reported as due after five years. The table also
summarizes our loan portfolio at December 31, 2010 with regard to fixed-rate and variable-rate maturity or repricing terms due in periods after one year (in thousands).



|                                                                   |  |                            |         |  |                                                                        |  |         |                     |  |  |         |  |  |            |         |  |               |  |         |  |  |  |        | 
|------------------------------------------------------------------ |  | -------------------------- | ------- |  | ---------------------------------------------------------------------- |  | ------- | ------------------- |  |  | ------- |  |  | ---------- | ------- |  | ------------- |  | ------- |  |  |  | ------ | 
|                                                                   |  | Maturity or Repricing Term |         |  | Rate structure for loanswith maturities
orrepricing terms over oneyear | 
|                                                                   |  | Due in oneyear or less     |         |  | Due after oneyear throughfive years                                    |  |         | Due after fiveyears |  |  | Total   |  |  | Fixed-rate |         |  | Variable-rate | 
|Commercial real estate                                             |  | $                          | 239,384 |  |                                                                        |  | 294,632 |                     |  |  | 39,806  |  |  |            | 573,822 |  |               |  | 334,438 |  |  |  |       | 
|Single-family residential                                          |  |                            | 55,380  |  |                                                                        |  | 41,721  |                     |  |  | 86,672  |  |  |            | 183,773 |  |               |  | 104,611 |  |  |  | 23,782 | 
|Commercial and industrial                                          |  |                            | 24,624  |  |                                                                        |  | 21,488  |                     |  |  | 1,700   |  |  |            | 47,812  |  |               |  | 23,188  |  |  |  |       | 
|Consumer                                                           |  |                            | 5,008   |  |                                                                        |  | 41,652  |                     |  |  | 5,992   |  |  |            | 52,652  |  |               |  | 47,644  |  |  |  |       | 
|Other                                                              |  |                            | 3,063   |  |                                                                        |  | 2,088   |                     |  |  | 1,166   |  |  |            | 6,317   |  |               |  | 3,254   |  |  |  |       | 
|                                                                   |  |                            |         |  |                                                                        |  |         |                     |  |  |         |  |  |            |         |  |               |  |         |  |  |  |        | 
|Total loans, including mortgage and commercial loans held for sale |  | $                          | 327,459 |  |                                                                        |  | 401,581 |                     |  |  | 135,336 |  |  |            | 864,376 |  |               |  | 513,135 |  |  |  | 23,782 | 
|                                                                   |  |                            |         |  |                                                                        |  |         |                     |  |  |         |  |  |            |         |  |               |  |         |  |  |  |        | 



Asset
Quality.    Given the negative credit quality trends which began in 2008, accelerated during 2009, and continued into 2010, we have performed extensive analysis of our nonconsumer loan portfolio, with particular focus on
commercial real estate loans. The analyses included internal and external loan reviews that required detailed, written analyses for the loans reviewed and vetting of the risk rating, accrual status, and collateral valuation of the loans by the loan
officers, our senior management team, external consultants, and an external loan review firm. Of particular significance is that these reviews have currently identified 30 specifically identified borrower relationships (43 individual loans) that
have resulted in $70.7 million (63%) of the $112.9 million of net loan charge-offs, writedowns on loans held for sale, and writedowns on foreclosed assets recorded in the past eight quarters. In general, these loans, have one or more of the
following common characteristics:



| |  |  | Individually larger commercial real estate loans originated in 2004 through 2008 that were larger and more complex loans than we historically
originated.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Out-of-market loans, participated loans purchased from other banks, or brokered loans brought to us by loan brokers, which were generally to
non-customers for whom we generally had no pre-existing banking relationship.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Concentrated originations in commercial real estate, including acquisition development and construction loans, by loan officers who did not have the
level of specialized expertise necessary to more effectively underwrite and manage these types of loans.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



In general, our entire commercial real estate loan portfolio has been impacted by the challenging economic environment in 2008, 2009, and
2010. However, this pool of loans is the primary contributor to our deteriorated asset quality, charge-offs, and resulting net loss over the past eight quarters. In addition, this pool of loans has exhibited a loss given default much higher than the
remainder of the loan portfolio that is comprised of in-market loans to our ongoing customers that were underwritten by loan officers using our normal credit underwriting standards. Accordingly, as we evaluate the credit quality of the remaining
loan portfolio, we do not currently believe that the higher loss rate incurred on this particular pool of loans is indicative of the loss rate to be incurred on the remainder of the loan portfolio.



34



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As part of the credit quality plan, to continue to address the impact of the economic
environment on our loan portfolio, we are continuing our detailed review of the loan portfolio and are focused on executing detailed loan workout plans for all of our problem loans led by a team of seasoned commercial lenders and using external loan
workout consulting expertise. It is clear that many of our borrowers are continuing to face financial stress manifesting itself in the following ways:



| |  |  | Cash flows from the underlying properties supporting the loans decreased,
| | - |  | -------------------------------------------------------------------------



| |  |  | Personal cash flows from the borrowers themselves and guarantors under pressure due to illiquid and diminished personal balance sheets resulting from
investing additional personal capital in the projects, and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Fair values of real estate related assets declining, resulting in lower cash proceeds from sales or fair values declining to the point that borrowers
are no longer willing to sell the assets at such deep discounts.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



We also continue to review our lending policies and procedures and credit administration function. To this end, during 2009 and 2010 we implemented several enhancements as follows:



| |  |  | Construction draws: In 2009, we centralized the oversight and disbursement of construction draws to contractors working for borrowers, and hired a
construction draw manager to review advance requests before funds are advanced to borrowers.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Loan Policy: In 2009 and 2010, we amended our loan policy to, among other changes, reduce lending limit approval authorities, prohibit out-of-market
loans to borrowers for which we do not have a previously existing relationship, and prohibit brokered loans.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Credit Administration: In 2009, we hired a new Chief Credit Officer who brings over 25 years of credit administration, loan review, and credit policy
experience to the Company; we reassigned two commercial lenders to credit analysts in the Credit Administration department; and we hired an additional Credit Administration executive.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Special Assets: In 2009 and 2010, we engaged two external workout consultants (who have since completed their engagements); reassigned a commercial
lender; hired two experienced special assets professionals, and we hired a seasoned department leader to manage our Special Assets Department. This department is currently comprised of five people and these internal personnel and external
consultants have been focused exclusively on accelerated resolution of our problem assets.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Training: During 2010, we conducted additional training including external specialists in the areas of problem loan workout and negotiating skills,
analysis of personal financial statements and business tax returns, cash flow analysis, perfecting security interests in collateral, and appraisals.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Delinquent Loans. We determine past due and delinquent status
based on contractual terms. When a borrower fails to make a scheduled loan payment, we attempt to cure the default through several methods including, but not limited to, collection contact and assessment of late fees. If these methods do not result
in the borrower remitting the past due payment, further action may be taken. Interest on loans deemed past due continues to accrue until the loan is placed in nonaccrual status.



Nonperforming Assets. Nonaccrual loans are those loans that
we have determined offer a more than normal risk of future uncollectibility. In most cases, loans are automatically placed in nonaccrual status by the loan system when the loan payment becomes 90 days delinquent and no acceptable arrangement has
been made between us and the borrower. Loans may be manually placed in nonaccrual status if we determine that some factor other than delinquency (such as imminent foreclosure or bankruptcy proceedings) causes us to believe that more than a normal
amount of risk exists with regard to collectability. When the loan is placed in nonaccrual status, accrued interest income is reversed based on the effective date of nonaccrual status. Thereafter, any cash payments received on the nonaccrual loan
are applied as a principal reduction until the entire amortized cost has been recovered. Any additional amounts received are reflected in interest income.



35



---

When the probability of future collectability on a nonaccrual loan declines, we may take
additional collection measures, including commencing foreclosure. Specific steps must be taken when commencing foreclosure action on loans secured by real estate, which takes time based on state-specific legal requirements.



At December 31, 2010, nonperforming assets decreased
$13.5 million (10.8%) from December 31, 2009, which is a total decline of 21.6% from the peak at March 31, 2010 and the third consecutive quarterly decline. However, we continue to have a high risk loan portfolio given the
concentration in commercial real estate and the number of individually large criticized loans.



The following table summarizes nonperforming assets, by class, at the dates indicated (dollars in thousands).



|                                                        |  |              |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|------------------------------------------------------- |  | ------------ | --------- | - | ---- | - | --------- | ---- |  | - | --------- | - |  | ---- | --------- | - |  | - | --------- | -
|                                                        |  | December 31, |          
|                                                        |  | 2010         |           |   | 2009 |   |           | 2008 |  |   | 2007      |   |  | 2006 |          
|Construction, land development and other land loans     |  | $            | 52,528    |   |      | $ | 47,901    |      |  | $ | 15,409    |   |  | $    | 182       |   |  | $ |          |  
|Multifamily residential                                 |  |              | 7,943     |   |      |   | 9,844     |      |  |   | 231       |   |  |      |          |   |  |   |          |  
|Nonfarm nonresidential                                  |  |              | 18,781    |   |      |   | 23,330    |      |  |   | 23,761    |   |  |      | 3,164     |   |  |   | 4,873     |  
|Single-family real estate, revolving, open end loans    |  |              | 998       |   |      |   | 127       |      |  |   | 305       |   |  |      | 143       |   |  |   | 54        |  
|Single-family real estate, closed end, first lien       |  |              | 7,607     |   |      |   | 7,079     |      |  |   | 2,264     |   |  |      | 638       |   |  |   | 1,229     |  
|Single-family real estate, closed end, junior lien      |  |              | 866       |   |      |   | 446       |      |  |   | 57        |   |  |      |          |   |  |   | 115       |  
|Commercial and industrial                               |  |              | 2,197     |   |      |   | 7,475     |      |  |   | 763       |   |  |      | 567       |   |  |   | 549       |  
|Credit cards                                            |  |              | 26        |   |      |   | 372       |      |  |   |          |   |  |      |          |   |  |   |          |  
|All other consumer                                      |  |              | 459       |   |      |   | 312       |      |  |   | 178       |   |  |      | 116       |   |  |   | 179       |  
|Farmland                                                |  |              |          |   |      |   | 50        |      |  |   |          |   |  |      |          |   |  |   |          |  
|                                                        |  |              |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Total nonaccrual loans                                  |  |              | 91,405    |   |      |   | 96,936    |      |  |   | 42,968    |   |  |      | 4,810     |   |  |   | 6,999     |  
|Real estate acquired in settlement of loans             |  |              | 19,983    |   |      |   | 27,826    |      |  |   | 6,719     |   |  |      | 7,743     |   |  |   | 600       |  
|Repossessed automobiles acquired in settlement of loans |  |              | 104       |   |      |   | 188       |      |  |   | 564       |   |  |      | 403       |   |  |   | 319       |  
|                                                        |  |              |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Total foreclosed assets                                 |  |              | 20,087    |   |      |   | 28,014    |      |  |   | 7,283     |   |  |      | 8,146     |   |  |   | 919       |  
|                                                        |  |              |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Total nonperforming assets                              |  | $            | 111,492   |   |      | $ | 124,950   |      |  | $ | 50,251    |   |  | $    | 12,956    |   |  | $ | 7,918     |  
|                                                        |  |              |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Less: Nonaccrual commercial loans held for sale         |  |              | (27,940   | ) |      |   |          |      |  |   |          |   |  |      |          |   |  |   |          |  
|                                                        |  |              |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Adjusted nonperforming assets                           |  | $            | 83,552    |   |      | $ | 124,950   |      |  | $ | 50,251    |   |  | $    | 12,956    |   |  | $ | 7,918     |  
|                                                        |  |              |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Loans*                                                  |  | $            | 859,583   |   |      | $ | 1,040,312 |      |  | $ | 1,158,480 |   |  | $    | 1,044,770 |   |  | $ | 945,913   |  
|Total assets                                            |  |              | 1,355,247 |   |      |   | 1,435,763 |      |  |   | 1,368,328 |   |  |      | 1,246,680 |   |  |   | 1,152,701 |  
|Total nonaccrual loans as a percentage of:              |  |              |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|loans* and foreclosed assets                            |  |              | 10.39     | % |      |   | 9.07      | %    |  |   | 3.69      | % |  |      | 0.46      | % |  |   | 0.74      | %
|total assets                                            |  |              | 6.74      |   |      |   | 6.75      |      |  |   | 3.14      |   |  |      | 0.39      |   |  |   | 0.61      |  
|Total nonperforming assets as a percentage of:          |  |              |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|loans* and foreclosed assets                            |  |              | 12.67     | % |      |   | 11.70     | %    |  |   | 4.31      | % |  |      | 1.23      | % |  |   | 0.84      | %
|total assets                                            |  |              | 8.23      |   |      |   | 8.70      |      |  |   | 3.67      |   |  |      | 1.04      |   |  |   | 0.69      |  



|* |  | includes gross loans and commercial loans held for sale
|- |  | -------------------------------------------------------



Loans placed in nonaccrual status during 2010 resulted from loans becoming delinquent on contractual payments due to deterioration in the
financial condition of the borrowers or guarantors such that payment in full of principal or interest was not expected due to personal cash flows from the borrowers and guarantors inadequate to service the loans, interest reserves on the loans being
depleted, a decrease in operating cash flows from the underlying properties supporting the loans, or a decline in fair values of the collateral resulting in lower cash proceeds from property sales.



36



---

Twenty-three loans with a balance at December 31, 2010 greater than $1 million
comprised approximately 62% of our nonaccrual loans at December 31, 2010. The following table summarizes the composition of these loans by collateral type (dollars in thousands).



|                                                                      |  |                                    |        |  |                            |  |    |  
|--------------------------------------------------------------------- |  | ---------------------------------- | ------ |  | -------------------------- |  | -- | -
|                                                                      |  | Total nonaccrual loans >$1 million |        |  | % of total nonaccrualloans | 
|Residential/residential lots/golf course development                  |  | $                                  | 39,470 |  |                            |  | 43 | %
|Multifamily residential                                               |  |                                    | 7,400  |  |                            |  | 8  |  
|Real estate for commercial use                                        |  |                                    | 8,700  |  |                            |  | 10 |  
|Marina                                                                |  |                                    | 1,228  |  |                            |  | 1  |  
|                                                                      |  |                                    |        |  |                            |  |    |  
|Total nonaccrual loans > $1 million secured by commercial real estate |  | $                                  | 56,798 |  |                            |  | 62 | %
|                                                                      |  |                                    |        |  |                            |  |    |  



Additionally, four of these
loans (18% based on the principal balance at December 31, 2010) were purchased participations and six of these loans (23% based on the principal balance at December 31, 2010) are out-of-market loans. In 2009, we amended our loan policy to
preclude originating any new loans of these kinds.



While a loan is in nonaccrual status, cash received is applied to the principal balance. Additional interest income of $4.3 million would
have been reported during the year ended December 31, 2010 had loans classified as nonaccrual during the period performed in accordance with their original terms. As a result, our earnings did not include this interest income.



The following table summarizes the changes in the Foreclosed
real estate portfolio at the dates and for the periods indicated (in thousands). Foreclosed real estate is net of participations sold of $4.6 million (three properties) at December 31, 2010.



|                                                      |  |                                        |         |   |      |   |        |      |  |   |        |  
|----------------------------------------------------- |  | -------------------------------------- | ------- | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                      |  | At and for the years endedDecember 31, |        
|                                                      |  | 2010                                   |         |   | 2009 |   |        | 2008 | 
|Foreclosed real estate, beginning of period           |  | $                                      | 27,826  |   |      | $ | 6,719  |      |  | $ | 7,743  |  
|Plus: New foreclosed real estate                      |  |                                        | 20,423  |   |      |   | 24,628 |      |  |   | 2,778  |  
|Less: Proceeds from sale of foreclosed real estate    |  |                                        | (17,616 | ) |      |   | (689   | )    |  |   | (3,511 | )
|Less: Gain / (loss) on sale of foreclosed real estate |  |                                        | 587     |   |      |   | (72    | )    |  |   | (123   | )
|Less: Provision charged to expense                    |  |                                        | (11,237 | ) |      |   | (2,760 | )    |  |   | (168   | )
|                                                      |  |                                        |         |   |      |   |        |      |  |   |        |  
|Foreclosed real estate, end of period                 |  | $                                      | 19,983  |   |      | $ | 27,826 |      |  | $ | 6,719  |  
|                                                      |  |                                        |         |   |      |   |        |      |  |   |        |  



The following table summarizes
the Foreclosed real estate portfolio, by FDIC code, at December 31, 2010 (in thousands).



|                                                     |  |   |        | 
|---------------------------------------------------- |  | - | ------ | 
|Construction, land development, and other land loans |  | $ | 6,727  | 
|Single-family residential                            |  |   | 1,807  | 
|Multifamily residential                              |  |   | 1,956  | 
|Nonfarm, nonresidential                              |  |   | 9,493  | 
|                                                     |  |   |        | 
|Total real estate acquired in settlement of loans    |  | $ | 19,983 | 
|                                                     |  |   |        | 



Four individual properties
greater than $1 million comprised approximately 48% of our foreclosed real estate portfolio at December 31, 2010. Of these properties, 37% were retirement center properties, 32% were retail offices, 20% were hotel properties, and 11% were
commercial lots. Additionally, 57% of these properties were participations. Two of the four were the result of out-of-market loans.



37



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These properties are being actively marketed with the primary objective of liquidating the
collateral at a level which most accurately approximates fair value and allows recovery of as much of the unpaid principal balance as possible upon the sale of the property in a reasonable period of time. As a result, loan charge-offs were recorded
prior to or upon foreclosure to writedown the loans to fair value less estimated costs to sell. For some assets, additional writedowns have been taken based on receipt of updated third party appraisals for which appraised values continue to decline.
Based on currently available valuation information, the carrying value of these assets is believed to be representative of their fair value less estimated costs to sell although there can be no assurance that the ultimate proceeds from the sale of
these assets will be equal to or greater than the carrying values particularly in the current real estate environment and the continued downward trend in third party appraised values.



During the year ended December 31, 2010, we sold 99 properties with an aggregate net carrying amount of
$17.0 million in total foreclosed real estate sales at a net gain of $587 thousand.



Subsequent to December 31, 2010, four properties with an aggregate net carrying amount of $2.2 million were sold at a loss of $62 thousand. At February 22, 2011, 11 additional properties with an aggregate
net carrying amount of $5.4 million were under contract for sale to close in the first and/or second quarter of 2011.



We are actively addressing the elevated level of nonperforming assets and will continue to be aggressive in working to resolve these
issues as quickly as possible. For problem assets identified, we prepared written workout plans that are borrower specific to determine how best to resolve the loans which could include restructuring the loans, requesting additional collateral,
demanding payment from guarantors, sale of the loans, or foreclosure and sale of the collateral. We are also actively marketing for sale commercial loans held for sale. However, given the nature of the projects related to such loans and the
distressed values within the real estate market, immediate resolution in all cases is not expected. Therefore, it is reasonable to expect that current negative asset quality trends may continue for coming periods when compared to historical periods.
The carrying values of these assets may require additional adjustment for further declines in estimated fair values.



Troubled Debt Restructurings. Troubled debt restructurings are loans which have undergone concessionary adjustments and were restructured
from their original contractual terms due to financial difficulty of the borrower, for example, reduction in the contractual interest rate below that at which the borrower could obtain new credit from another lender. As part of our proactive actions
to resolve problem loans and the resulting determination of our individual loan workout plans, we may restructure loans to assist borrowers facing cash flow challenges in the current economic environment to facilitate ultimate repayment of the loan.
At December 31, 2010, the principal balance of troubled debt restructurings, in gross loans and commercial loans held for sale, totaled $44.9 million, of which loans totaling $17.2 million are classified as commercial loans held for sale.



Historically, we have not split loans into two
legally separate loans. However, at December 31, 2010, we had four loans that had been legally split into separate loans (commonly referred to as an A/B loan structure), with both the A and B loans accounted for as troubled debt restructures.
Restructuring these loans into legally separate loans resulted in charge-offs of $1.5 million of the B loans during 2010. All of the A loans are currently performing in accordance with their terms. The aggregate balances of the A and B loans at
December 31, 2010 were $8.2 million and $11.4 million, respectively.



Twelve individual loans greater than $1 million comprised $35.8 million (80%) of our troubled debt restructurings, including commercial loans held for sale, at December 31, 2010. One of the
loans experienced rate concessions, two experienced term concessions, five experienced rate and term concessions, and three experienced a reduction in required principal paydowns. At December 31, 2010, 11 of the loans totaling $34.3 million are
performing as expected under the new terms.



38



---

A troubled debt restructuring can be removed from this classification in years after the
restructuring if both of the following conditions exist: the restructuring agreement specifies an interest rate equal to or greater than the rate that the creditor was willing to accept at the time of the restructuring for a new loan with comparable
risk, and the loan is not impaired based on the terms specified by the restructuring agreement. For the year ended December 31, 2010, no loans were removed from this classification. In the first quarter of 2011, we anticipate that $8.2 million
of these loans will be removed from troubled debt restructuring status as they are performing in accordance with their restructured terms.



Potential Problem Loans. Potential problem loans consist of commercial loans not already classified as nonaccrual for which questions
exist as to the current sound worth and paying capacity of the borrower or of the collateral pledged, if any, have a well-defined weakness or weaknesses that jeopardize the liquidation of the loan, and are characterized by the distinct possibility
that we will sustain some loss of the deficiencies are not corrected. We monitor these loans closely and review performance on a regular basis. As of December 31, 2010, total potential problem loans (loans classified as substandard and
doubtful) totaled $117.1 million, of which $34.9 million were in commercial loans held for sale. Total potential problem loans decreased 20.6% from their peak of $147.5 million at June 30, 2010.



Allowance for Loan Losses.    The
allowance for loan losses represents an amount that we believe will be adequate to absorb probable losses inherent in our loan portfolio as of the balance sheet date. Assessing the adequacy of the allowance for loan losses is a process that
requires considerable judgment. Our judgment in determining the adequacy of the allowance is based on evaluations of the collectability of loans, including consideration of factors such as the balance of impaired loans, the quality, mix, and
size of our overall loan portfolio, economic conditions that may impact the overall loan portfolio or an individual borrowers ability to repay, the amount and quality of collateral securing the loans, our historical loan loss experience, and
borrower and collateral specific considerations for loans individually evaluated for impairment.



The allowance for loan losses increased from $24.1 million, or 2.31% of gross loans, at December 31, 2009 to $26.9 million, or 3.39% of gross loans, at December 31, 2010. The increased allowance
and coverage ratio resulted from the overall trends in our asset quality, loan portfolio, and economic factors, some of which offset one another. We believed it was appropriate for the provision for loan losses to cover net charge-offs in 2010 and
incremental specific reserves on new loans individually analyzed for impairment that were added to the list during the year.



The allowance for loan losses at December 31, 2010 decreased $2.4 million from September 30, 2010. The decrease in the allowance
for loan losses resulted primarily from the declining trend in nonaccrual loans, criticized and classified loans, and acquisition, development and construction loans.



The December 31, 2010 allowance for loan losses, and,
therefore indirectly the provision for loan losses for the year ended December 31, 2010, was determined based on the following specific factors, though not intended to be an all inclusive list:



| |  |  | The impact of the ongoing depressed overall economic environment, including within our geographic market,
| | - |  | ---------------------------------------------------------------------------------------------------------



| |  |  | The cumulative impact of the extended duration of this economic deterioration on our borrowers, in particular commercial real estate loans for which we
have a heavy concentration,
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The level of real estate development loans, in which the majority of our losses have occurred, although such loans have decreased to 15.9% of the loan
portfolio, including commercial loans held for sale, at December 31, 2010 from 19.8% at December 31, 2009,
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The asset quality trends in our loan portfolio, including a high level of nonperforming assets at December 31, 2010, which while still at an
elevated level, decreased for the past three consecutive quarters,
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



39



---

| |  |  | The trend in our criticized and classified loans, which while still at an elevated level, decreased 11.6% and 8.8% from the previous quarter,
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The trend and elevated level of the historical loan loss rates within our loan portfolio,
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | The results of our internal and external loan reviews during 2010, and
| | - |  | ----------------------------------------------------------------------



| |  |  | Our individual impaired loan analysis which identified:
| | - |  | -------------------------------------------------------



| |  |  | Continued stress on borrowers given increasing lack of liquidity and limited bank financing and credit availability, and
| | - |  | ------------------------------------------------------------------------------------------------------------------------



| |  |  | Continued downward trends in appraised values and market assumptions used to value real estate dependent loans.
| | - |  | ---------------------------------------------------------------------------------------------------------------



The following table summarizes activity within our allowance
for loan losses, by portfolio segment, at the dates and for the periods indicated (dollars in thousands). Loans charged-off and recovered are charged or credited to the allowance for loan losses at the time realized.



|                                                                                   |  |                                         |         |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |         |  
|---------------------------------------------------------------------------------- |  | --------------------------------------- | ------- | - | ---- | - | --------- | ---- |  | - | --------- | - |  | ---- | --------- | - |  | - | ------- | -
|                                                                                   |  | At and for the years ended December 31, |        
|                                                                                   |  | 2010                                    |         |   | 2009 |   |           | 2008 |  |   | 2007      |   |  | 2006 |          
|Allowance for loan losses, beginning of period                                     |  | $                                       | 24,079  |   |      | $ | 11,000    |      |  | $ | 7,418     |   |  | $    | 8,527     |   |  | $ | 8,431   |  
|Provision for loan losses                                                          |  |                                         | 47,100  |   |      |   | 73,400    |      |  |   | 5,619     |   |  |      | 988       |   |  |   | 1,625   |  
|Less: Allowance reclassified as commercial loans held for sale valuation allowance |  |                                         | 2,358   |   |      |   |          |      |  |   |          |   |  |      |          |   |  |   |        |  
|Less: Allowance reclassified in credit card portfolio sale                         |  |                                         | 452     |   |      |   |          |      |  |   |          |   |  |      |          |   |  |   |        |  
|Loan charged-off                                                                   |  |                                         |         |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |         |  
|Commercial real estate                                                             |  |                                         | 33,481  |   |      |   | 49,753    |      |  |   | 198       |   |  |      | 496       |   |  |   | 191     |  
|Single-family residential                                                          |  |                                         | 4,214   |   |      |   | 4,060     |      |  |   | 367       |   |  |      | 371       |   |  |   | 247     |  
|Commercial and industrial                                                          |  |                                         | 3,135   |   |      |   | 4,945     |      |  |   | 430       |   |  |      | 505       |   |  |   | 453     |  
|Consumer                                                                           |  |                                         | 1,483   |   |      |   | 2,033     |      |  |   | 1,174     |   |  |      | 991       |   |  |   | 791     |  
|Other                                                                              |  |                                         | 647     |   |      |   |          |      |  |   |          |   |  |      |          |   |  |   |        |  
|                                                                                   |  |                                         |         |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |         |  
|Total loans charged-off                                                            |  |                                         | 42,960  |   |      |   | 60,791    |      |  |   | 2,169     |   |  |      | 2,363     |   |  |   | 1,682   |  
|Recoveries                                                                         |  |                                         |         |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |         |  
|Commercial real estate                                                             |  |                                         | 544     |   |      |   | 111       |      |  |   | 9         |   |  |      | 13        |   |  |   | 6       |  
|Single-family residential                                                          |  |                                         | 98      |   |      |   | 5         |      |  |   | 11        |   |  |      | 39        |   |  |   | 15      |  
|Commercial and industrial                                                          |  |                                         | 154     |   |      |   | 88        |      |  |   | 18        |   |  |      | 54        |   |  |   | 37      |  
|Consumer                                                                           |  |                                         | 729     |   |      |   | 266       |      |  |   | 94        |   |  |      | 160       |   |  |   | 95      |  
|Other                                                                              |  |                                         |        |   |      |   |          |      |  |   |          |   |  |      |          |   |  |   |        |  
|                                                                                   |  |                                         |         |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |         |  
|Total loans recovered                                                              |  |                                         | 1,525   |   |      |   | 470       |      |  |   | 132       |   |  |      | 266       |   |  |   | 153     |  
|                                                                                   |  |                                         |         |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |         |  
|Net loans charged-off                                                              |  |                                         | 41,435  |   |      |   | 60,321    |      |  |   | 2,037     |   |  |      | 2,097     |   |  |   | 1,529   |  
|                                                                                   |  |                                         |         |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |         |  
|Allowance for loan losses, end of period                                           |  | $                                       | 26,934  |   |      | $ | 24,079    |      |  | $ | 11,000    |   |  | $    | 7,418     |   |  | $ | 8,527   |  
|                                                                                   |  |                                         |         |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |         |  
|Average gross loans                                                                |  | $                                       | 943,101 |   |      | $ | 1,124,599 |      |  | $ | 1,107,007 |   |  | $    | 986,518   |   |  | $ | 895,062 |  
|Ending gross loans                                                                 |  |                                         | 793,426 |   |      |   | 1,040,312 |      |  |   | 1,158,480 |   |  |      | 1,044,770 |   |  |   | 945,913 |  
|Nonaccrual loans                                                                   |  |                                         | 91,405  |   |      |   | 96,936    |      |  |   | 42,968    |   |  |      | 4,810     |   |  |   | 6,999   |  
|Net loans charged-offs as a percentage of average gross loans                      |  |                                         | 4.39    | % |      |   | 5.36      | %    |  |   | 0.18      | % |  |      | 0.21      | % |  |   | 0.17    | %
|Allowance for loan losses as a percentage of ending gross loans                    |  |                                         | 3.39    |   |      |   | 2.31      |      |  |   | 0.95      |   |  |      | 0.71      |   |  |   | 0.90    |  
|Allowance for loan losses as a percentage of nonaccrual loans                      |  |                                         | 29.47   |   |      |   | 24.84     |      |  |   | 25.60     |   |  |      | 154.22    |   |  |   | 121.83  |  



40



---

In addition to loans charged-off in their entirety in the ordinary course of business,
included within loans charged-off for the year ended December 31, 2010 were $33.7 million in gross loan charge-offs relating to loans individually evaluated for impairment. The determination was made to take partial charge-offs on certain
collateral dependent loans based on the status of the underlying real estate projects or our expectation that these loans would be foreclosed on and we would take possession of the collateral. The loan charge-offs were recorded to writedown the
loans to the fair value of the collateral less estimated costs to sell generally based on fair values from third party appraisals.



We analyze individual loans within the portfolio and make allocations to the allowance for loan losses based on each individual
loans specific factors and other circumstances that impact the collectability of the loan. The population of loans evaluated to be potential impaired loans includes all troubled debt restructures and all loans with interest reserves, as
well as significant individual loans classified as doubtful or on nonaccrual status. At December 31, 2010, we had two loans totaling $3.3 million with Bank funded interest reserves. Based on their performance, these loans were not considered
impaired.



In situations where a loan is
determined to be impaired (primarily because it is probable that all principal and interest due according to the terms of the loan agreement will not be collected as scheduled), the loan is excluded from the general reserve calculation described
below and is evaluated individually for impairment. The impairment analysis is based on the determination of the most probable source of repayment which is typically liquidation of the underlying collateral but may also include discounted
future cash flows or, in rare cases, the market value of the loan itself. At December 31, 2010, $79.1 million of our loans evaluated individually for impairment, including commercial loans held for sale, were valued based on collateral value,
$23.9 million were valued based on discounted future cash flows, $3.4 million were valued based on a loans observable market price, and $1.3 million were based on bid prices for contracted loan sales expected to close in the first quarter of
2011.



Generally, for larger impaired loans valued
based on the value of the collateral, current appraisals performed by approved third party appraisers are the basis for estimating the current fair value of the collateral. However, in situations where a current appraisal is not available, we
use the best available information (including recent appraisals for similar properties, communications with qualified real estate professionals, information contained in reputable trade publications, and other observable market data) to estimate the
current fair value. The estimated costs to sell the property, if not already included in the appraisal, are then deducted from the appraised value to arrive at the net realizable value of the loan used to calculate the loans specific
reserve.



41



---

The following table summarizes the composition of and information relative to impaired
loans, by class, at December 31, 2010 (in thousands).



|                                                        |  |                    |        |  |                               |   |        |                  |  |   |                    |  |  |                        |        |  |                    |   |        |                        |  |   |                  |  |  |   |         |  |  |   |       | 
|------------------------------------------------------- |  | ------------------ | ------ |  | ----------------------------- | - | ------ | ---------------- |  | - | ------------------ |  |  | ---------------------- | ------ |  | ------------------ | - | ------ | ---------------------- |  | - | ---------------- |  |  | - | ------- |  |  | - | ----- | 
|                                                        |  | Gross Loans        |        |  | Commercial LoansHeld for Sale |   |        | Total Loans      | 
|                                                        |  | RecordedInvestment |        |  | UnpaidPrincipalBalance        |   |        | RelatedAllowance |  |   | RecordedInvestment |  |  | UnpaidPrincipalBalance |        |  | RecordedInvestment |   |        | UnpaidPrincipalBalance |  |   | RelatedAllowance | 
|With no related allowance recorded:                     |  |                    |        |  |                               |   |        |                  |  |   |                    |  |  |                        |        |  |                    |   |        |                        |  |   |                  |  |  |   |         |  |  |   |       | 
|Construction, land development and other land loans     |  | $                  | 29,183 |  |                               | $ | 39,953 |                  |  |   |                    |  |  | $                      | 11,123 |  |                    | $ | 25,303 |                        |  | $ | 40,306           |  |  | $ | 65,256  |  |  |   |       | 
|Multifamily residential                                 |  |                    |       |  |                               |   |       |                  |  |   |                    |  |  |                        | 7,943  |  |                    |   | 14,010 |                        |  |   | 7,943            |  |  |   | 14,010  |  |  |   |       | 
|Nonfarm nonresidential                                  |  |                    | 11,504 |  |                               |   | 17,099 |                  |  |   |                    |  |  |                        | 19,674 |  |                    |   | 30,367 |                        |  |   | 31,178           |  |  |   | 47,466  |  |  |   |       | 
|                                                        |  |                    |        |  |                               |   |        |                  |  |   |                    |  |  |                        |        |  |                    |   |        |                        |  |   |                  |  |  |   |         |  |  |   |       | 
|Total commercial real estate                            |  |                    | 40,687 |  |                               |   | 57,052 |                  |  |   |                    |  |  |                        | 38,740 |  |                    |   | 69,680 |                        |  |   | 79,427           |  |  |   | 126,732 |  |  |   |       | 
|                                                        |  |                    |        |  |                               |   |        |                  |  |   |                    |  |  |                        |        |  |                    |   |        |                        |  |   |                  |  |  |   |         |  |  |   |       | 
|Single-family real estate, revolving, open end loans    |  |                    |       |  |                               |   |       |                  |  |   |                    |  |  |                        |       |  |                    |   |       |                        |  |   |                 |  |  |   |        |  |  |   |       | 
|Single-family real estate, closed end, first lien       |  |                    | 2,567  |  |                               |   | 6,233  |                  |  |   |                    |  |  |                        | 595    |  |                    |   | 1,374  |                        |  |   | 3,162            |  |  |   | 7,607   |  |  |   |       | 
|Single-family real estate, closed end, junior lien      |  |                    |       |  |                               |   |       |                  |  |   |                    |  |  |                        |       |  |                    |   |       |                        |  |   |                 |  |  |   |        |  |  |   |       | 
|                                                        |  |                    |        |  |                               |   |        |                  |  |   |                    |  |  |                        |        |  |                    |   |        |                        |  |   |                  |  |  |   |         |  |  |   |       | 
|Total single-family residential                         |  |                    | 2,567  |  |                               |   | 6,233  |                  |  |   |                    |  |  |                        | 595    |  |                    |   | 1,374  |                        |  |   | 3,162            |  |  |   | 7,607   |  |  |   |       | 
|                                                        |  |                    |        |  |                               |   |        |                  |  |   |                    |  |  |                        |        |  |                    |   |        |                        |  |   |                  |  |  |   |         |  |  |   |       | 
|Commercial and industrial                               |  |                    | 117    |  |                               |   | 117    |                  |  |   |                    |  |  |                        |       |  |                    |   |       |                        |  |   | 117              |  |  |   | 117     |  |  |   |       | 
|                                                        |  |                    |        |  |                               |   |        |                  |  |   |                    |  |  |                        |        |  |                    |   |        |                        |  |   |                  |  |  |   |         |  |  |   |       | 
|Total impaired loans with no related allowance recorded |  | $                  | 43,371 |  |                               | $ | 63,402 |                  |  |   |                    |  |  | $                      | 39,335 |  |                    | $ | 71,054 |                        |  | $ | 82,706           |  |  | $ | 134,456 |  |  |   |       | 
|                                                        |  |                    |        |  |                               |   |        |                  |  |   |                    |  |  |                        |        |  |                    |   |        |                        |  |   |                  |  |  |   |         |  |  |   |       | 
|With an allowance recorded:                             |  |                    |        |  |                               |   |        |                  |  |   |                    |  |  |                        |        |  |                    |   |        |                        |  |   |                  |  |  |   |         |  |  |   |       | 
|Construction, land development and other land loans     |  | $                  | 11,164 |  |                               | $ | 17,527 |                  |  | $ | 3,103              |  |  |                        |        |  |                    |   |        |                        |  | $ | 11,164           |  |  | $ | 17,527  |  |  | $ | 3,103 | 
|Multifamily residential                                 |  |                    |       |  |                               |   |       |                  |  |   |                   |  |  |                        |        |  |                    |   |        |                        |  |   |                 |  |  |   |        |  |  |   |      | 
|Nonfarm nonresidential                                  |  |                    | 10,936 |  |                               |   | 10,936 |                  |  |   | 2,273              |  |  |                        |        |  |                    |   |        |                        |  |   | 10,936           |  |  |   | 10,936  |  |  |   | 2,273 | 
|                                                        |  |                    |        |  |                               |   |        |                  |  |   |                    |  |  |                        |        |  |                    |   |        |                        |  |   |                  |  |  |   |         |  |  |   |       | 
|Total commercial real estate                            |  |                    | 22,100 |  |                               |   | 28,463 |                  |  |   | 5,376              |  |  |                        |        |  |                    |   |        |                        |  |   | 22,100           |  |  |   | 28,463  |  |  |   | 5,376 | 
|                                                        |  |                    |        |  |                               |   |        |                  |  |   |                    |  |  |                        |        |  |                    |   |        |                        |  |   |                  |  |  |   |         |  |  |   |       | 
|Single-family real estate, revolving, open end loans    |  |                    |       |  |                               |   |       |                  |  |   |                   |  |  |                        |        |  |                    |   |        |                        |  |   |                 |  |  |   |        |  |  |   |      | 
|Single-family real estate, closed end, first lien       |  |                    | 1,300  |  |                               |   | 1,300  |                  |  |   | 94                 |  |  |                        |        |  |                    |   |        |                        |  |   | 1,300            |  |  |   | 1,300   |  |  |   | 94    | 
|Single-family real estate, closed end, junior lien      |  |                    | 165    |  |                               |   | 165    |                  |  |   | 57                 |  |  |                        |        |  |                    |   |        |                        |  |   | 165              |  |  |   | 165     |  |  |   | 57    | 
|                                                        |  |                    |        |  |                               |   |        |                  |  |   |                    |  |  |                        |        |  |                    |   |        |                        |  |   |                  |  |  |   |         |  |  |   |       | 
|Total single-family residential                         |  |                    | 1,465  |  |                               |   | 1,465  |                  |  |   | 151                |  |  |                        |        |  |                    |   |        |                        |  |   | 1,465            |  |  |   | 1,465   |  |  |   | 151   | 
|                                                        |  |                    |        |  |                               |   |        |                  |  |   |                    |  |  |                        |        |  |                    |   |        |                        |  |   |                  |  |  |   |         |  |  |   |       | 
|Commercial and industrial                               |  |                    | 1,381  |  |                               |   | 1,450  |                  |  |   | 819                |  |  |                        |        |  |                    |   |        |                        |  |   | 1,381            |  |  |   | 1,450   |  |  |   | 819   | 
|                                                        |  |                    |        |  |                               |   |        |                  |  |   |                    |  |  |                        |        |  |                    |   |        |                        |  |   |                  |  |  |   |         |  |  |   |       | 
|Total impaired loans with an allowance recorded         |  | $                  | 24,946 |  |                               | $ | 31,378 |                  |  | $ | 6,346              |  |  |                        |        |  |                    |   |        |                        |  | $ | 24,946           |  |  | $ | 31,378  |  |  | $ | 6,346 | 
|                                                        |  |                    |        |  |                               |   |        |                  |  |   |                    |  |  |                        |        |  |                    |   |        |                        |  |   |                  |  |  |   |         |  |  |   |       | 
|Total:                                                  |  |                    |        |  |                               |   |        |                  |  |   |                    |  |  |                        |        |  |                    |   |        |                        |  |   |                  |  |  |   |         |  |  |   |       | 
|Construction, land development and other land loans     |  | $                  | 40,347 |  |                               | $ | 57,480 |                  |  | $ | 3,103              |  |  | $                      | 11,123 |  |                    | $ | 25,303 |                        |  | $ | 51,470           |  |  | $ | 82,783  |  |  | $ | 3,103 | 
|Multifamily residential                                 |  |                    |       |  |                               |   |       |                  |  |   |                   |  |  |                        | 7,943  |  |                    |   | 14,010 |                        |  |   | 7,943            |  |  |   | 14,010  |  |  |   |      | 
|Nonfarm nonresidential                                  |  |                    | 22,440 |  |                               |   | 28,035 |                  |  |   | 2,273              |  |  |                        | 19,674 |  |                    |   | 30,367 |                        |  |   | 42,114           |  |  |   | 58,402  |  |  |   | 2,273 | 
|                                                        |  |                    |        |  |                               |   |        |                  |  |   |                    |  |  |                        |        |  |                    |   |        |                        |  |   |                  |  |  |   |         |  |  |   |       | 
|Total commercial real estate                            |  |                    | 62,787 |  |                               |   | 85,515 |                  |  |   | 5,376              |  |  |                        | 38,740 |  |                    |   | 69,680 |                        |  |   | 101,527          |  |  |   | 155,195 |  |  |   | 5,376 | 
|                                                        |  |                    |        |  |                               |   |        |                  |  |   |                    |  |  |                        |        |  |                    |   |        |                        |  |   |                  |  |  |   |         |  |  |   |       | 
|Single-family real estate, revolving, open end loans    |  |                    |       |  |                               |   |       |                  |  |   |                   |  |  |                        |       |  |                    |   |       |                        |  |   |                 |  |  |   |        |  |  |   |      | 
|Single-family real estate, closed end, first lien       |  |                    | 3,867  |  |                               |   | 7,533  |                  |  |   | 94                 |  |  |                        | 595    |  |                    |   | 1,374  |                        |  |   | 4,462            |  |  |   | 8,907   |  |  |   | 94    | 
|Single-family real estate, closed end, junior lien      |  |                    | 165    |  |                               |   | 165    |                  |  |   | 57                 |  |  |                        |       |  |                    |   |       |                        |  |   | 165              |  |  |   | 165     |  |  |   | 57    | 
|                                                        |  |                    |        |  |                               |   |        |                  |  |   |                    |  |  |                        |        |  |                    |   |        |                        |  |   |                  |  |  |   |         |  |  |   |       | 
|Total single-family residential                         |  |                    | 4,032  |  |                               |   | 7,698  |                  |  |   | 151                |  |  |                        | 595    |  |                    |   | 1,374  |                        |  |   | 4,627            |  |  |   | 9,072   |  |  |   | 151   | 
|                                                        |  |                    |        |  |                               |   |        |                  |  |   |                    |  |  |                        |        |  |                    |   |        |                        |  |   |                  |  |  |   |         |  |  |   |       | 
|Commercial and industrial                               |  |                    | 1,498  |  |                               |   | 1,567  |                  |  |   | 819                |  |  |                        |       |  |                    |   |       |                        |  |   | 1,498            |  |  |   | 1,567   |  |  |   | 819   | 
|                                                        |  |                    |        |  |                               |   |        |                  |  |   |                    |  |  |                        |        |  |                    |   |        |                        |  |   |                  |  |  |   |         |  |  |   |       | 
|Total impaired loans                                    |  | $                  | 68,317 |  |                               | $ | 94,780 |                  |  | $ | 6,346              |  |  | $                      | 39,335 |  |                    | $ | 71,054 |                        |  | $ | 107,652          |  |  | $ | 165,834 |  |  | $ | 6,346 | 
|                                                        |  |                    |        |  |                               |   |        |                  |  |   |                    |  |  |                        |        |  |                    |   |        |                        |  |   |                  |  |  |   |         |  |  |   |       | 



42



---

Interest income recognized on impaired loans during the year ended December 31, 2010
was $1.5 million. The average balance of total impaired loans was $105.7 million for the same period.



At December 31, 2009, the balance of impaired loans was $96.8 million. Of that balance, $11.3 million of the impaired loans had a
related allowance for loan losses of $5.3 million. The average balance of impaired loans was $82.5 million and $22.6 million for the years ended December 31, 2009 and 2008, respectively.



We calculate our general allowance by applying our historical loss factors to each sector of the loan
portfolio. For consistency of comparison on a quarterly basis, we utilize a five-year look-back period when computing historical loss rates. However, given the increase in charge-offs beginning in 2009, we also utilized a three-year look-back period
in 2010 for computing historical loss rates as another reference point in determining the allowance for loan losses.



We adjust these historical loss percentages for qualitative environmental factors derived from macroeconomic indicators and other
factors. Qualitative factors we considered in the determination of the December 31, 2010 allowance for loan losses include pervasive factors that generally impact borrowers across the loan portfolio (such as unemployment and consumer price
index) and factors that have specific implications to particular loan portfolios (such as residential home sales or commercial development). Factors evaluated may include changes in delinquent, nonaccrual and troubled debt restructured loan trends,
trends in risk ratings and net loans charged-off, concentrations of credit, competition and legal and regulatory requirements, trends in the nature and volume of the loan portfolio, national and local economic and business conditions, collateral
valuations, the experience and depth of lending management, lending policies and procedures, underwriting standards and practices, the quality of loan review systems and degree of oversight by the Board of Directors, peer comparisons, and other
external factors. The general reserve calculated using the historical loss rates and qualitative factors is then combined with the specific allowance on loans individually evaluated for impairment to determine the total allowance for loan losses.



The following table summarizes the allocation of the allowance
for loan losses, by portfolio segment, at December 31, 2010 (in thousands).



|                                                                        |  |                       |         |  |                          |   |         |                          |  |   |          |  |  |       |        |  |       |   |       |  |  |   |         | 
|----------------------------------------------------------------------- |  | --------------------- | ------- |  | ------------------------ | - | ------- | ------------------------ |  | - | -------- |  |  | ----- | ------ |  | ----- | - | ----- |  |  | - | ------- | 
|                                                                        |  | CommercialReal Estate |         |  | Single-familyResidential |   |         | Commercial andIndustrial |  |   | Consumer |  |  | Other |        |  | Total |  
|Allowance for loan losses:                                              |  |                       |         |  |                          |   |         |                          |  |   |          |  |  |       |        |  |       |   |       |  |  |   |         | 
|Allowance for loan losses, beginning of period                          |  | $                     | 13,369  |  |                          | $ | 3,683   |                          |  | $ | 4,853    |  |  | $     | 2,173  |  |       | $ | 1     |  |  | $ | 24,079  | 
|Provision for loan losses                                               |  |                       | 40,899  |  |                          |   | 4,500   |                          |  |   | 620      |  |  |       | 408    |  |       |   | 673   |  |  |   | 47,100  | 
|Less: Allowance reclassified to loans held for sale valuation allowance |  |                       | 2,352   |  |                          |   | 6       |                          |  |   |         |  |  |       |       |  |       |   |      |  |  |   | 2,358   | 
|Less: Allowance associated with credit card portfolio sale              |  |                       |        |  |                          |   |        |                          |  |   |         |  |  |       | 452    |  |       |   |      |  |  |   | 452     | 
|Loan charge-offs                                                        |  |                       | 33,481  |  |                          |   | 4,214   |                          |  |   | 3,135    |  |  |       | 1,483  |  |       |   | 647   |  |  |   | 42,960  | 
|Loan recoveries                                                         |  |                       | 544     |  |                          |   | 98      |                          |  |   | 154      |  |  |       | 729    |  |       |   |      |  |  |   | 1,525   | 
|                                                                        |  |                       |         |  |                          |   |         |                          |  |   |          |  |  |       |        |  |       |   |       |  |  |   |         | 
|Net loans charged-off                                                   |  |                       | 32,937  |  |                          |   | 4,116   |                          |  |   | 2,981    |  |  |       | 754    |  |       |   | 647   |  |  |   | 41,435  | 
|                                                                        |  |                       |         |  |                          |   |         |                          |  |   |          |  |  |       |        |  |       |   |       |  |  |   |         | 
|Allowance for loan losses, end of period                                |  | $                     | 18,979  |  |                          | $ | 4,061   |                          |  | $ | 2,492    |  |  | $     | 1,375  |  |       | $ | 27    |  |  | $ | 26,934  | 
|                                                                        |  |                       |         |  |                          |   |         |                          |  |   |          |  |  |       |        |  |       |   |       |  |  |   |         | 
|Individually evaluated for impairment                                   |  | $                     | 5,376   |  |                          | $ | 151     |                          |  | $ | 819      |  |  | $     |       |  |       | $ |      |  |  | $ | 6,346   | 
|Collectively evaluated for impairment                                   |  |                       | 13,603  |  |                          |   | 3,910   |                          |  |   | 1,673    |  |  |       | 1,375  |  |       |   | 27    |  |  |   | 20,588  | 
|                                                                        |  |                       |         |  |                          |   |         |                          |  |   |          |  |  |       |        |  |       |   |       |  |  |   |         | 
|Allowance for loan losses, end of period                                |  | $                     | 18,979  |  |                          | $ | 4,061   |                          |  | $ | 2,492    |  |  | $     | 1,375  |  |       | $ | 27    |  |  | $ | 26,934  | 
|                                                                        |  |                       |         |  |                          |   |         |                          |  |   |          |  |  |       |        |  |       |   |       |  |  |   |         | 
|                                                                        |  |                       |         |  |                          |  
|Gross loans, end of period:                                             |  |                       |         |  |                          |   |         |                          |  |   |          |  |  |       |        |  |       |   |       |  |  |   |         | 
|Individually evaluated for impairment                                   |  | $                     | 62,787  |  |                          | $ | 4,032   |                          |  | $ | 1,498    |  |  | $     |       |  |       | $ |      |  |  | $ | 68,317  | 
|Collectively evaluated for impairment                                   |  |                       | 445,810 |  |                          |   | 174,016 |                          |  |   | 46,314   |  |  |       | 52,652 |  |       |   | 6,317 |  |  |   | 725,109 | 
|                                                                        |  |                       |         |  |                          |   |         |                          |  |   |          |  |  |       |        |  |       |   |       |  |  |   |         | 
|Total gross loans                                                       |  | $                     | 508,597 |  |                          | $ | 178,048 |                          |  | $ | 47,812   |  |  | $     | 52,652 |  |       | $ | 6,317 |  |  | $ | 793,426 | 
|                                                                        |  |                       |         |  |                          |   |         |                          |  |   |          |  |  |       |        |  |       |   |       |  |  |   |         | 



43



---

Portions of the allowance for loan losses may be allocated for specific loans or portfolio
segments. However, the entire allowance for loan losses is available for any loan that, in our judgment, should be charged-off. While we utilize the best judgment and information available to it, the ultimate adequacy of the allowance for loan
losses depends on a variety of factors beyond our control, including the performance of our loan portfolio, the economy, changes in interest rates, and the view of the regulatory authorities toward loan classifications.



In addition to our portfolio review process, various
regulatory agencies periodically review our allowance for loan losses. These agencies may require us to recognize additions to the allowance for loan losses based on their judgments and information available to them at the time of their
examinations. While we use available information to recognize inherent losses on loans, future adjustments to the allowance for loan losses may be necessary based on changes in economic conditions and other factors and the impact of such changes and
other factors on our borrowers.



We believe that
the allowance for loan losses at December 31, 2010 is appropriate and adequate to cover probable inherent losses in the loan portfolio. However, underlying assumptions may be impacted in future periods by changes in economic conditions, the
impact of regulatory examinations, and the discovery of information with respect to borrowers which was not known to us at the time of the issuance of our Consolidated Financial Statements. Therefore, our assumptions may or may not prove valid.
Thus, there can be no assurance that loan losses in future periods, including potential incremental losses resulting from the sale of the commercial loans held for sale, will not exceed the current allowance for loan losses amount or that future
increases in the allowance for loan losses will not be required. Additionally, no assurance can be given that our ongoing evaluation of the loan portfolio, in light of changing economic conditions and other relevant factors, will not require
significant future additions to the allowance for loan losses, thus adversely impacting our business, financial condition, results of operations, and cash flows.



Commercial Loans Held for Sale Valuation
Allowance.    At December 31, 2010, commercial loans held for sale are carried at the lower of cost or fair value, and reflect a valuation allowance of $2.3 million recorded against the loans held for sale resulting in a
net carrying amount in the Consolidated Balance Sheets of $66.2 million. A valuation allowance is recorded against the loans held for sale for the excess of the recorded investment in the loan and the fair value less estimated selling costs.



In September 2010, we decided to market for sale
commercial loans totaling $90.9 million at September 30, 2010, and we are evaluating the bids received on a loan by loan basis. In general, we believe potential buyers are making bids at heavily discounted prices given the need for the banking
industry in general and our Company in particular to deleverage commercial real estate assets. We believe this was particularly true in the fourth quarter of 2010 as banks sought to rid themselves of problem assets prior to year end. In many cases,
we have not accepted such discounted bids. In certain cases, however, we are making the strategic decision to sell certain assets at amounts less than their recorded book values to continue to reduce our criticized assets and concentration in
commercial real estate as required by the Consent Order.



During the fourth quarter of 2010, we entered into contracts to sell loans with a gross book value of $13.9 million, of which $10.4 million closed in the fourth quarter. During the fourth quarter of 2010,
we transferred $6.0 million of commercial loans held for sale back to loans held for investment, as our intentions with respect to these loans had changed. We are continuing our efforts to sell the remaining loans held for sale.



44



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The following table summarizes activity within commercial loans held for sale and the
related valuation allowance, at the dates and for the periods indicated (in thousands).



|                                                                 |  |                                                            |        |  |                                                     |   |       | 
|---------------------------------------------------------------- |  | ---------------------------------------------------------- | ------ |  | --------------------------------------------------- | - | ----- | 
|                                                                 |  | Commercial loans heldfor sale, prior tovaluation allowance |        |  | Valuation allowanceon commercialloans held for sale |  
|Beginning balance at December 31, 2009                           |  | $                                                          |       |  |                                                     | $ |      | 
|Additions:                                                       |  |                                                            |        |  |                                                     |   |       | 
|Loans held for investment transferred to loans held for sale     |  |                                                            | 90,922 |  |                                                     |   | 2,358 | 
|Additional valuation requirements for ending loans held for sale |  |                                                            |       |  |                                                     |   | 1,198 | 
|                                                                 |  |                                                            |        |  |                                                     |   |       | 
|Total additions                                                  |  |                                                            | 90,922 |  |                                                     |   | 3,556 | 
|                                                                 |  |                                                            |        |  |                                                     |   |       | 
|Reductions:                                                      |  |                                                            |        |  |                                                     |   |       | 
|Loans held for sale sold                                         |  |                                                            | 10,402 |  |                                                     |   | 1,186 | 
|Net transfers out                                                |  |                                                            | 5,665  |  |                                                     |   | 36    | 
|Direct writedowns on loans held for sale                         |  |                                                            | 6,364  |  |                                                     |   |      | 
|                                                                 |  |                                                            |        |  |                                                     |   |       | 
|Total reductions                                                 |  |                                                            | 22,431 |  |                                                     |   | 1,222 | 
|                                                                 |  |                                                            |        |  |                                                     |   |       | 
|Ending balance at December 31, 2010                              |  | $                                                          | 68,491 |  |                                                     | $ | 2,334 | 
|                                                                 |  |                                                            |        |  |                                                     |   |       | 



Premises and equipment, net



Premises and equipment, net decreased by
$1.5 million (5.1%) during year ended December 31, 2010. As part of our earnings plan to improve our overall financial performance, we eliminated in 2010 all bank-owned automobiles provided to officers. Bank automobiles with a net book
value of $270 thousand were sold at a loss of $21 thousand during 2010.



In June 2010, we sold one vacant bank-owned branch with a net book value of $46 thousand at a gain of $14 thousand. At December 31, 2010, another vacant branch facility with a net book value of $235
thousand is under contract for sale and included in Other assets in the Consolidated Balance Sheets.



Goodwill



In the third quarter 2010, we recorded a goodwill impairment charge of $3.7 million. Goodwill resulted from past business combinations
from 1988 through 1999. We perform our annual impairment testing as of June 30 each year. However, due to the overall adverse economic environment and the negative impact on the banking industry as a whole, including the impact to the Company
resulting in net losses and a decline in market capitalization based on our common stock price, we also performed impairment tests of our goodwill quarterly in 2010.



Our common stock is not listed on any national securities
exchange or quoted on the OTC Bulletin Board. Our common stock is, however, quoted on the Pink Sheets under the symbol PLMT.PK. Although our common stock is quoted on the Pink Sheets, there is currently only a limited public trading
market of our common stock. Private trading of our common stock also has been limited and has typically been conducted through the Private Trading System on our website. In addition, buyers and sellers may privately negotiate transactions in our
common stock. Because there is not an established market for our common stock, we may not be aware of all prices at which our common stock has been traded. Accordingly, we normally determine the value of our common stock based on the last five
trades of the stock facilitated by the Company through the Private Trading System on our website.



While there were trades in our common stock in the first and second quarters of 2010 through the Private Trading System, there were not any trades through the Private Trading System during the three month
period ended September 30, 2010. The Private Placement was consummated on October 7, 2010 pursuant to which the



45



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Company issued 39,975,980 million shares of common stock at $2.60 per share. This per share issue price was negotiated by the Company at arms length with the investors and was
supported by a fairness opinion from the investment banking firm engaged by the Companys Board of Directors, including a comparison to common stock prices as a percentage of book value for publicly traded banks with similar asset quality and
financial condition of the Company, and in comparison to recent merger and acquisition transactions. Accordingly, we believe it was appropriate to utilize the $2.60 issue price in our goodwill impairment evaluation at September 30, 2010.



The first step of the goodwill impairment
evaluation was performed by comparing the fair value of our reporting unit with its carrying amount, including goodwill. Since the carrying amount of the reporting unit exceeded its fair value, the second step of the goodwill impairment test was
performed to measure the amount of impairment loss. The second step of the goodwill impairment test compared the implied fair value of our reporting unit goodwill with the carrying amount of that goodwill. Since the carrying amount of reporting unit
goodwill exceeded the implied fair value of that goodwill, an impairment loss was recognized in an amount equal to that excess. The evaluation at September 30, 2010 indicated that the carrying value of the Companys goodwill exceeded
the fair value and resulted in a third quarter noncash charge of $3.7 million, eliminating the goodwill as an asset on the Companys Consolidated Balance Sheets. This charge had no effect on the liquidity, regulatory capital, or daily
operations of the Company and was recorded as a component of noninterest expense on the Consolidated Statement of Income (Loss).



No impairment loss was recognized during 2009.



Deferred Tax Asset



As of December 31, 2010, prior to any valuation allowance, gross deferred tax assets totaling $25.9 million and gross deferred tax
liabilities totaling $5.4 million were recorded in the Companys Consolidated Balance Sheets. Based on our projections of future taxable income over the next three years, cumulative tax losses over the previous three years, limitations on
future utilization of various deferred tax assets under the Internal Revenue Code, and available tax planning strategies, we recorded a valuation allowance against the net deferred tax asset in the amount of $20.5 million through a charge against
income tax expense (benefit) at December 31, 2010. At December 31, 2009, net deferred tax assets totaled $5.8 million and were supported by an available net operating loss carryback against federal income taxes previously paid. No
valuation allowance was recorded at December 31, 2009.



The Private Placement that was consummated on October 7, 2010 is considered to be a change in control under the Internal Revenue Code. Accordingly, with the assistance of third party specialists we
were required to determine the fair value of the Company and our assets for the purpose of evaluating any potential limitation or deferral of our ability to carry forward pre-acquisition net operating losses and to determine the amount of net
unrealized built-in losses as of October 7, 2010, which also limits the amount of net operating losses that may be used in the future. As a result of the valuations and tax analysis, we currently estimate that future utilization of net
operating loss carry forwards and built-in losses of $46 million generated prior to October 7, 2010 will be limited to $1.1 million per year.



Analysis of our ability to realize deferred tax assets requires us to apply significant judgment and is inherently subjective because it
requires the future occurrence of circumstances that cannot be predicted with certainty. While we recorded a valuation allowance against our net deferred tax asset for financial reporting purposes at December 31, 2010, the net operating losses
are able to be carried forward for income tax purposes up to twenty years. Thus, to the extent we return to profitability and generate sufficient taxable income in the future, we will be able to utilize some of the net operating losses for income
tax purposes and reverse a portion of the valuation allowance for financial reporting purposes. The determination of how much of the net operating losses we will be able to utilize and therefore how much of the valuation allowance that may be
reversed and the timing is based on our future results of operations and the amount and timing of actual loan charge-offs and asset writedowns.



46



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Deposit Activities



Traditional deposit accounts have historically been the primary source of funds for the Company and a
competitive strength of our Company. Traditional deposit accounts also provide a customer base for the sale of additional financial products and services and fee income through service charges. We set targets for growth in deposit accounts annually
in an effort to increase the number of products per banking relationship. Deposits are attractive sources of funding because of their stability and generally low cost as compared with other funding sources.



The following table summarizes our composition of deposits at
the dates indicated (dollars in thousands).



|                                                 |  |              |           |  |           |  |       |       |  |   |           |  |  |       |       |   |           |   |           |       |  |  |           |   |  |       |           |  |           |  |       |   |  |   |         |  |  |  |       |  
|------------------------------------------------ |  | ------------ | --------- |  | --------- |  | ----- | ----- |  | - | --------- |  |  | ----- | ----- | - | --------- | - | --------- | ----- |  |  | --------- | - |  | ----- | --------- |  | --------- |  | ----- | - |  | - | ------- |  |  |  | ----- | -
|                                                 |  | December 31, |          
|                                                 |  | 2010         |           |  | 2009      |  |       | 2008  |  |   |           |  |  | 2007  |       |   |           |   |           | 2006  |  |  |           |  
|                                                 |  | Total        |           |  | % oftotal |  |       | Total |  |   | % oftotal |  |  | Total |       |   | % oftotal |   |           | Total |  |  | % oftotal |   |  | Total |           |  | % oftotal | 
|Noninterest-bearing transaction deposit accounts |  | $            | 141,281   |  |           |  | 12.0  | %     |  | $ | 142,609   |  |  |       | 11.7  | % |           | $ | 134,465   |       |  |  | 12.6      | % |  | $     | 135,920   |  |           |  | 12.8  | % |  | $ | 134,229 |  |  |  | 13.5  | %
|Interest-bearing transaction deposit accounts    |  |              | 292,827   |  |           |  | 25.0  |       |  |   | 307,258   |  |  |       | 25.3  |   |           |   | 364,315   |       |  |  | 34.0      |   |  |       | 387,248   |  |           |  | 36.6  |   |  |   | 313,613 |  |  |  | 31.5  |  
|                                                 |  |              |           |  |           |  |       |       |  |   |           |  |  |       |       |   |           |   |           |       |  |  |           |   |  |       |           |  |           |  |       |   |  |   |         |  |  |  |       |  
|Transaction deposit accounts                     |  |              | 434,108   |  |           |  | 37.0  |       |  |   | 449,867   |  |  |       | 37.0  |   |           |   | 498,780   |       |  |  | 46.6      |   |  |       | 523,168   |  |           |  | 49.4  |   |  |   | 447,842 |  |  |  | 45.0  |  
|Money market deposit accounts                    |  |              | 143,143   |  |           |  | 12.2  |       |  |   | 119,082   |  |  |       | 9.8   |   |           |   | 93,746    |       |  |  | 8.7       |   |  |       | 118,681   |  |           |  | 11.2  |   |  |   | 124,874 |  |  |  | 12.6  |  
|Savings deposit accounts                         |  |              | 49,472    |  |           |  | 4.2   |       |  |   | 40,335    |  |  |       | 3.3   |   |           |   | 36,623    |       |  |  | 3.4       |   |  |       | 34,895    |  |           |  | 3.3   |   |  |   | 41,887  |  |  |  | 4.2   |  
|Time deposit accounts                            |  |              | 546,639   |  |           |  | 46.6  |       |  |   | 605,630   |  |  |       | 49.9  |   |           |   | 442,347   |       |  |  | 41.3      |   |  |       | 382,859   |  |           |  | 36.1  |   |  |   | 379,584 |  |  |  | 38.2  |  
|                                                 |  |              |           |  |           |  |       |       |  |   |           |  |  |       |       |   |           |   |           |       |  |  |           |   |  |       |           |  |           |  |       |   |  |   |         |  |  |  |       |  
|Total deposits                                   |  | $            | 1,173,362 |  |           |  | 100.0 | %     |  | $ | 1,214,914 |  |  |       | 100.0 | % |           | $ | 1,071,496 |       |  |  | 100.0     | % |  | $     | 1,059,603 |  |           |  | 100.0 | % |  | $ | 994,187 |  |  |  | 100.0 | %
|                                                 |  |              |           |  |           |  |       |       |  |   |           |  |  |       |       |   |           |   |           |       |  |  |           |   |  |       |           |  |           |  |       |   |  |   |         |  |  |  |       |  



In March 2010, we introduced a
new checking account, MyPal checking, and a new savings account, Smart Savings. These accounts combine traditional banking features and nonbanking features and are expected to be a source of both additional deposits and noninterest income resulting
primarily from service charges or debit card transactions.



The MyPal checking account includes a monthly fee of $5, which is reduced by $0.50 each time an account holder uses their debit card. Thus, ten debit card transactions per month results in no monthly fee
to the account holder. However, the Company earns a per transaction fee from the merchant each time the debit cards are used. In addition, the MyPal checking account includes a competitive interest rate, free checks, free identity theft protection
and safety deposit rental for a period of time, and comes with a membership rewards program that provides purchase discounts to the account holders for items such as airfare, car rental and hotel, and every day savings at a wide variety of national
and local retailers and entertainment companies.



The Smart Savings account can be linked to any of our checking accounts and results in $1 being transferred from the account holders
checking account to the Smart Saving account each time the account holder uses their debit card. The Company initially matched each $1 transfer with $1 for the first six months. Effective October 1, 2010, the match was reduced to $0.10 per each
$1 transfer. The maximum match is $250 per year. The Smart Savings account is also interest-bearing.



We also evaluated the profitability of all of our pre-existing checking accounts and in October 2010 upgraded a large number of
unprofitable checking accounts to the MyPal account. We are also revising our existing fees (some increases and some decreases) and eliminating existing fees or implementing new fees based on our analysis of our fee structure in relation to our
costs and competitor fees, with various implementation dates generally between October 1, 2010 and March 31, 2011.



47



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The Dodd-Frank Act, which was signed into law on July 21, 2010, calls for new limits on
interchange transaction fees that banks receive from merchants via card networks like Visa, Inc. and MasterCard, Inc. when a customer uses a debit card. In December 2010, the Federal Reserve issued a proposal to implement a provision in the
Dodd-Frank Act that requires the Federal Reserve to set debit-card interchange fees. The proposed rule, if implemented in its current form, would result in a significant reduction in debit-card interchange revenue. Though the rule technically does
not apply to institutions with less than $10 billion in assets, such as the Bank, there is concern that the price controls may harm community banks, which could be pressured by the marketplace to lower their own interchange rates. The results of
this proposed legislation may impact our interchange income from debit card transactions in the future.



During the first and second quarters of 2010, we conducted targeted deposit growth and retention campaigns related to maturing
certificates of deposit and to attract new deposits. The CD campaigns included CDs with various maturities ranging from 6 months to 60 months, as well as 15, 20, and 36 month step-up add-on CDs that allow holders to reset their interest rate up to
one, two and three times, respectively, over the life of the CD and to add to the CDs over their lives. These CD campaigns ended on June 30, 2010. From January 1, 2010 through June 30, 2010, these campaigns resulted in the retention
of existing CDs and generation of new CDs totaling $258.1 million. However, in the second half of 2010, we did not aggressively pursue retention of maturing CDs given our excess cash and to reduce our net deposit funding cost. At December 31,
2010, CDs decreased $59.0 million from December 31, 2009. In general, this CD runoff was expected as part of our balance sheet management efforts to attract and retain lower priced transaction deposit accounts and shrink our higher priced
deposit base given the decline in the loan portfolio and is expected to continue in the first quarter 2011.



At December 31, 2010, traditional deposit accounts as a percentage of liabilities were 94.5% compared with 89.3% at December 31,
2009. Interest-bearing deposits decreased $40.2 million during the year ended December 31, 2010, primarily due to higher priced time deposit accounts not being retained at maturity as part of our balance sheet management efforts.
Noninterest-bearing deposits decreased $1.3 million during the same period. Traditional deposit accounts continue to be our primary source of funding, and, as part of our liquidity plan, we are proactively pursuing deposit retention initiatives with
our deposit customers. We are also pursuing strategies to increase our transaction deposit accounts as a proportion of our total deposits.



The Dodd-Frank Act also permanently raises the current standard maximum deposit insurance amount to $250,000. The standard maximum
insurance amount of $100,000 had been temporarily raised to $250,000 until December 31, 2013. The FDIC insurance coverage limit applies per depositor, per insured depository institution for each account ownership category. In addition, the FDIC
provides unlimited deposit insurance coverage for noninterest-bearing transaction accounts (typically business checking accounts) and certain funds swept into noninterest-bearing savings accounts. We elected to voluntarily participate in the program
through December 31, 2010. Throughout 2010, participating institutions paid fees of 15 to 25 basis points (annualized), depending on the Risk Category assigned to the institution, on the balance of each covered account in excess of $250
thousand. Coverage under the program was in addition to and separate from the basic coverage available under the FDICs general deposit insurance rules. We believe participation in the program enhanced our ability to retain customer deposits.
As a result of the Dodd-Frank Act, the voluntary TAGP program will end on December 31, 2010, and all institutions will be required to provide full deposit insurance on noninterest-bearing transaction accounts until December 31, 2012. There
will not be a separate assessment for this as there was for institutions participating in the TAGP program.



48



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The table set forth below summarizes the average balances of interest-bearing deposits by
type and the weighted average rates paid thereon for the periods indicated (dollars in thousands).



|                                |  |                                  |           |  |                 |   |        |                          |  |  |                |   |  |                 |           |  |                          |   |        |                |  |  |                 |   |  |                          |         |  |  |   |        |  |  |  |      |  
|------------------------------- |  | -------------------------------- | --------- |  | --------------- | - | ------ | ------------------------ |  |  | -------------- | - |  | --------------- | --------- |  | ------------------------ | - | ------ | -------------- |  |  | --------------- | - |  | ------------------------ | ------- |  |  | - | ------ |  |  |  | ---- | -
|                                |  | For the years ended December 31, |          
|                                |  | 2010                             |           |  | 2009            |   |        | 2008                     | 
|                                |  | Averagebalance                   |           |  | Interestexpense |   |        | Weightedaveragerate paid |  |  | Averagebalance |   |  | Interestexpense |           |  | Weightedaveragerate paid |   |        | Averagebalance |  |  | Interestexpense |   |  | Weightedaveragerate paid |        
|Transaction deposit accounts    |  | $                                | 292,696   |  |                 | $ | 248    |                          |  |  | 0.08           | % |  | $               | 323,613   |  |                          | $ | 526    |                |  |  | 0.16            | % |  | $                        | 374,382 |  |  | $ | 4,966  |  |  |  | 1.33 | %
|Money market deposit accounts   |  |                                  | 137,955   |  |                 |   | 622    |                          |  |  | 0.45           |   |  |                 | 108,566   |  |                          |   | 602    |                |  |  | 0.55            |   |  |                          | 105,834 |  |  |   | 1,922  |  |  |  | 1.82 |  
|Savings deposit accounts        |  |                                  | 46,112    |  |                 |   | 124    |                          |  |  | 0.27           |   |  |                 | 40,871    |  |                          |   | 132    |                |  |  | 0.32            |   |  |                          | 37,692  |  |  |   | 129    |  |  |  | 0.34 |  
|Time deposit accounts           |  |                                  | 552,854   |  |                 |   | 12,566 |                          |  |  | 2.27           |   |  |                 | 578,026   |  |                          |   | 18,251 |                |  |  | 3.16            |   |  |                          | 400,516 |  |  |   | 16,677 |  |  |  | 4.16 |  
|                                |  |                                  |           |  |                 |   |        |                          |  |  |                |   |  |                 |           |  |                          |   |        |                |  |  |                 |   |  |                          |         |  |  |   |        |  |  |  |      |  
|Total interest-bearing deposits |  | $                                | 1,029,617 |  |                 | $ | 13,560 |                          |  |  | 1.32           | % |  | $               | 1,051,076 |  |                          | $ | 19,511 |                |  |  | 1.86            | % |  | $                        | 918,424 |  |  | $ | 23,694 |  |  |  | 2.58 | %
|                                |  |                                  |           |  |                 |   |        |                          |  |  |                |   |  |                 |           |  |                          |   |        |                |  |  |                 |   |  |                          |         |  |  |   |        |  |  |  |      |  



Jumbo Time Deposit
Accounts.    Jumbo time deposit accounts are accounts with balances totaling $100,000 or greater at the date indicated. Jumbo time deposit accounts totaled 22.7% of total interest-bearing liabilities at
December 31, 2010. The following table summarizes our jumbo time deposit accounts by maturity at December 31, 2010 (in thousands).



|                                      |  |   |         | 
|------------------------------------- |  | - | ------- | 
|Three months or less                  |  | $ | 44,092  | 
|Over three months through six months  |  |   | 17,994  | 
|Over six months through twelve months |  |   | 90,171  | 
|                                      |  |   |         | 
|Twelve months or less                 |  |   | 152,257 | 
|Over twelve months                    |  |   | 94,912  | 
|                                      |  |   |         | 
|Total jumbo time deposit accounts     |  | $ | 247,169 | 
|                                      |  |   |         | 



Jumbo time deposit accounts
totaled $263.7 million at December 31, 2009. We believe our balance sheet management efforts to attract and retain lower priced transaction deposit accounts and shrink our higher priced deposit base contributed to the decrease in jumbo time
deposit accounts.



Borrowing Activities



Borrowings as a percentage of total
liabilities decreased from 10.0% at December 31, 2009 to 4.5% at December 31, 2010. The decrease was due to less reliance on such borrowed funding sources as liquidity was provided through deposit growth and cash retention of proceeds from
loan payments and maturing securities. We also utilized excess cash balances in December 2010 to prepay $61.0 million of FHLB advances.



The following table summarizes our borrowings composition at the dates indicated (dollars in thousands).



|                             |  |                   |        |  |                   |  |       |       |  |   |           |  |  |  |       |  
|---------------------------- |  | ----------------- | ------ |  | ----------------- |  | ----- | ----- |  | - | --------- |  |  |  | ----- | -
|                             |  | December 31, 2010 |        |  | December 31, 2009 | 
|                             |  | Total             |        |  | % oftotal         |  |       | Total |  |   | % oftotal | 
|Retail repurchase agreements |  | $                 | 20,720 |  |                   |  | 37.2  | %     |  | $ | 15,545    |  |  |  | 11.5  | %
|Commercial paper             |  |                   |       |  |                   |  |      |       |  |   | 19,061    |  |  |  | 14.0  |  
|FHLB advances                |  |                   | 35,000 |  |                   |  | 62.8  |       |  |   | 101,000   |  |  |  | 74.5  |  
|                             |  |                   |        |  |                   |  |       |       |  |   |           |  |  |  |       |  
|Total borrowed funds         |  | $                 | 55,720 |  |                   |  | 100.0 | %     |  | $ | 135,606   |  |  |  | 100.0 | %
|                             |  |                   |        |  |                   |  |       |       |  |   |           |  |  |  |       |  



49



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The following table provides further detail with respect to our borrowings composition at
the dates and for the periods indicated (dollars in thousands).



|                                                                     |  |                                        |         |   |      |   |         |      |  |   |         |  
|-------------------------------------------------------------------- |  | -------------------------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                     |  | At and for the years endedDecember 31, |        
|                                                                     |  | 2010                                   |         |   | 2009 |   |         | 2008 | 
|Retail repurchase agreements                                         |  |                                        |         |   |      |   |         |      |  |   |         |  
|Amount outstanding at year-end                                       |  | $                                      | 20,720  |   |      | $ | 15,545  |      |  | $ | 16,357  |  
|Average amount outstanding during year                               |  |                                        | 22,809  |   |      |   | 23,227  |      |  |   | 18,063  |  
|Maximum amount outstanding at any month-end                          |  |                                        | 26,106  |   |      |   | 29,461  |      |  |   | 21,817  |  
|Rate paid at year-end*                                               |  |                                        | 0.25    | % |      |   | 0.25    | %    |  |   | 0.25    | %
|Weighted average rate paid during the year                           |  |                                        | 0.25    |   |      |   | 0.25    |      |  |   | 1.37    |  
|                                                                     |  |                                        |        
|Commercial paper                                                     |  |                                        |         |   |      |   |         |      |  |   |         |  
|Amount outstanding at year-end                                       |  | $                                      |        |   |      | $ | 19,061  |      |  | $ | 27,955  |  
|Average amount outstanding during year                               |  |                                        | 8,435   |   |      |   | 24,085  |      |  |   | 32,415  |  
|Maximum amount outstanding at any month-end                          |  |                                        | 18,948  |   |      |   | 27,041  |      |  |   | 37,487  |  
|Rate paid at year-end*                                               |  |                                        |        | % |      |   | 0.25    | %    |  |   | 0.25    | %
|Weighted average rate paid during the year                           |  |                                        | 0.25    |   |      |   | 0.25    |      |  |   | 1.11    |  
|                                                                     |  |                                        |        
|Other short-term borrowingslines of credit from correspondent banks |  |                                        |         |   |      |   |         |      |  |   |         |  
|Amount outstanding at year-end                                       |  | $                                      |        |   |      | $ |        |      |  | $ | 35,785  |  
|Average amount outstanding during year                               |  |                                        | 1       |   |      |   | 5,335   |      |  |   | 13,240  |  
|Maximum amount outstanding at any month-end                          |  |                                        |        |   |      |   | 17,295  |      |  |   | 38,171  |  
|Rate paid at year-end                                                |  |                                        |        | % |      |   |        | %    |  |   | 0.68    | %
|Weighted average rate paid during the year                           |  |                                        |        |   |      |   | 0.62    |      |  |   | 2.27    |  
|                                                                     |  |                                        |        
|FHLB borrowings                                                      |  |                                        |         |   |      |   |         |      |  |   |         |  
|Amount outstanding at year-end                                       |  | $                                      | 35,000  |   |      | $ | 101,000 |      |  | $ | 96,000  |  
|Average amount outstanding during year                               |  |                                        | 95,231  |   |      |   | 78,166  |      |  |   | 76,718  |  
|Maximum amount outstanding at any month-end                          |  |                                        | 101,000 |   |      |   | 170,000 |      |  |   | 111,000 |  
|Rate paid at year-end                                                |  |                                        | 2.99    | % |      |   | 2.01    | %    |  |   | 2.02    | %
|Weighted average rate paid during the year                           |  |                                        | 1.79    |   |      |   | 2.27    |      |  |   | 2.61    |  



|* |  | Rates paid are tiered based on level of deposit. Rate presented represents the average rate for all tiers offered at year-end.
|- |  | ------------------------------------------------------------------------------------------------------------------------------



Retail Repurchase
Agreements.    We offer retail repurchase agreements as an alternative investment tool to conventional savings deposits. The investor buys an interest in a pool of U.S. government or agency securities. Funds are swept
daily between the customer and the Bank. Retail repurchase agreements are securities transactions, not insured deposits.



Commercial Paper.    Through June 30, 2010, we offered commercial paper as an alternative investment tool
for our commercial customers. Through a master note arrangement between the Company and the Bank, Palmetto Master Notes were issued as an alternative investment for commercial sweep accounts. These master notes were unsecured but backed by the full
faith and credit of the Company. The commercial paper was issued only in conjunction with deposits in the Banks automated sweep accounts.



Effective July 1, 2010, as part of our efforts to provide enhanced services to our customers, we terminated the commercial paper
program, and all commercial paper accounts were converted to a new money market sweep account. The money market sweep account is an FDIC insured deposit and includes interest paid on excess balances and automatic transfers between various customer
accounts.



Wholesale
Funding.    Wholesale funding options include lines of credit from correspondent banks, FHLB advances, and the Federal Reserve Discount Window. Such funding provides us with the ability to access the



50



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type of funding needed at the time and amount needed at market rates. This provides us with the flexibility to tailor borrowings to our specific needs. Interest rates on such borrowings vary from
time to time in response to general economic conditions.



Correspondent Bank Line of Credit.    At December 31, 2010, we had access to a line of credit from a correspondent bank in the amount of $5 million. From August 24,
2009 to October 31, 2010, this line of credit was secured by U.S. Treasury and federal agency securities. Effective November 1, 2010 we were no longer required to pledge collateral for this line of credit.



The following table summarizes our line of credit funding
utilization and availability at the dates indicated (in thousands).



|                                                          |  |              |       |  |      |   |       | 
|--------------------------------------------------------- |  | ------------ | ----- |  | ---- | - | ----- | 
|                                                          |  | December 31, |      
|                                                          |  | 2010         |       |  | 2009 |  
|Correspondent bank line of credit accomodations           |  | $            | 5,000 |  |      | $ | 5,000 | 
|Utilized correspondent bank line of credit accomodations  |  |              |      |  |      |   |      | 
|                                                          |  |              |       |  |      |   |       | 
|Available correspondent bank line of credit accomodations |  | $            | 5,000 |  |      | $ | 5,000 | 
|                                                          |  |              |       |  |      |   |       | 



This correspondent bank line of
credit funding source may be canceled at any time at the correspondent banks discretion.



FHLB Borrowings.    We pledge investment securities and loans to collateralize FHLB advances and letters of credit. Additionally, we may pledge cash and cash equivalents. The
amount that can be borrowed is based on the balance of the type of asset pledged as collateral multiplied by lendable collateral value percentages, as calculated by the FHLB.



The following table summarizes FHLB borrowed funds
utilization and availability at the dates indicated (in thousands).



|                                                                                                             |  |                  |         |   |                  |   |          |  
|------------------------------------------------------------------------------------------------------------ |  | ---------------- | ------- | - | ---------------- | - | -------- | -
|                                                                                                             |  | December 31,2010 |         |   | December 31,2009 |  
|Available lendable loan collateral value to serve against FHLB advances and letters of credit                |  | $                | 92,464  |   |                  | $ | 162,014  |  
|Available lendable investment security collateral value to serve against FHLB advances and letters of credit |  |                  | 46,275  |   |                  |   | 26,791   |  
|Advances and letters of credit                                                                               |  |                  |         |   |                  |   |          |  
|FHLB advances                                                                                                |  |                  | (35,000 | ) |                  |   | (101,000 | )
|Letters of credit                                                                                            |  |                  | (50,000 | ) |                  |   | (50,000  | )
|Excess / (deficiency)                                                                                        |  |                  | 53,303  |   |                  |   | 55       |  



The following table summarizes FHLB borrowings at December 31, 2010 (dollars in thousands). Our outstanding FHLB advances do not have
embedded call options.



|                  |  |   |          |   |  |   |          |       |  |   |        |  
|----------------- |  | - | -------- | - |  | - | -------- | ----- |  | - | ------ | -
|                  |  |   |          |   |  |   |          | Total | 
|Borrowing balance |  | $ | 30,000   |   |  | $ | 5,000    |       |  | $ | 35,000 |  
|Interest rate     |  |   | 2.89     | % |  |   | 3.61     | %     |  |   | 2.99   | %
|Maturity date     |  |   | 3/7/2011 |   |  |   | 4/2/2013 |       |  |   |        |  



In January 2010, we
were notified by the FHLB that we could only rollover existing advances as they matured and that incremental borrowings would not be allowed; however, in December 2010 we were notified by the FHLB that our borrowing capacity had been restored up to
10% of total assets.



51



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Any FHLB advance with a fixed interest rate is subject to a prepayment fee in the event of
full or partial repayment prior to maturity or the expiration of any interim interest rate period. In December 2010, as part of our overall balance sheet management efforts to utilize our excess cash and reduce our overall borrowing cost, we prepaid
$61.0 million of FHLB advances. In January 2011, we also prepaid FHLB advances of $30.0 million.



Federal Reserve Discount Window.    We have established a borrowing relationship with the Federal Reserve through its Discount Window. Through the Discount Window, primary
credit is available to generally sound depository institutions on a very short-term basis, typically overnight, at a rate above the Federal Open Market Committee target rate for federal funds. Our maximum maturity for potential borrowings is
overnight. Although we have not drawn on this availability since established in 2009 or during 2010, any potential borrowings from the Federal Reserve Discount Window would be at the secondary credit rate and must be used for operational issues.
Further, the Federal Reserve has the discretion to deny approval of borrowing requests.



Convertible Debt.    In March 2010, the Company issued unsecured convertible promissory notes in an aggregate principal amount of $380 thousand to members of the Board of
Directors. The notes bore interest at 10% per year payable quarterly, had a stated maturity of March 31, 2015, were prepayable by the Company at any time at the discretion of the Board of Directors, and were mandatorily convertible into
stock of the Company at the same terms and conditions as other investors that participate in the Companys next stock offering. The proceeds from the issuance of the notes were contributed to the Bank as a capital contribution. Upon the
consummation of the Private Placement on October 7, 2010, the outstanding convertible promissory notes were converted into shares of the Companys common stock at the same price per share as the common stock issued in the Private
Placement, and the accrued interest was paid on October 7, 2010.



Capital



At December 31, 2010, as a result of the consummation of the Private Placement on October 7, 2010, all of our capital ratios exceeded the well-capitalized regulatory minimum thresholds as well
as the minimum capital ratios established in the Consent Order.



The following table summarizes capital key performance indicators at the dates and for the periods indicated (dollars in thousands, except per share data).



|                                                               |  |                                         |         |   |      |   |         |      |  |   |         |  
|-------------------------------------------------------------- |  | --------------------------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                               |  | At and for the years ended December 31, |        
|                                                               |  | 2010                                    |         |   | 2009 |   |         | 2008 | 
|Total shareholders equity                                     |  | $                                       | 113,899 |   |      | $ | 75,015  |      |  | $ | 115,776 |  
|Average shareholders equity                                   |  |                                         | 87,463  |   |      |   | 106,906 |      |  |   | 116,222 |  
|Shareholders equity as a percentage of assets                 |  |                                         | 8.40    | % |      |   | 5.22    | %    |  |   | 8.46    | %
|Average shareholders equity as a percentage of average assets |  |                                         | 6.25    |   |      |   | 7.48    |      |  |   | 8.79    |  
|Cash dividends per common share                                |  | $                                       |        |   |      | $ | 0.06    |      |  | $ | 0.80    |  
|Dividend payout ratio                                          |  |                                         | n/a     | % |      |   | n/a     | %    |  |   | 37.89   | %



52



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The following table summarizes activity impacting shareholders equity for the period
indicated (in thousands).



|                                                                                               |  |                                            |         |  
|---------------------------------------------------------------------------------------------- |  | ------------------------------------------ | ------- | -
|                                                                                               |  | At and for the yearended December 31, 2010 |        
|Total shareholders equity, beginning of period                                                |  | $                                          | 75,015  |  
|Additions to shareholders equity during period                                                |  |                                            |         |  
|Change in accumulated other comprehensive loss due to investment securities available for sale |  |                                            | 958     |  
|Common stock issued pursuant to Private Placement, net of issuance costs                       |  |                                            | 95,980  |  
|Common stock issued pursuant to Follow-On offering                                             |  |                                            | 2,018   |  
|Common stock issued upon conversion of convertible debt                                        |  |                                            | 380     |  
|Common stock issued pursuant to restricted stock plan                                          |  |                                            | 297     |  
|Compensation expense related to stock option plan                                              |  |                                            | 30      |  
|                                                                                               |  |                                            |         |  
|Total additions to shareholders equity during period                                          |  |                                            | 99,663  |  
|Reductions in shareholders equity during period                                               |  |                                            |         |  
|Net loss                                                                                       |  |                                            | (60,202 | )
|Change in accumulated other comprehensive loss due to defined benefit pension plan             |  |                                            | (577    | )
|                                                                                               |  |                                            |         |  
|Total reductions in shareholders equity during period                                         |  |                                            | (60,779 | )
|                                                                                               |  |                                            |         |  
|Total shareholders equity, end of period                                                      |  | $                                          | 113,899 |  
|                                                                                               |  |                                            |         |  



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Accumulated Other Comprehensive Loss.    The following table
summarizes the components of accumulated other comprehensive loss, net of tax impact, at the dates and for the periods indicated (in thousands).



|                                                                                   |  |                                  |         |   |      |   |         |      |  |   |        |  
|---------------------------------------------------------------------------------- |  | -------------------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------ | -
|                                                                                   |  | For the years ended December 31, |        
|                                                                                   |  | 2010                             |         |   | 2009 |   |         | 2008 | 
|Net Unrealized (Losses) Gains on Investment Securities Available for Sale          |  |                                  |         |   |      |   |         |      |  |   |        |  
|Balance, beginning of year                                                         |  | $                                | 306     |   |      | $ | (1,621  | )    |  | $ | (252   | )
|Other comprehensive income (loss):                                                 |  |                                  |         |   |      |   |         |      |  |   |        |  
|Unrealized holding gains (losses) arising during the period                        |  |                                  | (64     | ) |      |   | 3,211   |      |  |   | (2,201 | )
|Income tax (expense) benefit                                                       |  |                                  | 24      |   |      |   | (1,216  | )    |  |   | 832    |  
|Less: Reclassification adjustment for (gains) losses included in net (loss) income |  |                                  | 1,608   |   |      |   | (104    | )    |  |   |       |  
|Income tax expense (benefit)                                                       |  |                                  | (610    | ) |      |   | 36      |      |  |   |       |  
|                                                                                   |  |                                  |         |   |      |   |         |      |  |   |        |  
|                                                                                   |  |                                  | 958     |   |      |   | 1,927   |      |  |   | (1,369 | )
|                                                                                   |  |                                  |         |   |      |   |         |      |  |   |        |  
|Balance, end of year                                                               |  |                                  | 1,264   |   |      |   | 306     |      |  |   | (1,621 | )
|                                                                                   |  |                                  |         |   |      |   |         |      |  |   |        |  
|Net Unrealized (Losses) Gains on Impact of Defined Benefit Pension Plan            |  |                                  |         |   |      |   |         |      |  |   |        |  
|Balance, beginning of year                                                         |  |                                  | (7,266  | ) |      |   | (4,496  | )    |  |   | (2,486 | )
|Other comprehensive loss:                                                          |  |                                  |         |   |      |   |         |      |  |   |        |  
|Impact of FASB ASC 715                                                             |  |                                  | (887    | ) |      |   | (4,261  | )    |  |   | (3,092 | )
|Income tax benefit                                                                 |  |                                  | 310     |   |      |   | 1,491   |      |  |   | 1,082  |  
|                                                                                   |  |                                  |         |   |      |   |         |      |  |   |        |  
|                                                                                   |  |                                  | (577    | ) |      |   | (2,770  | )    |  |   | (2,010 | )
|                                                                                   |  |                                  |         |   |      |   |         |      |  |   |        |  
|Balance, end of year                                                               |  |                                  | (7,843  | ) |      |   | (7,266  | )    |  |   | (4,496 | )
|                                                                                   |  |                                  |         |   |      |   |         |      |  |   |        |  
|                                                                                   |  | $                                | (6,579  | ) |      | $ | (6,960  | )    |  | $ | (6,117 | )
|                                                                                   |  |                                  |         |   |      |   |         |      |  |   |        |  
|Total other comprehensive income (loss), end of year                               |  | $                                | 381     |   |      | $ | (843    | )    |  | $ | (3,379 | )
|Net (loss) income                                                                  |  |                                  | (60,202 | ) |      |   | (40,085 | )    |  |   | 13,599 |  
|                                                                                   |  |                                  |         |   |      |   |         |      |  |   |        |  
|Comprehensive (loss) income                                                        |  | $                                | (59,821 | ) |      | $ | (40,928 | )    |  | $ | 10,220 |  
|                                                                                   |  |                                  |         |   |      |   |         |      |  |   |        |  



Dividends,    The Company and the Bank are subject to regulatory policies and requirements relating to the
payment of dividends. In an effort to retain capital during this period of economic uncertainty, the Board of Directors reduced the quarterly dividend for the first quarter of 2009 and has not declared or paid a quarterly common stock dividend since
that date. The Board of Directors believes that suspension of the dividend was prudent to protect our capital base. In addition, given the Banks recent losses and the restrictions imposed by the Consent Order with the Supervisory Authorities,
we are subject to regulatory policies and requirements relating to the payment of dividends, including requirements to seek regulatory approval prior to paying dividends and to maintain adequate capital above regulatory minimums. Our Board of
Directors will continue to evaluate dividend payment opportunities on a quarterly basis. There can be no assurance as to when and if future dividends will be reinstated, and at what level, because they are dependent on our financial condition,
results of operations, and / or cash flows, as well as capital and dividend regulations from the FDIC and others.



Basel III.    Internationally, both the Basel Committee and the Financial Stability Board (established in April
2009 by the G-20 Finance Ministers and Central Bank Governors to take action to strengthen regulation and supervision of the financial system with greater international consistency, cooperation, and transparency) have committed to raise capital
standards and liquidity buffers within the banking system through Basel III. On September 12, 2010, the Group of Governors and Heads of Supervision agreed to the calibration and phase-in of the Basel III minimum capital requirements
(raising the minimum Tier 1 common equity ratio to 4.5% and minimum Tier 1 equity ratio to 6.0%, with full implementation by January 2015) and introducing a capital conservation buffer of common equity of an additional 2.5% with implementation by
January 2019. The U.S. federal banking agencies support this agreement. In December 2010, the Basel Committee issued the Basel III



54



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rules text that outlines the details and time-lines of global regulatory standards on bank capital adequacy and liquidity. According to the Basel Committee, the Framework sets out higher and
better-quality capital, better risk coverage, the introduction of a leverage ratio as a backstop to the risk-based requirement, measures to promote the build-up of capital that can be drawn down in periods of stress, and the introduction of two
global liquidity standards.



Private
Placement.    On May 25, 2010 (and as amended on June 8, 2010 and September 22, 2010), the Company entered into the definitive investment agreements with institutional investors, pursuant to which on
October 7, 2010 the investors purchased $103.9 million of shares of the Companys common stock at $2.60 per share. As a result, the Companys and the Banks capital adequacy ratios now exceed the minimum capital adequacy ratios
to be categorized as well capitalized and those required by the Consent Order for the Bank.



In addition, the investors have preemptive rights with respect to public or private offerings of the Companys common stock (or
rights to purchase, or securities convertible into or exercisable for, common stock) during a 24-month period after the closing of the Private Placement to enable the investors to maintain their percentage interests of the Companys common
stock beneficially owned, subject to certain exceptions, including an exception that permits the Company to conduct a common stock offering following the closing of the Private Placement of up to $10 million directed to the Companys
shareholders as of the close of business on October 6, 2010. On December 6, 2010, a registration statement was declared effective by the SEC for the offering of up to 3,846,153 shares of our common stock at $2.60. These shareholders had
until January 3, 2011 to purchase shares of the Companys common stock. At December 31, 2010, we had issued 776,123 shares of common stock for proceeds of $2.0 million, and in January 2011 we issued an additional 453,906 shares for
proceeds of $1.2 million.



Under the terms of the
Private Placement, the institutional investors who participated in the Private Placement had the right to purchase any unsubscribed shares from the follow-on offering to the legacy shareholders. As a result, in the first quarter 2011, we issued to
these institutional investors 2,616,124 shares of common stock at $2.60 per share for net proceeds of $6.8 million, resulting in the $10 million offering being fully subscribed. The net proceeds of the offerings were contributed to the Bank as an
additional capital contribution.



In connection
with the Private Placement, we evaluated the appropriate accounting for the transaction by analyzing investor ownership, independence, risk, solicitation and collaboration considerations. Based on our analysis of these factors, we concluded that the
Private Placement transaction resulted in a recapitalization of the Companys ownership for which push-down accounting was not required.



Regulatory Capital and Other Requirements.    The Company and the Bank are required to meet regulatory capital
requirements that include several measures of capital. Under regulatory capital requirements, accumulated other comprehensive income (loss) amounts do not increase or decrease regulatory capital and are not included in the calculation of risk-based
capital and leverage ratios.



As previously
described, in March 2010, the Company issued unsecured convertible promissory notes in an aggregate principal amount of $380 thousand. The proceeds from this issuance, along with other cash of the Company, were contributed to the Bank as a capital
contribution. Upon the consummation of the Private Placement, the principal balances of the outstanding convertible promissory notes were converted into shares of the Companys common stock at the same price per share as the common stock issued
in the Private Placement, and the accrued interest was paid on October 7, 2010.



Due to the Consent Order we may not accept brokered deposits unless a waiver is granted by the FDIC. Although we currently do not utilize brokered deposits as a funding source, if we were to seek to begin
using such funding source, there is no assurance that the FDIC will grant us the approval when requested. These restrictions could have a substantial negative impact on our liquidity. Additionally, we would normally be



55



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restricted from offering an effective yield on deposits of more than 75 basis points over the national rates published by the FDIC weekly on their website. However, on April 1, 2010, we were
notified by the FDIC that they had determined that the geographic areas in which we operate were considered high-rate areas. Accordingly, we are able to offer interest rates on deposits up to 75 basis points over the prevailing interest rates in our
geographic areas. The FDIC has informed us that this high-rate determination is also effective for 2011.



In addition, as a result of the Private Placement, as of October 7, 2010 the Companys and the Banks capital adequacy
ratios exceed the minimum capital adequacy ratios to be categorized as well capitalized and also met the requirements of the Consent Order.



The balance of the net deferred income tax asset at December 31, 2010 represented tax assets and liabilities arising from temporary
differences between the financial reporting and income tax bases of various items as of that date. As of December 31, 2010, we evaluated whether it was more likely than not that the net deferred tax asset could be supported as realizable, given
the financial results for the year and change in control resulting from the Private Placement that was consummated on October 7,2010. Based on this evaluation, as described in more detail in Financial ConditionDeferred Tax Asset, we
recorded a valuation allowance for financial reporting purposes at December 31, 2010. Additionally, for regulatory capital purposes, deferred tax assets are limited to the assets which can be realized through (i) carryback to prior years
or (ii) taxable income in the next twelve months. At December 31, 2010, all of our net deferred tax asset was excluded from Tier 1 and total capital based on these criteria. We will continue to evaluate the realizability of our deferred
tax asset on a quarterly basis for both financial reporting and regulatory capital purposes. The evaluation may result in the inclusion of some of the deferred tax asset in regulatory capital in future periods.



See Item 8. Financial Statements and Supplementary Data,
Note 21, Regulatory Capital Requirements and Dividend Restrictions, for disclosures regarding the Companys and the Banks actual and required regulatory capital requirements and ratios.



Since December 31, 2010, no conditions or events have
occurred of which we are aware, that have resulted in a material change in the Companys or the Banks regulatory capital category other than as reported in this Annual Report on Form 10-K.



Equity.    We have authorized
common stock and preferred stock of 75 million and 2.5 million shares, respectively. In the Private Placement, 39,975,980 shares of common stock were issued on October 7, 2010, 1,230,029 shares were issued in connection with the
follow-on offering to legacy shareholders as of October 6, 2010, and 2,616,124 shares were issued to the institutional investors in the Private Placement in the first quarter 2011, resulting in remaining authorized but unissued common shares of
50,513,722 at February 22, 2011.



Government Financing.    We did not participate in the U.S. Treasurys Capital Purchase Program offered in
2008 based on our evaluation of the merits of the program at that time.



On September 27, 2010, the U.S. President signed into law the Small Business Jobs Act of 2010. The SBLF, which was enacted as part of the Act, a $30 billion fund that encourages lending to small
businesses by providing Tier 1 capital to qualified community banks with assets of less than $10 billion. On December 21, 2010, the U.S. Treasury published the application form, term sheet and their guidance for participation in the SBLF. Under
the terms of the SBLF, the Treasury will purchase shares of senior preferred stock from banks, bank holding companies, and other financial institutions that will qualify as Tier 1 capital for regulatory purposes and rank senior to a participating
institutions common stock. The application deadline for participating in the SBLF is March 31, 2011. Based on the program criteria, we do not plan to participate in the SBLF.



With respect to any other potential government assistance programs in the future, we will evaluate the merits
of the programs, including the terms of the financing, the Companys capital position, the cost to the Company of alternative capital, and the Companys strategy for the use of additional capital, to determine whether it is prudent to
participate.



56



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Private Trading System.    On June 26, 2009, we implemented
a Private Trading System on our website (www.palmettobank.com). The Private Trading System is a passive mechanism created to assist buyers and sellers in facilitating trades in our common stock. On June 30, 2009, the Company mailed a
letter and related materials to shareholders regarding the Private Trading System and elected to furnish this information as an exhibit to a Current Report on Form 8-K filed with the SEC on July 2, 2009 which can be accessed through the
SECs website (www.sec.gov).



One of the
requirements of the Private Placement is that the Company will use its reasonable best efforts to list the shares of our common stock on NASDAQ or another national securities exchange within nine months of the closing date of the Private Placement
on October 7, 2010. While we intend to list our common stock on NASDAQ, we are currently evaluating the listing requirements, and no assurances can be provided at this time that we will meet such listing requirements.



Board of Directors and
Governance.    During 2009 and 2010, as part of our ongoing self-assessment process, management and the Board of Directors focused on their governance roles and processes to improve the risk management oversight of the
Company, refine the roles and responsibilities of the Board of Directors and Board committees, and to support an overall healthy corporate culture. In 2010, the Board performed a self-assessment facilitated by an external consultant including
comparisons to best practices from recognized authorities such as the Business Roundtable, CalPERS, and the national stock exchanges. In 2009 and 2010, the Board also reviewed the Companys Articles of Incorporation and Bylaws and Committee
charters and updated them to fit the current and future size, structure, and business activities of the Company. Also, during 2009 and 2010, Committees of the Board determined annual Committee objectives and management refined its performance
evaluation process with a more detailed focus on roles and responsibilities and related accountabilities.



As a condition of the Private Placement, the Company appointed three designees of the investors to the Companys Board of Directors
effective October 12, 2010, and these designees have also been appointed to the Board of Directors of the Bank. Based on terms of the Private Placement the Board of Directors of the Company was reduced to 11 directors, including the three new
investor designees, immediately following the consummation of the Private Placement. The changes in the Boards of Directors were reported on a Current Report on Form 8-K filed with the SEC on October 18, 2010.



Derivative Activities



We are required to recognize all derivatives as either
assets or liabilities in the balance sheet and measure those instruments at fair value. Changes in the fair value of those derivatives are reported in current earnings or other comprehensive income depending on the purpose for which the derivative
is held and whether the derivative qualifies for hedge accounting.



We originate certain residential loans with the intention of selling these loans. Between the time that we enter into an interest rate lock commitment to originate a residential loan with a potential
borrower and the time the closed loan is sold, we are subject to variability in market prices related to these commitments. We also enter into forward sale agreements of to be issued loans. The commitments to originate residential loans
and forward sales commitments are freestanding derivative instruments and are recorded on the Consolidated Balance Sheets at fair value. They do not qualify for hedge accounting treatment. Fair value adjustments are recorded within Mortgage-banking
in the Consolidated Statements of Income (Loss).



At December 31, 2010, commitments to originate conforming loans totaled $12.2 million. At December 31, 2010, these derivative
loan commitments had positive fair values, included within Other assets in the Consolidated Balance Sheets, totaling $103 thousand and negative fair values, included with Other liabilities in the Consolidated Balance Sheets, totaling $40 thousand.
At December 31, 2009, commitments to originate conforming loans totaled $7.0 million. At December 31, 2009, these derivative loan commitments had positive



57



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fair values, included within Other assets in the Consolidated Balance Sheets, totaling $52 thousand, and negative fair values, included within Other liabilities in the Consolidated Balance
Sheets, totaling $11 thousand. The net change in derivative loan commitment fair values during the years ended December 31, 2010 and 2009, resulted in net derivative loan commitment income of $22 thousand and $41 thousand, respectively.



Forward sales commitments totaled $19.6 million
at December 31, 2010. At December 31, 2010, forward sales commitments had positive fair values, included with Other assets in the Consolidated Balance Sheets, totaling $175 thousand and negative fair values, included within Other
liabilities in the Consolidated Balance Sheets, totaling $96 thousand. At December 31, 2009, forward sales commitments totaled $10.0 million. At December 31, 2009, these forward sales commitments had positive fair values, included within
Other assets in the Consolidated Balance Sheets, totaling $92 thousand, and negative fair values, included within Other liabilities in the Consolidated Balance Sheets, totaling $1 thousand. The net change in forward sales commitment fair values
during the years ended December 31, 2010 and 2009 resulted in a loss of $12 thousand and income of $91 thousand, respectively.



Liquidity



General



Liquidity measures our ability to meet current and future cash flow needs as they become due. The liquidity of a financial institution
reflects its ability to accommodate possible outflows in deposit accounts, meet loan requests and commitments, maintain reserve requirements, pay operating expenses, provide funds for dividends and debt service, manage operations on an ongoing
basis, capitalize on new business opportunities, and take advantage of interest rate market opportunities. The ability of a financial institution to meet its current financial obligations is a function of its balance sheet structure, its ability to
liquidate assets, and its access to alternative sources of funds. We seek to ensure our funding needs are met by maintaining a level of liquid funds through proactive balance sheet management.



Asset liquidity is provided by liquid assets which are readily convertible into cash, are pledgeable or which
will mature in the near future. Our liquid assets may include cash, interest-bearing deposits in banks, investment securities available for sale, and federal funds sold. Liability liquidity is provided by access to funding sources, which include
deposits and borrowed funds. We may also issue equity securities although our common and preferred stock are not listed on a national exchange or quoted on the OTC Bulletin Board. Each of the Companys sources of liquidity is subject to various
factors beyond our control.



Liquidity resources
and balances at December 31, 2010, contained herein, are an accurate depiction of our activity during the period and, except as noted, have not materially changed to date.



In June 2009, we implemented a forward-looking liquidity plan
and increased our liquidity monitoring. The liquidity plan includes, among other things:



| |  |  | Implementing proactive customer deposit retention initiatives specific to large deposit customers and our deposit customers in general.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Executing targeted deposit growth and retention campaigns which resulted in retained and new certificates of deposit through June 30, 2010. Since
June 30, 2010, our deposits have remained stable through our normal growth and retention efforts, and therefore we have not utilized any special campaigns. In addition, given our cash position, in the fourth quarter 2010 and continuing into the
first quarter 2011, we are not pursuing special CD campaigns and have reduced our deposit pricing to allow our higher priced CDs to roll off as they mature.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Evaluating our sources of available financing and identifying additional collateral for pledging for FHLB and Federal Reserve borrowings.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------



58



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| |  |  | Accelerating the filing of our 2009 income tax refund claims resulting in refunds received totaling $20.9 million, all of which were received during
the three month period ended March 31, 2010, reduced by $661 thousand as a result of the filing of an amended 2009 federal income tax return in June 2010.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Planned filing of a 2008 income tax refund claim in early 2011for the carryback of net operating losses generated in 2010. The carryback of these
losses is expected to result in the refund of $7.4 million of income taxes previously paid for the 2008 tax year. The refund is expected to be received in 2011.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | During 2009 and most of 2010, maintaining cash received primarily from loan and security repayments invested in cash rather than being reinvested in
other earning assets. Maintaining this cash balance has reduced our interest income by $4.7 million for the year ended December 31, 2010 when compared with investing these funds at the average yield of 2.75% on our investment securities, since
we are retaining a higher level of cash instead of reinvesting this cash in higher yielding assets. Following the consummation of our Private Placement on October 7, 2010, we have redeployed, through February 22, 2011, $96.0 million of
this cash into investment securities and prepaid $91 million of FHLB advances which were scheduled to mature in January through April 2011.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



These measures resulted in an overall improved liquidity position at December 31, 2010 when compared with that of December 31,
2009.



Cash Flow Needs



In the normal course of business, we enter into various
transactions, some of which, in accordance with accounting principles generally accepted in the U.S., are not recorded in our Consolidated Balance Sheets. These transactions may involve, to varying degrees, elements of credit risk and interest rate
risk in excess of the amounts recognized in the Consolidated Balance Sheets, if any.



Lending Commitments and Standby Letters of Credit.    Unused lending commitments to customers are not recorded in our Consolidated Balance Sheets until funds are advanced,
except for those associated with mortgage loans held for sale as described in Financial ConditionDerivative Activities. For commercial customers, lending commitments generally take the form of unused revolving credit arrangements to finance
customers working capital requirements. For retail customers, lending commitments are generally unused lines of credit secured by residential property. At December 31, 2010, unused lending availability totaled $111.0 million.



Standby letters of credit are issued for customers in
connection with contracts between the customers and third parties. Letters of credit are conditional commitments issued by us to guarantee the performance of a customer to a third party. The maximum potential amount of undiscounted future payments
related to letters of credit at December 31, 2009 was $2.7 million compared with $4.6 million at December 31, 2009.



Our lending commitments and standby letters of credit do not meet the criteria to be accounted for at fair value since our commitment
letters contained material adverse change clauses. Accordingly, we account for these instruments in a manner similar to our loans.



We use the same credit policies in making and monitoring commitments as used for loan underwriting. Therefore, in general the methodology
to determine the reserve for unfunded commitments is inherently similar to that used to determine the general reserve component of the allowance for loan losses. However, commitments have fixed expiration dates and most of our commitments to extend
credit have adverse change clauses that allow the Bank to cancel the commitments based on various factors, including deterioration in the creditworthiness of the borrower. Accordingly, many of our loan commitments are expected to expire without
being drawn upon and therefore the total commitment amounts do not necessarily represent potential credit exposure. The credit reserve for unfunded commitments at December 31, 2010 was $99 thousand and is recorded in Other liabilities in the
Consolidated Balance Sheets.



59



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Derivatives.    See Derivative Activities, included
elsewhere in this item, for discussion regarding the Companys off-balance sheet arrangements and commitments related to our derivative loan commitments and freestanding derivatives.



Dividend Obligations.    The holders of the Companys common stock are entitled
to receive dividends, when and if declared by the Companys Board of Directors, out of funds legally available for such dividends. The Company is a legal entity separate and distinct from the Bank and depends on the payment of dividends from
the Bank. The Company and the Bank are subject to regulatory policies and requirements relating to the payment of dividends, including requirements to maintain adequate capital above regulatory minimums. The appropriate federal regulatory
authorities are authorized to determine under certain circumstances that the payment of dividends by a bank holding company or a bank would be an unsafe or unsound practice and to prohibit payment of those dividends. The appropriate federal
regulatory authorities have indicated that banking organizations should generally pay dividends only out of current income. In addition, as a South Carolina chartered bank, the Bank is subject to legal limitations on the amount of dividends it is
permitted to pay.



In an effort to retain capital
during this period of economic uncertainty, the Board of Directors reduced the quarterly dividend for the first quarter of 2009. For the three month period ended March 31, 2009, cash dividends were declared by the Board of Directors and paid
totaling $389 thousand, or $0.06 per common share. These dividends equate to a dividend payout ratio of 19.51% for the quarter ended March 31, 2009. The Board of Directors suspended the quarterly common stock dividend since the first quarter of
2009. The Board of Directors believes that suspension of the dividend was prudent to protect our capital base. In addition, payment of a dividend on our common stock requires prior notification to and non-objection from the applicable banking
regulators. Our Board of Directors will continue to evaluate dividend payment opportunities on a quarterly basis. There can be no assurance as to when and if future dividends will be reinstated, and at what level, because they are dependent on our
financial condition, results of operations, and / or cash flows, as well as capital and dividend regulations from the FDIC and others.



For the year ended December 31, 2008, cash dividends were declared by the Companys Board of Directors and paid totaling $5.2
million, or $0.80 per common share, respectively. These dividends equate to a dividend payout ratios of 37.89% for the same period. The Companys dividend payout ratio calculates the percentage of income paid to shareholders in the form of
dividends.



Long-Term Contractual
Obligations.    In addition to the contractual commitments and arrangements previously described, the Company enters into other contractual obligations in the ordinary course of business. The following table summarizes these
contractual obligations at December 31, 2010 (in thousands) except obligations for employee benefit plans as these obligations are paid from separately identified assets. See Item 8. Financial Statements and Supplementary Data, Note 14,
Employee Benefit Plans, for discussion regarding this employee benefit plan.



|                                          |  |                   |         |  |                            |   |         |                             |  |   |                |  |  |       |        |  |  |   |         | 
|----------------------------------------- |  | ----------------- | ------- |  | -------------------------- | - | ------- | --------------------------- |  | - | -------------- |  |  | ----- | ------ |  |  | - | ------- | 
|Other contractual obligations             |  | Less thanone year |         |  | Over onethrough threeyears |   |         | Over threethroughfive years |  |   | Over fiveyears |  |  | Total |       
|Real property operating lease obligations |  | $                 | 1,867   |  |                            | $ | 3,358   |                             |  | $ | 3,118          |  |  | $     | 12,740 |  |  | $ | 21,083  | 
|Time deposit accounts                     |  |                   | 367,673 |  |                            |   | 175,131 |                             |  |   | 3,801          |  |  |       | 34     |  |  |   | 546,639 | 
|FHLB advances                             |  |                   | 30,000  |  |                            |   | 5,000   |                             |  |   |               |  |  |       |       |  |  |   | 35,000  | 
|                                          |  |                   |         |  |                            |   |         |                             |  |   |                |  |  |       |        |  |  |   |         | 
|Total other contractual obligations       |  | $                 | 399,540 |  |                            | $ | 183,489 |                             |  | $ | 6,919          |  |  | $     | 12,774 |  |  | $ | 602,722 | 
|                                          |  |                   |         |  |                            |   |         |                             |  |   |                |  |  |       |        |  |  |   |         | 



In January 2011, we prepaid
$30.0 million of FHLB advances due in 2011.



Obligations under noncancelable real property operating lease agreements noted above are payable over several years with the longest
obligation expiring in 2029. Option periods that the Company has not yet exercised are not included in the preceding table.



60



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Real property operating lease obligations summarized in the preceding table:



| |  |  | Are net of payments to be received under a sublease agreement with a third party with regard to the Companys previous Blackstock Road banking
office for which we are contracted under a lease agreement as Lessee. This lease is scheduled to expire in February 2011.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Include obligations with regard to one banking office that was consolidated during 2008 that is leased by the Company and currently vacant. Management
is considering options with regard to this leased location.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Do not include periodic increases in lease payments for the Rock Hill operating building lease and operating lease for additional office space. Lease
payment increases are subject to consumer price index changes. We do not believe that future minimum lease payments relative to these locations will significantly differ from current obligations at December 31, 2010. Therefore, current lease
obligations have been used to determine the operating lease obligations in the preceding table. Obligations under these operating lease agreements are payable over several years with the building lease expiring in 2015 and the additional office
space lease expiring in 2011.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Do not include the parking leases in downtown Greenville which are paid month-to-month.
| | - |  | ---------------------------------------------------------------------------------------



We relocated our corporate headquarters to downtown
Greenville, South Carolina during March 2009 into a leased facility.



The Company enters into agreements with third parties with respect to the leasing, servicing, and maintenance of equipment. However, because we believe that these agreements are immaterial when considered
individually, or in the aggregate, with regard to our Consolidated Financial Statements, we have not included such agreements in the preceding contractual obligations table. Therefore, we believe that noncompliance with terms of such agreements
would not have a material impact on our business, financial condition, results of operations, and cash flows. Furthermore, as most such commitments are entered into for a 12-month period with option extensions, long-term obligations beyond 2011
cannot be reasonably estimated at this time.



Short-Term Contractual and Noncontractual Obligations.    In conjunction with our annual budgeting process,
capital expenditures are approved for the coming year. During the budgeting process for 2011, the Board of Directors approved $2.4 million in capital expenditures related to technology and facilities. Generally, purchase obligations are not made in
advance of such purchases, although to obtain discounted pricing we may enter into such arrangements. In addition, we anticipate that expenditures will be required during 2011 that could not have been expected and, therefore, were not approved in
the budgeting process. Funds to fulfill both budgeted and nonbudgeted commitments will come from our operational cash flows.



Although we expect to make capital expenditures in years subsequent to 2011, capital expenditures are reviewed on an annual basis.
Therefore, we have not yet estimated such capital expenditure obligations for years subsequent to 2011.



61



---

Earnings Review



Overview



PALMETTO BANCSHARES, INC. AND SUBSIDIARY



Consolidated Statements of Income (Loss)

(dollars in thousands, except per share data)



|                                                                |  |                                  |            |   |                         |   |           |      |  |   |                |   |  |                 |         |   |  |  |        |   
|--------------------------------------------------------------- |  | -------------------------------- | ---------- | - | ----------------------- | - | --------- | ---- |  | - | -------------- | - |  | --------------- | ------- | - |  |  | ------ | --
|                                                                |  | For the years ended December 31, |            |   | 2010 to 2009 comparison |  
|                                                                |  | 2010                             |            |   | 2009                    |   |           | 2008 |  |   | Dollarvariance |   |  | Percentvariance |        
|Interest income                                                 |  |                                  |            |   |                         |   |           |      |  |   |                |   |  |                 |         |   |  |  |        |   
|Interest earned on cash and cash equivalents                    |  | $                                | 498        |   |                         | $ | 215       |      |  | $ | 106            |   |  | $               | 283     |   |  |  | 131.6  | % 
|Dividends received on FHLB stock                                |  |                                  | 23         |   |                         |   | 19        |      |  |   | 189            |   |  |                 | 4       |   |  |  | 21.1   |   
|Interest earned on investment securities available for sale     |  |                                  | 3,725      |   |                         |   | 5,667     |      |  |   | 6,010          |   |  |                 | (1,942  | ) |  |  | (34.3  | ) 
|Interest and fees earned on loans                               |  |                                  | 52,381     |   |                         |   | 60,309    |      |  |   | 71,940         |   |  |                 | (7,928  | ) |  |  | (13.1  | ) 
|                                                                |  |                                  |            |   |                         |   |           |      |  |   |                |   |  |                 |         |   |  |  |        |   
|Total interest income                                           |  |                                  | 56,627     |   |                         |   | 66,210    |      |  |   | 78,245         |   |  |                 | (9,583  | ) |  |  | (14.5  | ) 
|Interest expense                                                |  |                                  |            |   |                         |   |           |      |  |   |                |   |  |                 |         |   |  |  |        |   
|Interest paid on deposits                                       |  |                                  | 13,560     |   |                         |   | 19,511    |      |  |   | 23,694         |   |  |                 | (5,951  | ) |  |  | (30.5  | ) 
|Interest paid on retail repurchase agreements                   |  |                                  | 57         |   |                         |   | 58        |      |  |   | 247            |   |  |                 | (1      | ) |  |  | (1.7   | ) 
|Interest paid on commercial paper                               |  |                                  | 21         |   |                         |   | 60        |      |  |   | 359            |   |  |                 | (39     | ) |  |  | (65.0  | ) 
|Interest paid on other short-term borrowings                    |  |                                  |           |   |                         |   | 33        |      |  |   | 301            |   |  |                 | (33     | ) |  |  | (100.0 | ) 
|Interest paid on FHLB borrowings                                |  |                                  | 1,708      |   |                         |   | 1,777     |      |  |   | 2,005          |   |  |                 | (69     | ) |  |  | (3.9   | ) 
|Interest paid on long-term borrowings                           |  |                                  | 20         |   |                         |   |          |      |  |   |               |   |  |                 | 20      |   |  |  | 100.0  |   
|                                                                |  |                                  |            |   |                         |   |           |      |  |   |                |   |  |                 |         |   |  |  |        |   
|Total interest expense                                          |  |                                  | 15,366     |   |                         |   | 21,439    |      |  |   | 26,606         |   |  |                 | (6,073  | ) |  |  | (28.3  | ) 
|                                                                |  |                                  |            |   |                         |   |           |      |  |   |                |   |  |                 |         |   |  |  |        |   
|Net interest income                                             |  |                                  | 41,261     |   |                         |   | 44,771    |      |  |   | 51,639         |   |  |                 | (3,510  | ) |  |  | (7.8   | ) 
|Provision for loan losses                                       |  |                                  | 47,100     |   |                         |   | 73,400    |      |  |   | 5,619          |   |  |                 | (26,300 | ) |  |  | (35.8  | ) 
|                                                                |  |                                  |            |   |                         |   |           |      |  |   |                |   |  |                 |         |   |  |  |        |   
|Net interest income (expense) after provision for loan losses   |  |                                  | (5,839     | ) |                         |   | (28,629   | )    |  |   | 46,020         |   |  |                 | 22,790  |   |  |  | (79.6  | ) 
|                                                                |  |                                  |            |   |                         |   |           |      |  |   |                |   |  |                 |         |   |  |  |        |   
|Noninterest income                                              |  |                                  |            |   |                         |   |           |      |  |   |                |   |  |                 |         |   |  |  |        |   
|Service charges on deposit accounts, net                        |  |                                  | 7,543      |   |                         |   | 8,275     |      |  |   | 8,596          |   |  |                 | (732    | ) |  |  | (8.8   | ) 
|Fees for trust and investment management and brokerage services |  |                                  | 2,597      |   |                         |   | 2,275     |      |  |   | 2,996          |   |  |                 | 322     |   |  |  | 14.2   |   
|Mortgage-banking                                                |  |                                  | 1,794      |   |                         |   | 1,903     |      |  |   | 1,264          |   |  |                 | (109    | ) |  |  | (5.7   | ) 
|Automatic teller machine                                        |  |                                  | 1,300      |   |                         |   | 1,389     |      |  |   | 1,234          |   |  |                 | (89     | ) |  |  | (6.4   | ) 
|Merchant services                                               |  |                                  | 937        |   |                         |   | 1,079     |      |  |   | 1,129          |   |  |                 | (142    | ) |  |  | (13.2  | ) 
|Bankcard services                                               |  |                                  | 1,793      |   |                         |   | 658       |      |  |   | 724            |   |  |                 | 1,135   |   |  |  | 172.5  |   
|Investment securities gains                                     |  |                                  | 10         |   |                         |   | 2         |      |  |   | 1              |   |  |                 | 8       |   |  |  | 400.0  |   
|Other                                                           |  |                                  | 1,627      |   |                         |   | 1,850     |      |  |   | 2,073          |   |  |                 | (223    | ) |  |  | (12.1  | ) 
|                                                                |  |                                  |            |   |                         |   |           |      |  |   |                |   |  |                 |         |   |  |  |        |   
|Total noninterest income                                        |  |                                  | 17,601     |   |                         |   | 17,431    |      |  |   | 18,017         |   |  |                 | (170    | ) |  |  | (1.0   | ) 
|Noninterest expense                                             |  |                                  |            |   |                         |   |           |      |  |   |                |   |  |                 |         |   |  |  |        |   
|Salaries and other personnel                                    |  |                                  | 24,677     |   |                         |   | 24,463    |      |  |   | 23,774         |   |  |                 | 214     |   |  |  | 0.9    |   
|Occupancy                                                       |  |                                  | 4,778      |   |                         |   | 4,293     |      |  |   | 3,293          |   |  |                 | 485     |   |  |  | 11.3   |   
|Furniture and equipment                                         |  |                                  | 3,841      |   |                         |   | 3,407     |      |  |   | 3,823          |   |  |                 | 434     |   |  |  | 12.7   |   
|Loss (gain) on disposition of premises and equipment            |  |                                  | 37         |   |                         |   | 81        |      |  |   | (2             | ) |  |                 | (44     | ) |  |  | (54.3  | ) 
|Professional services                                           |  |                                  | 2,507      |   |                         |   | 1,709     |      |  |   | 942            |   |  |                 | 798     |   |  |  | 46.7   |   
|FDIC deposit insurance assessment                               |  |                                  | 4,487      |   |                         |   | 3,261     |      |  |   | 786            |   |  |                 | 1,226   |   |  |  | 37.6   |   
|Marketing                                                       |  |                                  | 1,407      |   |                         |   | 1,114     |      |  |   | 1,576          |   |  |                 | 293     |   |  |  | 26.3   |   
|Foreclosed real estate writedowns and expenses                  |  |                                  | 11,656     |   |                         |   | 3,233     |      |  |   | 516            |   |  |                 | 8,423   |   |  |  | 260.5  |   
|Goodwill impairment                                             |  |                                  | 3,691      |   |                         |   |          |      |  |   |               |   |  |                 | 3,691   |   |  |  | 100.0  |   
|Loss on commercial loans held for sale                          |  |                                  | 7,562      |   |                         |   |          |      |  |   |               |   |  |                 | 7,562   |   |  |  | 100.0  |   
|Other                                                           |  |                                  | 8,663      |   |                         |   | 9,454     |      |  |   | 8,266          |   |  |                 | (791    | ) |  |  | (8.4   | ) 
|                                                                |  |                                  |            |   |                         |   |           |      |  |   |                |   |  |                 |         |   |  |  |        |   
|Total noninterest expense                                       |  |                                  | 73,306     |   |                         |   | 51,015    |      |  |   | 42,974         |   |  |                 | 22,291  |   |  |  | 43.7   |   
|                                                                |  |                                  |            |   |                         |   |           |      |  |   |                |   |  |                 |         |   |  |  |        |   
|Net income (loss) before provision (benefit) for income taxes   |  |                                  | (61,544    | ) |                         |   | (62,213   | )    |  |   | 21,063         |   |  |                 | 669     |   |  |  | (1.1   | ) 
|                                                                |  |                                  |            |   |                        
|Provision (benefit) for income taxes                            |  |                                  | (1,342     | ) |                         |   | (22,128   | )    |  |   | 7,464          |   |  |                 | 20,786  |   |  |  | (93.9  | ) 
|                                                                |  |                                  |            |   |                         |   |           |      |  |   |                |   |  |                 |         |   |  |  |        |   
|Net income (loss)                                               |  | $                                | (60,202    | ) |                         | $ | (40,085   | )    |  | $ | 13,599         |   |  | $               | (20,117 | ) |  |  | 50.2   | % 
|                                                                |  |                                  |            |   |                         |   |           |      |  |   |                |   |  |                 |         |   |  |  |        |   
|                                                                |  |                                  |            |   |                        
|Common and per share data                                       |  |                                  |            |   |                         |   |           |      |  |   |                |   |  |                 |         |   |  |  |        |   
|Net income (loss)basic                                         |  | $                                | (3.78      | ) |                         | $ | (6.21     | )    |  | $ | 2.11           |   |  | $               | 2.43    |   |  |  | (39.1  | )%
|Net income (loss)diluted                                       |  |                                  | (3.78      | ) |                         |   | (6.21     | )    |  |   | 2.09           |   |  | $               | 2.43    |   |  |  | (39.1  | ) 
|Cash dividends                                                  |  |                                  |           |   |                         |   | 0.06      |      |  |   | 0.80           |   |  | $               | (0.06   | ) |  |  | (100.0 | ) 
|Book value                                                      |  |                                  | 2.40       |   |                         |   | 11.55     |      |  |   | 17.96          |   |  | $               | (9.15   | ) |  |  | (79.2  | ) 
|                                                                |  |                                  |            |   |                        
|Weighted average common shares outstandingbasic                |  |                                  | 15,913,000 |   |                         |   | 6,449,754 |      |  |   | 6,438,071      |   |  |                 |         |   |  |  |        |   
|Weighted average common shares outstandingdiluted              |  |                                  | 15,913,000 |   |                         |   | 6,449,754 |      |  |   | 6,519,849      |   |  |                 |         |   |  |  |        |   



62



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Summary



Historically, our earnings were driven primarily by a high
net interest margin which allowed for a higher expense base related primarily to personnel and facilities. However, given the narrowing of our net interest margin due to the reduction of 500 to 525 basis points in interest rates by the Federal
Reserve in 2007 and 2008, we have become much more focused on increasing our noninterest income and managing expenses. In addition, we are realigning our lending focus to originate higher yielding loan portfolio segments with lower historical loss
rates. To accelerate efforts to improve our earnings, we also engaged external strategic consulting firms in 2010 which specialize in assessment of banking products and services, revenue enhancements, and efficiency reviews.



One of the components of our Strategic Project Plan is an
earnings plan that is focused on earnings improvement through a combination of revenue increases and expense reductions. In summary, to date:



| |  |  | With respect to net interest income, we have implemented risk-based loan pricing and interest rate floors on renewed and new loans meeting certain
criteria. At December 31, 2010, loans aggregating $214.6 million had interest rate floors, of which $196.1 million had floors greater than or equal to 5%. In June and July 2010, we began loan specials intended to generate additional loan volume
for residential mortgage, auto, credit card, consumer, and commercial loans. In light of the current low interest rate environment, we have also reduced the interest rates paid on our deposit accounts. Given expectations for rising interest rates,
during 2010 we borrowed longer-term advances from the FHLB and extended maturities on certain CD specials to lock in the current low interest rates. In December 2010 and January 2011, we used excess cash earning 0.25 basis points to prepay $91.0
million of FHLB advances bearing interest at an average rate of 1.58%.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Regarding noninterest income, we are evaluating other noninterest sources of income. For example, in March 2010, we introduced a new checking account,
MyPal checking, and a new savings account, Smart Savings, both of which provide noninterest income resulting from service charges or debit card transactions. We evaluated the profitability of all of our pre-existing checking accounts and in October
2010 upgraded a large number of unprofitable checking accounts to the MyPal account. We also revised our existing fees and implemented new fees, with various implementation dates generally between October 1, 2010 and March 31, 2011.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Regarding noninterest expenses, we identified specific noninterest expense reductions realized in 2009 and 2010 and are continuing to review other
expense areas for additional reductions. These expense reductions have been and will be partially offset by the higher level of credit-related costs incurred due to legal, consulting, and carrying costs related to our higher level of nonperforming
assets.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We continue to critically evaluate each of our businesses to determine their contribution to our financial performance and their relative risk / return
relationship. Based on the evaluation to date, we sold two product lines during 2010. In March 2010, we sold our merchant services product line and entered into a referral and services agreement with Global Direct which resulted in a net gain of
$587 thousand. Similarly, in December 2010 we sold our credit card portfolio and entered into a joint marketing agreement with Elan Financial Services, Inc., resulting in a net gain of $1.2 million.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



We are continuing our keen focus on improving credit quality
and earnings. Overall, with the completion of the Private Placement in October 2010, we are in the process of repositioning the balance sheet as part of our balance sheet management efforts to utilize our excess cash more effectively to improve our
net interest margin. This includes investing in higher yielding investment securities until loan growth resumes, as well as paying down higher priced funding such as FHLB advances and maturing CDs. We are also continuing to adapt our organizational
structure to fit the current and future size and scope of our business activities and operations. Such efforts include hiring management personnel with specialized industry experience, more specifically delineating our businesses, and preparing
go to market strategies with relevant products and services and marketing plans by business.



63



---

Net Interest Income



General.    Net interest income is the difference between interest income earned on
interest-earning assets, primarily loans and investment securities, and interest expense paid on interest-bearing deposits and other interest-bearing liabilities. This measure represents the largest component of income for us. The net interest
margin measures how effectively we manage the difference between the interest income earned on interest-earning assets and the interest expense paid for funds to support those assets. Changes in interest rates earned on interest-earning assets and
interest rates paid on interest-bearing liabilities, the rate of growth of the interest-earning assets and interest-bearing liabilities base, the ratio of interest-earning assets to interest-bearing liabilities, and the management of interest rate
sensitivity factor into fluctuations within net interest income.



During the second half of 2008 and continuing in 2009 and 2010, the financial markets experienced significant volatility resulting from the continued fallout of subprime lending and the global liquidity
crisis. A multitude of government initiatives along with interest rate cuts by the Federal Reserve have been designed to improve liquidity for the distressed financial markets and stabilize the banking system. The relationship between declining
interest-earning asset yields and more slowly declining interest-bearing liability costs has caused, and may continue to cause, net interest margin compression. Net interest margin compression may also continue to be impacted by continued
deterioration of assets resulting in further interest income adjustments.



Net interest income totaled $41.3 million for the year ended December 31, 2010 compared with $44.8 million for the year ended December 31, 2009. Overall, interest income in 2010 was negatively
impacted by the following:



| |  |  | Reduction in interest rates by the Federal Reserve by 500 to 525 basis points throughout 2007 and 2008. In response, taking into consideration the
yields earned and rates paid, we have refined the type of loan and deposit products we prefer to pursue and are exercising more discipline in our loan and deposit interest rate levels. We have also implemented interest rate floors on loans. At
December 31, 2010, loans aggregating $214.6 million had interest rate floors, of which $196.1 million had floors greater than or equal to 5%.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Higher level of loans placed in nonaccrual status during the period; foregone interest on nonaccrual loans for the year ended December 31, 2010
totaled $4.3 million.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Maintaining cash received primarily from loan and security repayments invested in cash rather than being reinvested in other earning assets.
Maintaining this cash balance has reduced our interest income by $4.7 million for the year ended December 31, 2010 when compared with investing these funds at the average yield of 2.75% on our investment securities, since we are retaining a
higher level of cash instead of reinvesting this cash in higher yielding assets. Given the consummation of our Private Placement on October 7, 2010, we have begun redeploying this cash balance into investment securities and also prepaid $91
million of FHLB advances in December 2010 and January 2011 scheduled to mature in January through April 2011.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Reduction of $246.9 million in the loan portfolio, including the net transfer of $82.9 million commercial real estate loans to the held for sale
portfolio in 2010.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------



Average
Balance Sheets and Net Interest Income/Margin Analysis.    The following table summarizes our average balance sheets and net interest income / margin analysis for the periods indicated (dollars in thousands). Our interest
yield earned on interest-earning assets and interest rate paid on interest-bearing liabilities shown in the table are derived by dividing interest income and expense by the average balances of interest-earning assets or interest-bearing liabilities,
respectively. The following table does not include a tax-equivalent adjustment to net interest income for interest-earning assets earning tax-exempt income to a comparable yield on a taxable basis.



64



---

|                                                         |  |                                  |           |   |                |   |        |            |  |  |                |   |  |                |           |   |            |   |        |                |  |  |                |   |  |            |           |   |  |   |        |  |  |  |      |  
|-------------------------------------------------------- |  | -------------------------------- | --------- | - | -------------- | - | ------ | ---------- |  |  | -------------- | - |  | -------------- | --------- | - | ---------- | - | ------ | -------------- |  |  | -------------- | - |  | ---------- | --------- | - |  | - | ------ |  |  |  | ---- | -
|                                                         |  | For the years ended December 31, |          
|                                                         |  | 2010                             |           |   | 2009           |   |        | 2008       | 
|                                                         |  | Averagebalance                   |           |   | Income/expense |   |        | Yield/rate |  |  | Averagebalance |   |  | Income/expense |           |   | Yield/rate |   |        | Averagebalance |  |  | Income/expense |   |  | Yield/rate |          
|Assets                                                   |  |                                  |           |   |                |   |        |            |  |  |                |   |  |                |           |   |            |   |        |                |  |  |                |   |  |            |           |   |  |   |        |  |  |  |      |  
|Interest-earnings assets                                 |  |                                  |           |   |                |   |        |            |  |  |                |   |  |                |           |   |            |   |        |                |  |  |                |   |  |            |           |   |  |   |        |  |  |  |      |  
|Cash and cash equivalents                                |  | $                                | 215,482   |   |                | $ | 498    |            |  |  | 0.23           | % |  | $              | 96,546    |   |            | $ | 215    |                |  |  | 0.22           | % |  | $          | 9,365     |   |  | $ | 106    |  |  |  | 1.13 | %
|FHLB stock                                               |  |                                  | 6,908     |   |                |   | 23     |            |  |  | 0.33           |   |  |                | 6,363     |   |            |   | 19     |                |  |  | 0.30           |   |  |            | 5,640     |   |  |   | 189    |  |  |  | 3.35 |  
|Investment securities available for sale, taxable (1)    |  |                                  | 91,338    |   |                |   | 2,251  |            |  |  | 2.46           |   |  |                | 70,693    |   |            |   | 4,027  |                |  |  | 5.70           |   |  |            | 71,778    |   |  |   | 4,204  |  |  |  | 5.86 |  
|Investment securities available for sale, nontaxable (1) |  |                                  | 44,041    |   |                |   | 1,474  |            |  |  | 3.35           |   |  |                | 48,545    |   |            |   | 1,640  |                |  |  | 3.38           |   |  |            | 51,773    |   |  |   | 1,806  |  |  |  | 3.49 |  
|Loans (2)                                                |  |                                  | 967,882   |   |                |   | 52,381 |            |  |  | 5.41           |   |  |                | 1,130,809 |   |            |   | 60,309 |                |  |  | 5.33           |   |  |            | 1,111,436 |   |  |   | 71,940 |  |  |  | 6.47 |  
|                                                         |  |                                  |           |   |                |   |        |            |  |  |                |   |  |                |           |   |            |   |        |                |  |  |                |   |  |            |           |   |  |   |        |  |  |  |      |  
|Total interest-earning assets                            |  |                                  | 1,325,651 |   |                |   | 56,627 |            |  |  | 4.27           |   |  |                | 1,352,956 |   |            |   | 66,210 |                |  |  | 4.89           |   |  |            | 1,249,992 |   |  |   | 78,245 |  |  |  | 6.26 |  
|                                                         |  |                                  |           |   |                |   |        |            |  |  |                |   |  |                |           |   |            |   |        |                |  |  |                |   |  |            |           |   |  |   |        |  |  |  |      |  
|Noninterest-earning assets                               |  |                                  |           |   |                |   |        |            |  |  |                |   |  |                |           |   |            |   |        |                |  |  |                |   |  |            |           |   |  |   |        |  |  |  |      |  
|Cash and cash equivalents                                |  |                                  | 11,438    |   |                |   |        |            |  |  |                |   |  |                | 23,022    |   |            |   |        |                |  |  |                |   |  |            | 25,915    |   |  |   |        |  |  |  |      |  
|Allowance for loan losses                                |  |                                  | (25,818   | ) |                |   |        |            |  |  |                |   |  |                | (16,831   | ) |            |   |        |                |  |  |                |   |  |            | (7,611    | ) |  |   |        |  |  |  |      |  
|Premises and equipment, net                              |  |                                  | 29,217    |   |                |   |        |            |  |  |                |   |  |                | 28,931    |   |            |   |        |                |  |  |                |   |  |            | 24,704    |   |  |   |        |  |  |  |      |  
|Goodwill                                                 |  |                                  | 2,749     |   |                |   |        |            |  |  |                |   |  |                | 3,688     |   |            |   |        |                |  |  |                |   |  |            | 3,688     |   |  |   |        |  |  |  |      |  
|Accrued interest receivable                              |  |                                  | 4,223     |   |                |   |        |            |  |  |                |   |  |                | 4,934     |   |            |   |        |                |  |  |                |   |  |            | 6,012     |   |  |   |        |  |  |  |      |  
|Real estate acquired in settlement of loans              |  |                                  | 25,952    |   |                |   |        |            |  |  |                |   |  |                | 14,887    |   |            |   |        |                |  |  |                |   |  |            | 7,563     |   |  |   |        |  |  |  |      |  
|Income tax refund receivable                             |  |                                  | 7,231     |   |                |   |        |            |  |  |                |   |  |                | 57        |   |            |   |        |                |  |  |                |   |  |            |          |   |  |   |        |  |  |  |      |  
|Deferred tax asset, net                                  |  |                                  | 8,761     |   |                |   |        |            |  |  |                |   |  |                | 7,677     |   |            |   |        |                |  |  |                |   |  |            |          |   |  |   |        |  |  |  |      |  
|Other                                                    |  |                                  | 10,188    |   |                |   |        |            |  |  |                |   |  |                | 9,402     |   |            |   |        |                |  |  |                |   |  |            | 11,460    |   |  |   |        |  |  |  |      |  
|                                                         |  |                                  |           |   |                |   |        |            |  |  |                |   |  |                |           |   |            |   |        |                |  |  |                |   |  |            |           |   |  |   |        |  |  |  |      |  
|Total noninterest-earning assets                         |  |                                  | 73,941    |   |                |   |        |            |  |  |                |   |  |                | 75,767    |   |            |   |        |                |  |  |                |   |  |            | 71,731    |   |  |   |        |  |  |  |      |  
|                                                         |  |                                  |           |   |                |   |        |            |  |  |                |   |  |                |           |   |            |   |        |                |  |  |                |   |  |            |           |   |  |   |        |  |  |  |      |  
|Total assets                                             |  | $                                | 1,399,592 |   |                |   |        |            |  |  |                |   |  | $              | 1,428,723 |   |            |   |        |                |  |  |                |   |  | $          | 1,321,723 |   |  |   |        |  |  |  |      |  
|                                                         |  |                                  |           |   |                |   |        |            |  |  |                |   |  |                |           |   |            |   |        |                |  |  |                |   |  |            |           |   |  |   |        |  |  |  |      |  
|Liabilities and Shareholders Equity                     |  |                                  |           |   |                |   |        |            |  |  |                |   |  |                |           |   |            |   |        |                |  |  |                |   |  |            |           |   |  |   |        |  |  |  |      |  
|Liabilities                                              |  |                                  |           |   |                |   |        |            |  |  |                |   |  |                |           |   |            |   |        |                |  |  |                |   |  |            |           |   |  |   |        |  |  |  |      |  
|Interest-bearing liabilities                             |  |                                  |           |   |                |   |        |            |  |  |                |   |  |                |           |   |            |   |        |                |  |  |                |   |  |            |           |   |  |   |        |  |  |  |      |  
|Transaction deposit accounts                             |  | $                                | 292,696   |   |                | $ | 248    |            |  |  | 0.08           | % |  | $              | 323,613   |   |            | $ | 526    |                |  |  | 0.16           | % |  | $          | 374,382   |   |  | $ | 4,966  |  |  |  | 1.33 | %
|Money market deposit accounts                            |  |                                  | 137,955   |   |                |   | 622    |            |  |  | 0.45           |   |  |                | 108,566   |   |            |   | 602    |                |  |  | 0.55           |   |  |            | 105,834   |   |  |   | 1,922  |  |  |  | 1.82 |  
|Savings deposit accounts                                 |  |                                  | 46,112    |   |                |   | 124    |            |  |  | 0.27           |   |  |                | 40,871    |   |            |   | 132    |                |  |  | 0.32           |   |  |            | 37,692    |   |  |   | 129    |  |  |  | 0.34 |  
|Time deposit accounts                                    |  |                                  | 552,854   |   |                |   | 12,566 |            |  |  | 2.27           |   |  |                | 578,026   |   |            |   | 18,251 |                |  |  | 3.16           |   |  |            | 400,516   |   |  |   | 16,677 |  |  |  | 4.16 |  
|                                                         |  |                                  |           |   |                |   |        |            |  |  |                |   |  |                |           |   |            |   |        |                |  |  |                |   |  |            |           |   |  |   |        |  |  |  |      |  
|Total interest-bearing deposits                          |  |                                  | 1,029,617 |   |                |   | 13,560 |            |  |  | 1.32           |   |  |                | 1,051,076 |   |            |   | 19,511 |                |  |  | 1.86           |   |  |            | 918,424   |   |  |   | 23,694 |  |  |  | 2.58 |  
|Retail repurchase agreements                             |  |                                  | 22,809    |   |                |   | 57     |            |  |  | 0.25           |   |  |                | 23,227    |   |            |   | 58     |                |  |  | 0.25           |   |  |            | 18,063    |   |  |   | 247    |  |  |  | 1.37 |  
|Commercial paper (Master notes)                          |  |                                  | 8,435     |   |                |   | 21     |            |  |  | 0.25           |   |  |                | 24,085    |   |            |   | 60     |                |  |  | 0.25           |   |  |            | 32,415    |   |  |   | 359    |  |  |  | 1.11 |  
|Other short-term borrowings                              |  |                                  | 1         |   |                |   |       |            |  |  |               |   |  |                | 5,335     |   |            |   | 33     |                |  |  | 0.62           |   |  |            | 13,240    |   |  |   | 301    |  |  |  | 2.27 |  
|FHLB borrowings                                          |  |                                  | 95,231    |   |                |   | 1,708  |            |  |  | 1.79           |   |  |                | 78,166    |   |            |   | 1,777  |                |  |  | 2.27           |   |  |            | 76,718    |   |  |   | 2,005  |  |  |  | 2.61 |  
|Convertible debt                                         |  |                                  | 199       |   |                |   | 20     |            |  |  | 10.06          |   |  |                |          |   |            |   |       |                |  |  |               |   |  |            |          |   |  |   |       |  |  |  |     |  
|                                                         |  |                                  |           |   |                |   |        |            |  |  |                |   |  |                |           |   |            |   |        |                |  |  |                |   |  |            |           |   |  |   |        |  |  |  |      |  
|Total interest-bearing liabilities                       |  |                                  | 1,156,292 |   |                |   | 15,366 |            |  |  | 1.33           |   |  |                | 1,181,889 |   |            |   | 21,439 |                |  |  | 1.81           |   |  |            | 1,058,860 |   |  |   | 26,606 |  |  |  | 2.51 |  
|                                                         |  |                                  |           |   |                |   |        |            |  |  |                |   |  |                |           |   |            |   |        |                |  |  |                |   |  |            |           |   |  |   |        |  |  |  |      |  
|Noninterest-bearing deposits                             |  |                                  |           |   |                |   |        |            |  |  |                |   |  |                |           |   |            |   |        |                |  |  |                |   |  |            |           |   |  |   |        |  |  |  |      |  
|Noninterest-bearing deposits                             |  |                                  | 143,974   |   |                |   |        |            |  |  |                |   |  |                | 134,138   |   |            |   |        |                |  |  |                |   |  |            | 138,373   |   |  |   |        |  |  |  |      |  
|Accrued interest payable                                 |  |                                  | 1,588     |   |                |   |        |            |  |  |                |   |  |                | 2,209     |   |            |   |        |                |  |  |                |   |  |            | 2,301     |   |  |   |        |  |  |  |      |  
|Other                                                    |  |                                  | 10,275    |   |                |   |        |            |  |  |                |   |  |                | 3,581     |   |            |   |        |                |  |  |                |   |  |            | 5,967     |   |  |   |        |  |  |  |      |  
|                                                         |  |                                  |           |   |                |   |        |            |  |  |                |   |  |                |           |   |            |   |        |                |  |  |                |   |  |            |           |   |  |   |        |  |  |  |      |  
|Total noninterest-bearing liabilities                    |  |                                  | 155,837   |   |                |   |        |            |  |  |                |   |  |                | 139,928   |   |            |   |        |                |  |  |                |   |  |            | 146,641   |   |  |   |        |  |  |  |      |  
|                                                         |  |                                  |           |   |                |   |        |            |  |  |                |   |  |                |           |   |            |   |        |                |  |  |                |   |  |            |           |   |  |   |        |  |  |  |      |  
|Total liabilities                                        |  |                                  | 1,312,129 |   |                |   |        |            |  |  |                |   |  |                | 1,321,817 |   |            |   |        |                |  |  |                |   |  |            | 1,205,501 |   |  |   |        |  |  |  |      |  
|                                                         |  |                                  |           |   |                |   |        |            |  |  |                |   |  |                |           |   |            |   |        |                |  |  |                |   |  |            |           |   |  |   |        |  |  |  |      |  
|Shareholders equity                                     |  |                                  | 87,463    |   |                |   |        |            |  |  |                |   |  |                | 106,906   |   |            |   |        |                |  |  |                |   |  |            | 116,222   |   |  |   |        |  |  |  |      |  
|                                                         |  |                                  |           |   |                |   |        |            |  |  |                |   |  |                |           |   |            |   |        |                |  |  |                |   |  |            |           |   |  |   |        |  |  |  |      |  
|Total liabilities and shareholders equity               |  | $                                | 1,399,592 |   |                |   |        |            |  |  |                |   |  | $              | 1,428,723 |   |            |   |        |                |  |  |                |   |  | $          | 1,321,723 |   |  |   |        |  |  |  |      |  
|                                                         |  |                                  |           |   |                |   |        |            |  |  |                |   |  |                |           |   |            |   |        |                |  |  |                |   |  |            |           |   |  |   |        |  |  |  |      |  
|NET INTEREST INCOME/NET YIELD ON INTEREST-EARNING ASSETS |  |                                  |           |   |                | $ | 41,261 |            |  |  | 3.11           | % |  |                |           |   |            | $ | 44,771 |                |  |  | 3.31           | % |  |            |           |   |  | $ | 51,639 |  |  |  | 4.13 | %
|                                                         |  |                                  |           |   |                |   |        |            |  |  |                |   |  |                |           |   |            |   |        |                |  |  |                |   |  |            |           |   |  |   |        |  |  |  |      |  



|(1) |  | The average balances for investment securities include the applicable unrealized gain or loss recorded for available for sale securities.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Calculated including mortgage and commercial loans held for sale, excluding the allowance for loan losses. Nonaccrual loans are included in average balances for yield
computations. The impact of foregone interest income as a result of loans on nonaccrual was not considered in the above analysis. All loans and deposits are domestic.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



65



---

Federal Reserve Rate Influences.    The Federal Reserve
influences the general market rates of interest earned on interest-earning assets and interest paid on interest-bearing liabilities. However, there have been no changes by the Federal Reserve with regard to the federal funds interest rate from
December 31, 2008 through December 31, 2010.



Rate/Volume Analysis.    The following rate/volume analysis summarizes the dollar amount of changes in interest income and interest expense attributable to changes in volume and
the amount attributable to changes in rate when comparing the periods indicated (in thousands). The impact of the combination of rate and volume change has been divided proportionately between the rate change and volume change.



|                                         |  |                                                                                  |        |   |               |   |        |             |  |   |        |  
|---------------------------------------- |  | -------------------------------------------------------------------------------- | ------ | - | ------------- | - | ------ | ----------- |  | - | ------ | -
|                                         |  | For the year endedDecember 31,
2010 comparedwith the year endedDecember 31, 2009 |       
|                                         |  | Change involume                                                                  |        |   | Changein rate |   |        | Totalchange | 
|Assets                                   |  |                                                                                  |        |   |               |   |        |             |  |   |        |  
|Interest-earnings assets                 |  |                                                                                  |        |   |               |   |        |             |  |   |        |  
|Cash and cash equivalents                |  | $                                                                                | 275    |   |               | $ | 8      |             |  | $ | 283    |  
|FHLB stock                               |  |                                                                                  | 2      |   |               |   | 2      |             |  |   | 4      |  
|Investment securities available for sale |  |                                                                                  | 920    |   |               |   | (2,862 | )           |  |   | (1,942 | )
|Loans                                    |  |                                                                                  | (8,832 | ) |               |   | 904    |             |  |   | (7,928 | )
|                                         |  |                                                                                  |        |   |               |   |        |             |  |   |        |  
|Total interest income                    |  | $                                                                                | (7,635 | ) |               | $ | (1,948 | )           |  | $ | (9,583 | )
|Liabilities and Shareholders Equity     |  |                                                                                  |        |   |               |   |        |             |  |   |        |  
|Interest-bearing liabilities             |  |                                                                                  |        |   |               |   |        |             |  |   |        |  
|Transaction deposit accounts             |  | $                                                                                | (46    | ) |               | $ | (232   | )           |  | $ | (278   | )
|Money market deposit accounts            |  |                                                                                  | 65     |   |               |   | (45    | )           |  |   | 20     |  
|Savings deposit accounts                 |  |                                                                                  | 27     |   |               |   | (35    | )           |  |   | (8     | )
|Time deposit accounts                    |  |                                                                                  | (765   | ) |               |   | (4,920 | )           |  |   | (5,685 | )
|                                         |  |                                                                                  |        |   |               |   |        |             |  |   |        |  
|Total interest paid on deposits          |  |                                                                                  | (719   | ) |               |   | (5,232 | )           |  |   | (5,951 | )
|                                         |  |                                                                                  |       
|Retail repurchase agreements             |  |                                                                                  | (1     | ) |               |   |       |             |  |   | (1     | )
|Commercial paper                         |  |                                                                                  | (39    | ) |               |   |       |             |  |   | (39    | )
|Other short-term borrowings              |  |                                                                                  | (16    | ) |               |   | (17    | )           |  |   | (33    | )
|FHLB borrowings                          |  |                                                                                  | (2,059 | ) |               |   | 1,990  |             |  |   | (69    | )
|Convertible debt                         |  |                                                                                  | 20     |   |               |   |       |             |  |   | 20     |  
|                                         |  |                                                                                  |        |   |               |   |        |             |  |   |        |  
|Total interest expense                   |  | $                                                                                | (2,814 | ) |               | $ | (3,259 | )           |  | $ | (6,073 | )
|                                         |  |                                                                                  |        |   |               |   |        |             |  |   |        |  
|Net interest income                      |  | $                                                                                | (4,821 | ) |               | $ | 1,311  |             |  | $ | (3,510 | )
|                                         |  |                                                                                  |        |   |               |   |        |             |  |   |        |  



66



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Absent the significant impact of nonaccrual loans during 2010, the change in loans due
to volume and the change due to rate for the year ended December 31, 2010 compared with the year ended December 31, 2009 was ($10.6) million and $2.7 million, respectively.



|                                         |  |                                                                                  |        |   |               |   |         |             |  |   |         |  
|---------------------------------------- |  | -------------------------------------------------------------------------------- | ------ | - | ------------- | - | ------- | ----------- |  | - | ------- | -
|                                         |  | For the year endedDecember 31,
2009 comparedwith the year endedDecember 31, 2008 |       
|                                         |  | Change involume                                                                  |        |   | Change inrate |   |         | Totalchange | 
|Assets                                   |  |                                                                                  |        |   |               |   |         |             |  |   |         |  
|Interest-earnings assets                 |  |                                                                                  |        |   |               |   |         |             |  |   |         |  
|Cash and cash equivalents                |  | $                                                                                | 119    |   |               | $ | (10     | )           |  | $ | 109     |  
|FHLB stock                               |  |                                                                                  | 28     |   |               |   | (198    | )           |  |   | (170    | )
|Investment securities available for sale |  |                                                                                  | (207   | ) |               |   | (136    | )           |  |   | (343    | )
|Loans                                    |  |                                                                                  | 1,278  |   |               |   | (12,909 | )           |  |   | (11,631 | )
|                                         |  |                                                                                  |        |   |               |   |         |             |  |   |         |  
|Total interest income                    |  | $                                                                                | 1,218  |   |               | $ | (13,253 | )           |  | $ | (12,035 | )
|Liabilities and Shareholders Equity     |  |                                                                                  |        |   |               |   |         |             |  |   |         |  
|Interest-bearing liabilities             |  |                                                                                  |        |   |               |   |         |             |  |   |         |  
|Transaction deposit accounts             |  | $                                                                                | (594   | ) |               | $ | (3,846  | )           |  | $ | (4,440  | )
|Money market deposit accounts            |  |                                                                                  | 51     |   |               |   | (1,371  | )           |  |   | (1,320  | )
|Savings deposit accounts                 |  |                                                                                  | 8      |   |               |   | (5      | )           |  |   | 3       |  
|Time deposit accounts                    |  |                                                                                  | 3,462  |   |               |   | (1,888  | )           |  |   | 1,574   |  
|                                         |  |                                                                                  |        |   |               |   |         |             |  |   |         |  
|Total interest paid on deposits          |  |                                                                                  | 2,927  |   |               |   | (7,110  | )           |  |   | (4,183  | )
|                                         |  |                                                                                  |       
|Retail repurchase agreements             |  |                                                                                  | 102    |   |               |   | (291    | )           |  |   | (189    | )
|Commercial paper                         |  |                                                                                  | (74    | ) |               |   | (225    | )           |  |   | (299    | )
|Other short-term borrowings              |  |                                                                                  | (121   | ) |               |   | (147    | )           |  |   | (268    | )
|FHLB borrowings                          |  |                                                                                  | 39     |   |               |   | (267    | )           |  |   | (228    | )
|                                         |  |                                                                                  |        |   |               |   |         |             |  |   |         |  
|Total interest expense                   |  | $                                                                                | 2,873  |   |               | $ | (8,040  | )           |  | $ | (5,167  | )
|                                         |  |                                                                                  |        |   |               |   |         |             |  |   |         |  
|Net interest income                      |  | $                                                                                | (1,655 | ) |               | $ | (5,213  | )           |  | $ | (6,868  | )
|                                         |  |                                                                                  |        |   |               |   |         |             |  |   |         |  



Absent the significant impact of
nonaccrual loans during 2009, the change in loans due to volume and the change due to rate for the year ended December 31, 2009 compared with the year ended December 31, 2008 was ($3.0) million and ($8.6) million,
respectively.



Provision for Loan Losses



Provision for loan losses decreased from
$73.4 million during the year ended December 31, 2009 to $47.1 million for the year ended December 31, 2010. The decrease was due primarily to declining charge-offs during 2010. See also Financial ConditionLending Activities,
included elsewhere in this item, for discussion regarding our accounting policies related to, factors impacting, and methodology for analyzing the adequacy of our allowance for loan losses and, therefore, our provision for loan losses.



67



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Noninterest Income



General.    The following table summarizes the components of noninterest income for
the periods indicated (in thousands).



|                                                                |  |                                 |        |  |      |   |        |      |  |   |        | 
|--------------------------------------------------------------- |  | ------------------------------- | ------ |  | ---- | - | ------ | ---- |  | - | ------ | 
|                                                                |  | For the years
endedDecember 31, |       
|                                                                |  | 2010                            |        |  | 2009 |   |        | 2008 | 
|Service charges on deposit accounts, net                        |  | $                               | 7,543  |  |      | $ | 8,275  |      |  | $ | 8,596  | 
|Fees for trust and investment management and brokerage services |  |                                 | 2,597  |  |      |   | 2,275  |      |  |   | 2,996  | 
|Mortgage-banking                                                |  |                                 | 1,794  |  |      |   | 1,903  |      |  |   | 1,264  | 
|Automatic teller machine                                        |  |                                 | 1,300  |  |      |   | 1,389  |      |  |   | 1,234  | 
|Merchant services                                               |  |                                 | 937    |  |      |   | 1,079  |      |  |   | 1,129  | 
|Bankcard services                                               |  |                                 | 1,793  |  |      |   | 658    |      |  |   | 724    | 
|Investments securities gains                                    |  |                                 | 10     |  |      |   | 2      |      |  |   | 1      | 
|Other                                                           |  |                                 | 1,627  |  |      |   | 1,850  |      |  |   | 2,073  | 
|                                                                |  |                                 |        |  |      |   |        |      |  |   |        | 
|Total noninterest income                                        |  | $                               | 17,601 |  |      | $ | 17,431 |      |  | $ | 18,017 | 
|                                                                |  |                                 |        |  |      |   |        |      |  |   |        | 



Service Charges on Deposit
Accounts, Net.    Net service charges on deposit accounts comprise a significant component of noninterest income totaling 1.7% of average transaction deposit accounts for the year ended December 31, 2010 compared with
1.8% of average transaction deposit accounts for the year ended December 31, 2009. The decrease in service charges on deposit accounts is attributed to a decrease in overdraft fees resulting from a $100 free overdraft limit included with the
new MyPal account that we began offering in March 2010, a change in customer behavior from their increased awareness of overdraft fees such that the number of transactions that would otherwise result in overdrafts has been reduced, and the customers
with historical overdraft transactions who did not opt-in to overdraft protection in accordance with Regulation E.



In response to competition to retain deposits, institutions in the financial services industry have increasingly been providing services
for free in an effort to lure deposits away from competitors and retain existing balances. Services that were initially developed as fee income opportunities, such as Internet banking and bill payment service, are now provided to customers free of
charge. Consequently, opportunities to earn additional income from service charges for such services have been more limited. In addition, recent focus on the level of deposit service charges within the banking industry by the media and the U.S.
Government may result in future legislation limiting the amount and type of services charges within the banking industry.



The November 2009 amendment to Regulation E of the Electronic Fund Transfer Act, which was effective July 1, 2010 for new customers
and August 15, 2010 for existing customers, prohibits financial institutions from charging consumers fees for paying overdrafts on automated teller machine and one-time debit card transactions unless a consumer consents to the overdraft service
for those types of transactions. Some industry experts estimated that the impact of the change from Regulation E would result in a reduction of 30% to 40% of such overdraft fees. To continue to have overdraft services available to those customers
who desired to have this service, we were proactive in encouraging our deposit customers to opt-in to overdraft protection; however, not all of our customers who have previously utilized overdraft features have opted-in to overdraft protection. In
addition, in December 2010, the Federal Reserve issued a proposal to implement a provision in the Dodd-Frank Act that requires the Federal Reserve to set debit-card interchange fees. The proposed rule, if implemented in its current form, would
result in a significant reduction in debit-card interchange revenue. Though the rule technically does not apply to institutions with less than $10 billion in assets, such as the Bank, there is concern that the price controls may harm community
banks, which could be pressured by the marketplace to lower their own interchange rates. We are still evaluating the guidance and at this time we do not yet know if the guidance and the implementation of Regulation E will result in a sustained
reduction in our services charges.



68



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Fees for Trust and Investment Management and Brokerage
Services.    The following table summarizes the composition of fees for trust and investment management and brokerage services for the periods indicated (in thousands).



|                                                                      |  |                                 |       |  |      |   |       |      |  |   |       | 
|--------------------------------------------------------------------- |  | ------------------------------- | ----- |  | ---- | - | ----- | ---- |  | - | ----- | 
|                                                                      |  | For the years endedDecember 31, |      
|                                                                      |  | 2010                            |       |  | 2009 |   |       | 2008 | 
|Fees for trust and investment management services                     |  | $                               | 1,967 |  |      | $ | 1,764 |      |  | $ | 2,311 | 
|Fees for brokerage services                                           |  |                                 | 630   |  |      |   | 511   |      |  |   | 685   | 
|                                                                      |  |                                 |       |  |      |   |       |      |  |   |       | 
|Total fees for trust and investment management and brokerage services |  | $                               | 2,597 |  |      | $ | 2,275 |      |  | $ | 2,996 | 
|                                                                      |  |                                 |       |  |      |   |       |      |  |   |       | 



Fees for trust and investment
management and brokerage services for 2010 increased $322 thousand (14.2%) to $2.6 million from $2.3 million for 2009, primarily as a result of the overall increase in the average market values of securities held in trust accounts upon which
trust fees are calculated. Fees for brokerage services are primarily transaction-based. As such, the increase in these fees was primarily due to the increase in brokerage transaction activity over the periods presented.



In October 2010, we refined our organizational structure and
designated one of our most senior members of executive management with the role of expanding the Banks existing trust, investments and insurance division into a comprehensive wealth management business. We believe providing broader wealth
management services to our customers, including private banking and investment management, is critical to obtaining market growth. We will be evaluating our overall strategy, platform and resources over the next few months, and expect the expansion
into wealth management to occur in 2011.



Mortgage-Banking.    Most of the residential mortgage loans that we originate are sold in the secondary market.
Normally we retain the servicing rights to maintain the customer relationships related to servicing the loans. Mortgage loans serviced for the benefit of others amounted to $423.6 million and $426.6 million at December 31, 2010 and
December 31, 2009, respectively, and are not included in our Consolidated Balance Sheets.



The following table summarizes the components of mortgage-banking income for the periods indicated (dollars in thousands).



|                                                                                                     |  |                                 |       |   |      |   |        |      |  |   |       |  
|---------------------------------------------------------------------------------------------------- |  | ------------------------------- | ----- | - | ---- | - | ------ | ---- |  | - | ----- | -
|                                                                                                     |  | For the years endedDecember 31, |      
|                                                                                                     |  | 2010                            |       |   | 2009 |   |        | 2008 | 
|Mortgage-servicing fees                                                                              |  | $                               | 1,069 |   |      | $ | 978    |      |  | $ | 904   |  
|Gain on sale of mortgage loans held for sale                                                         |  |                                 | 1,256 |   |      |   | 1,728  |      |  |   | 994   |  
|Mortgage-servicing rights portfolio amortization and impairment                                      |  |                                 | (798  | ) |      |   | (1,271 | )    |  |   | (881  | )
|Derivative loan commitment income                                                                    |  |                                 | 22    |   |      |   | 41     |      |  |   |      |  
|Forward sales commitment income (loss)                                                               |  |                                 | (12   | ) |      |   | 91     |      |  |   |      |  
|Other                                                                                                |  |                                 | 257   |   |      |   | 336    |      |  |   | 247   |  
|                                                                                                     |  |                                 |       |   |      |   |        |      |  |   |       |  
|Total mortgage-banking income                                                                        |  | $                               | 1,794 |   |      | $ | 1,903  |      |  | $ | 1,264 |  
|                                                                                                     |  |                                 |       |   |      |   |        |      |  |   |       |  
|Mortgage-servicing fees as a percentage of average mortgage loans serviced for the benefit of others |  |                                 | 0.25  | % |      |   | 0.24   | %    |  |   | 0.25  | %



Mortgage-banking income decreased $109 thousand (5.7%) from December 31, 2009 to December 31, 2010. Gains on sales of mortgage loans declined approximately $472 thousand (27.3%) while
the expense associated with amortization and impairment of mortgage-servicing rights decreased $473 thousand (37.2%) from the year ended December 31, 2009 to the year ended December 31, 2010. During 2007 and 2008,



69



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the Federal Reserve decreased rates by 500 to 525 basis points. During 2009, this decline in interest rates resulted in an increase in new loan volume and existing loan prepayments and,
therefore, increased gains on sales and amortization within the mortgage-servicing rights portfolio. Loan sales and loan prepayments were significantly lower in 2010 both because many of those borrowers who were able to refinance had already done so
and because mortgage rates increased during the fourth quarter 2010. Offsetting this change, derivative loan commitment income and forward sales commitment income decreased $122 thousand over the same periods. Derivative loan commitment income and
forward sales commitment income fluctuates based on the change in interest rates between the time we entered into the commitment to originate / sell the loans and the valuation date. In January 2011, we began a review of our mortgage origination and
servicing business with the assistance of a third party consultant to identify opportunities to improve the profitability of this business.



Automatic Teller Machine.    Automatic teller machine income decreased $89 thousand (6.4%) from
December 31, 2009 to December 31, 2010. The decrease was consistent with a decrease of one automatic teller machine in 2010 and our revised deposit product related fees implemented throughout 2010.



Merchant Services.    Merchant
services income decreased $142 thousand (13.2%) from December 31, 2009 to December 31, 2010. As previously described in the Executive Summary of 2010 Financial Results, Strategic Project Plan, we are critically evaluating each of our
product lines to determine their contribution to our financial performance and their relative risk / return relationship. Based on the evaluation to date, on March 31, 2010 we sold this product line and entered into a referral and services
agreement with Global Direct related to our merchant services business which resulted in a gross payment to the Company of $786 thousand, which is included in Merchant services income in the amount of $587 thousand, net of transaction fees, for the
year ended December 31, 2010. Under the agreement, Global Direct will provide services including merchant sales through a dedicated sales person, marketing and advertising within our geographic footprint, credit review and approval and
activating new merchant accounts, equipment sales and customer service, transaction authorization service, risk mitigation services, and compliance with applicable laws and card association and payment network rules. Under the terms of the
agreement, we now receive referral income when we refer customers that are accepted by Global Direct and a percentage of the ongoing revenues related to merchant services accounts sold to Global Direct.



Bankcard Services.    In
connection with our on-going strategic review of our business, we sold our credit card portfolio and entered into a joint marketing agreement in December 2010 with Elan Financial Services, Inc., resulting in a net gain of $1.2 million, included
within this financial statement item. We also entered into an interim servicing agreement to cover the period through the date the accounts are transferred to the third partys system, a period expected not to exceed eight months. In connection
with the interim servicing agreement, we will receive a set servicing fee per active account per month for providing servicing related functions such as payment processing, collections, customer service and billing. Based on the structure of the
interim servicing agreement, the servicing fee to be received is considered adequate compensation for the services to be performed and, therefore, no servicing asset or liability was recognized in connection with the sale.



Other.    Other noninterest income
decreased $223 thousand (12.1%) from the year ended December 31, 2009 to December 31, 2010. The decrease was primarily due to the cost of new deposit product incentives which are recorded as an offset to the associated fee income
within this financial statement line item.



Noninterest Expense



General.    The earnings component of our Strategic Project Plan includes keen focus on expense management. As
part of our earnings plan to improve our overall financial performance, we identified specific noninterest expense reductions realized in 2009 and 2010 and are continuing to review other expense areas for additional reductions. Examples include:



| |  |  | Freezing most employee salaries effective May 1, 2009 and eliminating the remaining officer cash incentive plan awards under the corporate
incentive plan for 2009
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------



70



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| |  |  | Reducing our Saturday banking hours from 2:00 p.m. to noon in September 2009 and converting some branch office hours on Saturdays to drive thru only in
October 2010
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Reducing marketing expenses and corporate contributions to not-for-profit organizations
| | - |  | ---------------------------------------------------------------------------------------



| |  |  | Reducing officer perquisites, including elimination in 2010 of all bank-owned automobiles, reduction in coverage for annual physical examinations,
elimination in 2010 of Company paid life insurance premiums for certain officers, and termination of officer participation in the Supplemental Executive Retirement Plan.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



With the assistance from a third party consulting firm, we also reviewed our Retail Banking network in March
through June 2010 and are implementing process improvements and other recommendations that we believe will result in reduced expenses. In September 2010 through January 2011, with assistance from the same consulting firm, we performed a
comprehensive review of our lending process that we believe will similarly result in efficiency improvements and cost savings. Savings have also been realized resulting from more fully leveraging existing technology, implementing more advanced
technology, and other process improvements. These expense reductions are partially offset by the higher level of credit-related costs incurred due to legal, consulting, and carrying costs related to our higher level of nonperforming assets. We
continue to review other expense areas for additional reduction opportunities.



The following table summarizes the components of noninterest expense for the periods indicated (in thousands).



|                                                     |  |                                  |        |  |      |   |        |      |  |   |        |  
|---------------------------------------------------- |  | -------------------------------- | ------ |  | ---- | - | ------ | ---- |  | - | ------ | -
|                                                     |  | For the years ended December 31, |       
|                                                     |  | 2010                             |        |  | 2009 |   |        | 2008 | 
|Salaries and other personnel                         |  | $                                | 24,677 |  |      | $ | 24,463 |      |  | $ | 23,774 |  
|Occupancy                                            |  |                                  | 4,778  |  |      |   | 4,293  |      |  |   | 3,293  |  
|Furniture and equipment                              |  |                                  | 3,841  |  |      |   | 3,407  |      |  |   | 3,823  |  
|Loss (gain) on disposition of premises and equipment |  |                                  | 37     |  |      |   | 81     |      |  |   | (2     | )
|Professional services                                |  |                                  | 2,507  |  |      |   | 1,709  |      |  |   | 942    |  
|FDIC deposit insurance assessment                    |  |                                  | 4,487  |  |      |   | 3,261  |      |  |   | 786    |  
|Marketing                                            |  |                                  | 1,407  |  |      |   | 1,114  |      |  |   | 1,576  |  
|Foreclosed real estate writedowns and expenses       |  |                                  | 11,656 |  |      |   | 3,233  |      |  |   | 516    |  
|Goodwill impairment                                  |  |                                  | 3,691  |  |      |   |       |      |  |   |       |  
|Loss on commercial loans held for sale               |  |                                  | 7,562  |  |      |   |       |      |  |   |       |  
|Other                                                |  |                                  | 8,663  |  |      |   | 9,454  |      |  |   | 8,266  |  
|                                                     |  |                                  |        |  |      |   |        |      |  |   |        |  
|Total noninterest expense                            |  | $                                | 73,306 |  |      | $ | 51,015 |      |  | $ | 42,974 |  
|                                                     |  |                                  |        |  |      |   |        |      |  |   |        |  



Salaries and Other
Personnel.    Salaries and personnel expense increased $214 thousand (0.9%) for the year ended December 31, 2010 as compared to the same period of 2009 as declines in salaries expense were more than offset by increases
in contract labor, incentives and employee benefit costs. In connection with the execution of our strategic plan, we are evaluating the proper alignment of roles and responsibilities within the Company and working to ensure our overall compensation
structure remains competitive with the industry as we continue to compete for talent.



Occupancy.    Occupancy expense increased $485 thousand (11.3%) for the year ended December 31, 2010 over 2009, primarily as a result of the impact of the new
corporate headquarters. Occupancy expense for the year ended December 31, 2010 included twelve monthly payments under the lease agreement for the new headquarters and only nine and one-half monthly payments for the year ended December 31,
2009. This increase was offset by the impact of expenses associated with banking offices previously consolidated or relocated that have not yet been subleased or sold no longer being recorded within this financial statement line item but rather
being recorded as a branch closure expense within Other noninterest expense in the Consolidated Statements of Income (Loss).



71



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Furniture and Equipment.    Furniture and equipment expense
increased $434 thousand (12.7%) for the year ended December 31, 2010 over 2009. Furniture and equipment depreciation and capital lease amortization, included within this line item, increased $355 thousand over the same periods primarily
due to a new capitalized lease in December 2009.



Professional Services.    Professional services expense increased $798 thousand (46.7%) for the year ended
December 31, 2010 over 2009 due to increased use of consultant services to assist with strategic business reviews and process improvement engagements, an increase in tax services related to the Private Placement, legal fees related to the
Consent Order, and loan advisory firm fees associated with the marketing of commercial loans held for sale.



FDIC Deposit Insurance Assessment.    FDIC insurance premiums increased $1.2 million (37.6%) for the year ended
December 31, 2010 compared to the same period of 2009. For the year ended December 31, 2010, the FDICs general assessment rates increased compared to 2009. The increase in the general assessment was the result of our voluntary
participation in the FDICs Transaction Account Guarantee Program and our capital classification being below well-capitalized. During the second quarter of 2009, we accrued an incremental $680 thousand of increased FDIC premiums due to the
industry-wide special assessment by the FDIC to bolster the FDIC insurance fund. The FDIC imposed a 5 basis point special assessment on assets less tier 1 capital with a cap of 10-basis points times deposits.



In February 2011, the FDIC approved two rules that amend the
deposit insurance assessment regulations. The first rule changes the assessment base from one based on domestic deposits to one based on assets. The assessment base changes from adjusted domestic deposits to average consolidated total assets minus
average tangible equity. The second rule changes the deposit insurance assessment system for large institutions in conjunction with the guidance given in the Dodd-Frank Act. Since the new base would be much larger than the current base, the FDIC
will lower assessment rates, which achieves the FDICs goal of not significantly altering the total amount of revenue collected from the industry. Risk categories and debt ratings will be eliminated from the assessment calculation for large
banks which will instead use scorecards. The scorecards will include financial measures that are predictive of long-term performance. A large financial institution will continue to be defined as an insured depository institution with at least $10
billion in assets. Both changes in the assessment system will be effective as of April 1, 2011 and will be payable at the end of September.



With the consummation of the Private Placement on October 7, 2010 and the resulting change in the Banks capital classification
to well-capitalized, as well as the changes to the deposit insurance assessment regulations, we project that our FDIC insurance premiums will be reduced by approximately $1.8 million in 2011, based on our 2011 budgeted level of deposits and assets.



Marketing.    Marketing expense increased $293 thousand (26.3%) from the year ended December 31, 2009
to the same period of 2010, primarily due to promotional efforts related to our new MyPal checking and Smart Savings deposit accounts introduced in March 2010 and increased marketing related to mortgage and small business. In 2009, a concerted
effort was made to reduce discretionary expenditures.



Foreclosed Real Estate Writedowns and Expenses.    Foreclosed real estate writedowns and expenses increased $8.4 million for the year ended December 31, 2010 in comparison
with the same period of 2009. Based on currently available valuation information primarily from third party appraisals, the carrying value of these assets is written down to their fair value less estimated selling costs. Writedowns on seven such
properties resulted in a provision charged to expense of $7.0 million (61.9% of total writedowns). The continued high level of writedowns is due to receipts of contracts for sale and updated appraisals which continued to show declining values based
on lack of property sales activity. The continued high level of expenses is due to payment of legal fees, taxes, insurance, utilities, property management company fees, and other carrying costs on our elevated level of foreclosed properties.



72



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Goodwill Impairment.    Goodwill impairment of $3.7 million was
recognized during the year ended December 31, 2010. As described in Part I., Item 7. Financial Condition, Goodwill, we performed an impairment test of our goodwill quarterly in 2010. The September 30, 2010 evaluation indicated that
the carrying value of the Companys goodwill exceeded the fair value and resulted in a noncash charge of $3.7 million, eliminating the entire balance of the goodwill on the Companys Consolidated Balance Sheets. This charge had no
effect on the liquidity, regulatory capital, or daily operations of the Company.



Loss on Loans Held for Sale.    In September 2010, we decided to market for sale commercial loans totaling $90.9 million at September 30, 2010 and we are evaluating the
bids received on a loan by loan basis. In general, we believe potential buyers are making bids at heavily discounted prices given the need for the banking industry in general and our Company in particular to deleverage commercial real estate assets.
We believe this was particularly true in the fourth quarter of 2010 as banks sought to rid themselves of problem assets prior to year end. In many cases, we have not accepted such discounted bids. In certain cases, however, we are making the
strategic decision to sell certain assets at amounts less than their recorded book values to continue to reduce our criticized assets and concentration in commercial real estate as required by the Consent Order.



During the fourth quarter of 2010, we sold five loans,
representing two relationships, with a gross book value of $10.4 million for an aggregate loss of $3.5 million. At December 31, 2010, we had commercial loans held for sale aggregating $66.2 million, of which $2.0 million were under contract for
sale and expected to close in the first quarter 2011. Writedowns of $1.1 million were recorded in the fourth quarter 2010 to reduce the value of these loans to the contract value less estimated costs to sell.



Other.    Other noninterest
expense decreased $791 thousand (8.4%) during the year ended December 31, 2010 over 2009. Included in this financial statement line item are the following:



| |  |  | Credit-related costs and expenses associated with the execution of the Strategic Project Plan and problem loan resolution consulting assistance.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Branch closure expense associated with banking offices previously consolidated or relocated that have not yet been subleased or sold. Two operating
leases with total monthly payments of approximately $9 thousand expired during 2010 and will result in a reduction in branch facilities expense going forward.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In December 2010, a vacant bank-owned branch facility was placed under contract. Based on the contract price, we recorded a writedown of $24 thousand
for the year ended December 31, 2010.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In December 2010, as part of our overall balance sheet management efforts to utilize our excess cash and reduce our overall borrowing cost, we prepaid
$61.0 million of FHLB advances resulting in a prepayment penalty of $33 thousand for the year ended December 31, 2010.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Provision (Benefit) for Income Taxes



As a result of a charge against income tax provision (benefit) to record a valuation allowance of $20.5 million against our gross deferred
tax asset as of December 31, 2010, our income tax benefit of $1.3 million for the year ended December 31, 2010 was significantly less than the normal expectation using a 35% federal income tax rate applied to the net loss for the year
before income taxes. During the year ended December 31, 2009, we recognized an income tax benefit of $22.1 million, and during the year ended December 31, 2008, we recognized an income tax expense of $7.5 million. Our effective tax rates
were 2.2%, 35.6%, and 35.4% for the years ended December 31, 2010, 2009, and 2008, respectively. The 2010 benefit is related to our ability to utilize operating losses as a carryback to offset income taxes paid in 2008.



As of December 31, 2010, prior to any valuation
allowance, net deferred tax assets totaling $20.5 million were recorded in the Companys Consolidated Balance Sheets. Based on our projections of future taxable income over the next three years, cumulative tax losses over the previous three
years, net operating loss carry forward limitations as discussed below and available tax planning strategies, we recorded a valuation allowance against



73



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the net deferred tax asset at December 31, 2010. The Private Placement that was consummated on October 7, 2010 is considered to be a change in control under the Internal Revenue Service
rules. Accordingly, with the assistance of third party specialists we were required to determine the fair value of the Company and our assets for the purpose of evaluating any potential limitation or deferral of our ability to carry forward
pre-acquisition net operating losses and to determine the amount of net unrealized built-in losses as of October 7, 2010, which also limits the amount of net operating losses that may be used in the future. As a result of the valuations and tax
analysis, we currently estimate that future utilization of net operating loss carry forwards and built-in losses of $46 million generated prior to October 7, 2010 will be limited to $1.1 million per year.



Analysis of our ability to realize deferred tax assets
requires us to apply significant judgment and is inherently subjective because it requires the future occurrence of circumstances that cannot be predicted with certainty. While we recorded a valuation allowance against our net deferred tax asset for
financial reporting purposes at December 31, 2010, the net operating losses are able to be carried forward for income tax purposes up to twenty years. Thus, to the extent we return to profitability and generate sufficient taxable income in the
future, we will be able to utilize some of the net operating losses for income tax purposes and reverse a portion of the valuation allowance for financial reporting purposes. The determination of how much of the net operating losses we will be able
to utilize and therefore how much of the valuation allowance that may be reversed and the timing is based on our future results of operations and the amount and timing of actual loan charge-offs and asset writedowns.



Recently Issued / Adopted Authoritative Pronouncements



See Item 8. Financial Statements
and Supplementary Data, Note 1, Summary of Significant Accounting Policies, for a discussion regarding recently issued and recently adopted authoritative pronouncements and their expected impact on our business, financial condition, results of
operations, and cash flows.



Impact of
Inflation and Changing Prices



The
Consolidated Financial Statements contained in Item 8 of this document and related data have been prepared in accordance with GAAP which require the measurement of financial position and operating results in terms of historical dollars, without
considering changes in the relative purchasing power of money over time because of inflation.



Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary. As a result, interest rates have a more significant impact on a financial
institutions performance than the impact of general levels of inflation. Interest rates do not necessarily move in the same direction or in the same magnitude as the price of goods and services since such prices are impacted by
inflation. We are committed to continuing to actively manage the gap between our interest-sensitive assets and interest-sensitive liabilities.



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PART III



|ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
|-------- | ------------------------------------------------------



The Board of Directors currently has 11 members divided into
three classes. Our current directors and their classes are:



|                                          |  |                                           |  |                                         
|----------------------------------------- |  | ----------------------------------------- |  | ----------------------------------------
|Terms Expiring at the 2011
Annual Meeting |  | Terms Expiring at the 2012 Annual Meeting |  | Terms Expiring at the 2013Annual
Meeting
|                                          |  |                                          
|Robert B. Goldstein                       |  | L. Leon Patterson                         |  | Michael D. Glenn                        
|John D. Hopkins, Jr.                      |  | L. Stewart Spinks                         |  | Lee S. Dixon                            
|James J. Lynch                            |  | J. David Wasson, Jr.                      |  | Samuel L. Erwin                         
|Jane S. Sosebee                           |  |                                           |  |                                         
|John P. Sullivan                          |  |                                           |  |                                         



The following provides
information regarding each of our directors whose term expires at the 2011 Annual Meeting, including their age and the year in which they first became a director of the Company, the year in which their term expires, their business experience for at
least the past five years, the names of other publicly-held where they currently serve as a director or served as a director during the past five years, and additional information about the specific experience, qualifications, attributes, or skills
that led to the Boards conclusion that such person should serve as a director for the Company:



|                                 |  |              |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|-------------------------------- |  | ------------ |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Robert B. Goldstein              |  |              |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|Age
Director Since Term Expiring |  | 70 2010 2011 |  | Business Experience:    Mr. Goldstein has worked in the banking industry since 1963 in various capacities.
In 2007, Mr. Goldstein partnered with three other individuals to form a bank holding company and private equity fund that invests in banks and financial service companies, CapGen Capital Advisors, LLC, and currently serves as a Principal.
Immediately prior to this, he served as Chairman and Chief Executive Officer of a $6 billion bank holding company in the San Francisco Bay area from 2001-2006. His experience includes many years in commercial banks, savings and loan associations and
other financial institutions including serving as Chief Executive Officer of numerous banks and thrifts. Mr. Goldsteins extensive experience in the financial services industry and familiarity with helping institutions manage through
difficult situations provides us with beneficial leadership and counsel.  Other Public Company Directorships:    Mr. Goldstein currently holds the following directorships:
    FNB
Corporation; 
   Seacoast Banking Corp; and     Hampton Roads Bankshares.
 Additional Information:
 Through the various capacitates in which he has served during his career,
Mr. Goldstein has become nationally recognized for his expert investing and operational experience in turning around and implementing growth strategies for banks under the most challenging circumstances. He is also highly regarded for
identifying new opportunities for investment in community and regional banking.



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|-------------------------------- |  | ------------ |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                 |  |              |  | A consistently successful investor for himself and others, Mr. Goldstein has been a senior executive and/or director at 14 financial
institutions over a career that has spanned more than 40 years. Mr. Goldstein is often the first call when community and regional banks encounter difficulties that require outside operational and investing expertise. His network of
relationships in banking and financial services is a key competitive feature of the CapGen Program.  Mr. Goldstein recently spearheaded the merger of Bay View Capital Corp, San Mateo, California, and Great Lakes Bancorp, Buffalo, New York. Bay View was the most recent in a series of turnarounds and
recapitalizations which he engineered. This company was a deeply troubled $5 billion bank holding company which had lost credibility with regulators and shareholders. Mr. Goldstein was elected Chief Executive Officer of the company in 2001 bringing
with him a seasoned team of banking professionals and an infusion of $137 million of equity capital raised through institutional investors who had participated with him in prior engagements. The resultant company returned to financial health,
regained credibility, and provided the participants with a significant return on their investment.  Throughout his tenure, first as Chief Executive Officer and later as Chairman of Bay View, Mr. Goldstein was also fully engaged in other banking activities. He co-authored the 2003 spin-off of the
Florida subsidiary of F.N.B. Corporation into a second publicly traded entity which has subsequently been acquired. Mr. Goldstein was an original investor, founder, and board member of RS Group Holdings, a privately owned and operated trust
services company, which was subsequently sold to another financial services company. Mr. Goldstein was a founder and director of the publicly-held Luminent Mortgage Capital Corp., which was converted to a partnership and Mr. Goldstein has no
interest in the continuing business, now called Cobalt Holdings. 
Mr. Goldstein is the Chairman of the Board of Directors of The BANKshares, Inc. and a director of its subsidiary, BankFIRST of Winter Park, FL. The
BANKshares, Inc. is a privately-owned bank holding company doing business in the greater Orlando and Brevard County areas of Florida. 
Previously, Mr. Goldstein successfully raised capital, injected new management, and reenergized banks and thrifts in Connecticut, New Jersey, New York,
and Pennsylvania. These activities have earned him a widely known and respected reputation in the domestic financial services industry. 
As a private investor, Mr. Goldstein has also invested in de novo banks, recapitalizations of existing institutions, and has recently served as one of the
advisors and directors facilitating the successful geographic spin-off of a commercial bank into a separate holding company creating a substantial improvement in the combined equity value of the two related organizations.
 Mr. Goldstein is a graduate of graduate of Texas Christian University. He
also served for seven years on the faculty of the Southwestern Graduate School of Banking at Southern Methodist University.
|John D. Hopkins, Jr.             |  |              |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|Age
Director Since Term Expiring |  | 59 2004 2011 |  | Business Experience:    Mr. Hopkins has served as owner of The Fieldstone Group, a diversified investment
and development company with real estate, farm, land, and timber holdings, since 2000. Prior to 2000, Mr. Hopkins was employed for 26 years at Owens Corning, a Fortune 500 company, the last 10 of which he served as an officer.
 Other Public Company
Directorships:    None                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       



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|-------------------------------- |  | ------------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                 |  |              |  | Additional Information:    As the owner and officer of two companies during the past 36 years, including
recently with a company involved in real estate activities, Mr. Hopkins brings leadership and business management experience to the Board. In addition, he has extensive expertise that he gained through this business experience as well as through his
current service as a member of the Companys Compensation, Corporate Governance and Nominating, and Regulatory Oversight Committees. Mr. Hopkins serves as Chairman of the Board for the South Carolina Technology and Aviation Center, the National
Clean Transportation Technology and Innovation Center, and Anderson University, and serves on the Board of the Greenville County Research and Technological Development Corporation. Mr. Hopkins provides entrepreneurial experience to the Board,
which is important to our many consumer businesses. Mr. Hopkins is a graduate of Clemson University and the South Carolina Bankers Association Directors College.                                                                                                                                                                                                                                                                                                                                                               
|James J. Lynch                   |  |              |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|Age
Director Since
Term Expiring |  | 61 2010 2011 |  | Business Experience:    Mr. Lynch has over 35 years of bank management experience. Since 2007, he has
served as Managing Partner of Patriot Financial Partners, L.P., a private equity investment fund focusing on investments in the community banking sector throughout the United States. Mr. Lynch was a founding partner of this fund. Prior to Patriot,
from 2003 to 2007, he served as Vice Chairman of Sovereign Bancorp and Chief Executive Officer of the Mid-Atlantic Division for Sovereign Bank. 
Other Public Company Directorships:    Mr. Lynch currently holds the following directorships:
    Heritage
Oaks Bancorp (Heritage Oaks Bank)Also serves on the Audit Committee; and 
   Cape Bancorp (Cape Bank).  Additional Information:    Mr. Lynch has considerable experience in and knowledge of the
capital markets, as well as significant executive level banking experience, which are valuable to the board of directors in its assessment of the Companys sources and uses of capital. Mr. Lynch is active in several professional and civic
organizations and is a graduate of LaSalle University in Philadelphia. His graduate studies were at Drexel University. He received an Honorary Doctorate from La Salle University in 2010.  In addition to the public company directorships summarized above, Mr. Lynch holds several private and not-for-profit
directorships.
|Jane S. Sosebee                  |  |              |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|Age
Director Since Term Expiring |  | 54 2006 2011 |  | Business Experience:    From 2003 until November 2007, Ms. Sosebee served as regional director with
AT&T South Carolina (formerly Southern Bell and BellSouth). From November 2007 until 2010, Ms. Sosebee has served as Director of External Affairs for AT&T South Carolina, a communications holding company. Since that time, she has held
the position of Director of Governmental Affairs.  Other Public
Company Directorships:    None 
Additional Information:    Ms. Sosebee brings extensive leadership and business management skills to the Board obtained through
her years of employment with AT&T. During her tenure, she has managed various teams within South Carolina including a marketing, sales and servicing organization including oversight of the compensation plan. Additionally, she has managed
external affairs, public                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       



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|                                 |  |              |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|-------------------------------- |  | ------------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                 |  |              |  | relations, and philanthropy. Through her current capacity as Director of Governmental Affairs for AT&T, she manages a team of
external lobbyists and directs public policy for the Companys South Carolina region. This experience provides valuable insight to the Board on regulatory issues. Accordingly, Ms. Sosebee serves on the Boards Regulatory Oversight
Committee as well as the Trust Committee. Ms. Sosebee has served on and chaired various community organizations in our market area, developing relationships beneficial to us. With regard to one such organization, Ms. Sosebee serves on the Audit
Committee. Ms. Sosebee is a graduate of Clemson University and the South Carolina Bankers Association Directors College. 
Ms. Sosebee holds several not-for-profit directorships.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|John P. Sullivan                 |  |              |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|Age
Director Since Term Expiring |  | 54 2010 2011 |  | Business Experience:    In 2007, Mr. Sullivan joined with three other individuals to form a bank holding
company and private equity fund that invests in banks and financial services companies, CapGen Capital Advisors, LLC, and currently serves as Managing Director. Immediately prior to this, he served as a senior advisor to the global financial
services practice of a big four accounting firm. 
Other Public Company Directorships:    Mr. Sullivan currently holds the following directorships:
    Signature
Bank (Advisory Board); 
   Jacksonville Bank; and     Hampton Roads Bankshares (Board Observer).
 Additional Information:    Mr. Sullivan has
extensive experience and a diverse background in all facets of bank and financial management. He served as Chairman, President, Chief Executive, and Chief Operating Officer of various financial institutions in the New York metropolitan area,
including Hamilton Bancorp, River Bank America (East River Savings Bank), Continental Bank, and the Olympian New York Corp. 
Mr. Sullivan has gained a reputation as a business turnaround specialist with strong allegiances to both investors and customers, having resuscitated
ailing institutions and facilitated their mergers with stronger financial companies, generating superior returns for his investors. Mr. Sullivan has been a first call executive for many bank regulators when trouble surfaces at a
regulated entity. His leadership as well as his operational and financial expertise is integral to the success of the CapGen investment program. 
Mr. Sullivan is a senior advisor and member of the advisory board for New York States largest de novo banking effort, Signature Bank. Prior to
joining CapGen, he served as a senior advisor to the global financial services practice of a big four accounting firm. In this capacity, he provided guidance and thought leadership to some of the firms largest financial services
clients on banking matters, such as merger and acquisition activity, capital transactions, regulatory issues, credit quality, and credit risk. He is frequently called upon to provide guidance and expertise in highly complex financial and operational
situations for banks and other financial services companies.  Mr.
Sullivan has successfully raised capital at all of the banks with which he has been affiliated and is a member of or a board observer on a number of corporate boards and serves on the Audit, Compensation, Loan, and Executive Committees on several of
those entities.



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| |  |  |  |                                                                                                                                                                                                                                                                     
| |  |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  |  | Mr. Sullivan is a graduate of Niagara University and a Certified Public Accountant.
 Mr. Sullivan has significant operational banking experience as well as input
into capital markets activities and provides the Board with input on critical strategic decisions.



The following provides information regarding each of our other directors, including their age and the year in which they first became a
director of the Company, the year in which their term expires, their business experience for at least the past five years, the names of other publicly-held companies where they currently serve as a director or served as a director during the past
five years, and additional information about the specific experience, qualifications, attributes, or skills that led to the Boards conclusion that such person should serve as a director for the Company:



|                                 |  |              |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|-------------------------------- |  | ------------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Lee S. Dixon                     |  |              |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|Age
Director Since
Term Expiring |  | 45 2009 2013 |  | Business Experience:    Mr. Dixon has served as Chief Operating Officer of Palmetto Bancshares, Inc. and
The Palmetto Bank since July 2009 and as Chief Risk Officer of Palmetto Bancshares, Inc. and The Palmetto Bank since October 2009. In addition, from July 1, 2010 to February 2, 2011, Mr. Dixon served as Chief Financial Officer of Palmetto
Bancshares, Inc. and The Palmetto Bank. Mr. Dixon served as Senior Executive Vice President of Palmetto Bancshares, Inc. and The Palmetto Bank from May 2009 through June 2009. Mr. Dixon served as Chief Operating Officer of First Presbyterian Church
of Winston-Salem from July 2006 through May 2009. He was employed in the Banking and Capital Markets practice of PricewaterhouseCoopers LLP from January 1989 through June 2006, admitted as a Partner in July 1999.
 Other Public Company
Directorships:    None  Additional
Information:    Mr. Dixon brings extensive operational, accounting and financial reporting expertise to the Board from his 23 years of business experience, 18 years of which he served in the Banking and Capital Markets
practice at PricewaterhouseCoopers LLP. Mr. Dixon has worked with banking clients ranging from small community banks to some of the largest national banks, and he has extensive operational experience covering all aspects of banking and financial
services. Mr. Dixons background with PricewaterhouseCoopers LLP has provided him with substantial banking, regulatory, financial reporting, and risk management experience. Mr. Dixon also has extensive leadership and business management
experience and skills. Mr. Dixon is a graduate of the University of South Carolina, and graduated with distinction from the Stonier Graduate School of Banking. Mr. Dixon is a certified public accountant.
|Samuel L. Erwin                  |  |              |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|Age
Director Since Term Expiring |  | 43 2009 2013 |  | Business Experience:    Mr. Erwin has served as Chief Executive Officer and President of The Palmetto Bank
since July 2009. In addition, Mr. Erwin was appointed Chief Executive Officer of Palmetto Bancshares, Inc. in January 2010. Mr. Erwin served as Senior Executive Vice President of Palmetto Bancshares, Inc. and The Palmetto Bank from March 2009
through June 2009. Mr. Erwin began his banking career at First Union National Bank (now Wachovia) in July 1990. At the time of his departure in January 1997, he served as Vice President and City Executive in Orangeburg, South Carolina. He worked
with First National Bank (now South Carolina Bank and Trust) from January 1997 until January 2000 where he held the position of Senior Vice President and Region Executive in Orangeburg, South Carolina. From January 2000 until June 2002, he held
the position of Senior                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           



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|                                 |  |              |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|-------------------------------- |  | ------------ |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                 |  |              |  | Vice President and Market President in Columbia, South Carolina with First Union National Bank (now Wachovia). From June 2002 until
December 2004, he served as Senior Vice President and Commercial Relationship Manager for Carolina National Bank, a start-up bank in Columbia, South Carolina. Most recently, Mr. Erwin served as Chief Executive Officer of Community Bancshares,
Inc. in Orangeburg, South Carolina.  Other Public Company
Directorships:    Mr. Erwin served on the Board of Community Bankshares, Inc from 2005 until 2008. 
Additional Information:    Mr. Erwin has extensive knowledge and experience in finance and the banking and financial services
industry. In addition to his experience at the Company, Mr. Erwin has 20 years of banking experience. At Community Bankshares, Mr. Erwin addressed significant asset quality and organizational issues associated with a multi-bank holding company with
decentralized policies, procedures, and operations. With Mr. Erwins leadership and experience, Community Bankshares successfully resolved the asset quality issues which ultimately resulted in a sale of the bank in October 2008 at two times
book value despite a depressed market. Erwins experience brings a unique perspective to the Board including, but not limited to, banking, regulatory, governmental, financial, and economic matters. Mr. Erwin is a graduate of Clemson
University.
|Michael D. Glenn                 |  |              |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|Age
Director Since Term Expiring |  | 70 1994 2012 |  | Business Experience:    Mr. Glenn has been engaged in the practice of law since 1965. He has worked
as an active trial attorney since 1978 with a concentration in complicated business and class action litigation. Mr. Glenn has been a partner with the law firm of Glenn, Haigler, McClain & Stathakis, LLP since 1993.
 Other Public Company
Directorships:    None  Additional
Information:    During his career, Mr. Glenn served on numerous boards and commissions upon appointment by the South Carolina Supreme Court and the South Carolina Bar Association and has served on numerous private and public
agency boards. In addition, he has served in three judgeships for ten years. Additionally, Mr. Glenns professional experience as a business owner provides the board with business insight and analytical skills that are necessary to manage
the Companys affairs in this difficult economic environment. Mr. Glenn is a graduate of Furman University and received his law degree from the University of South Carolina. Mr. Glenns law experience and education provides him with
additional perspective on the legal, regulatory, and risk matters impacting the Company.                                                                                                                                                                                                                                           
|L. Leon Patterson                |  |              |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|Age
Director Since Term Expiring |  | 70 1971 2012 |  | Business Experience:    Mr. Patterson has served as Chairman of the Board of Directors of Palmetto
Bancshares, Inc. since April 1990. Mr. Patterson served as Chief Executive Officer of Palmetto Bancshares, Inc. from April 1990 to December 31, 2009. From June 1982 to April 1994, he served also as President of Palmetto Bancshares, Inc.
 Mr. Patterson has served as Chairman of the Board of The Palmetto Bank since
July 2009. Prior to that, Mr. Patterson served as Chairman of the Board of The Palmetto Bank from January 1978 to January 2004. In addition, Mr. Patterson served as President of The Palmetto Bank from 1977 to February 1986 and as Chief Executive
Officer of The Palmetto Bank from March 1986 to January 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                



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|                                 |  |              |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|-------------------------------- |  | ------------ |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                 |  |              |  | Mr. Patterson served as Senior Executive for Strategic Development of Palmetto Bancshares, Inc. during 2010.
 Other Public Company Directorships:    None  Additional Information:    Mr.
Patterson has been employed for over 43 years in the banking industry and the Company, in a variety of management and senior management positions, and he brings to the Board tremendous experience and knowledge regarding the financial services
industry and the Companys businesses, as well as an understanding of the Companys vision and strategy. Mr. Patterson has extensive leadership experience. Mr. Patterson serves on various community organizations in our market area
which are critical to developing beneficial relationships for us. Mr. Patterson is a graduate of Wofford College, Wharton Graduate School, American Bankers Association Stonier Graduate School of Banking, and the American Bankers
Association Kellogg Chief Executive Officer Management Program. 
Mr. Patterson holds several not-for-profit directorships.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|L. Stewart Spinks                |  |              |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|Age
Director Since Term Expiring |  | 64 2006 2012 |  | Business Experience:    Mr. Spinks founded the Spinx Oil Company in 1972. He now serves as The Spinx
Company, Inc.s Chief Executive Officer. Spinx is the largest privately held gasoline convenience retailer in South Carolina. Mr. Spinks has served as President and Chief Executive Officer of Enigma, Inc., a real estate development
company, since 1984. Mr. Spinks served as Chief Executive Officer of Spinx Foods from 1996 until its closing in 2007. Mr. Spinks has served as Treasurer of Spinks Investments since 1990, a real estate company that owns and leases properties to
internal, as well as, external Spinx lessees. He has also served as Chief Executive Officer of Trans Equipment Services, Inc., a transportation leasing company, since 1985. Mr. Spinks founded Spinx Transportation, a fuel delivery company, in 1994,
and has served as President and Chief Executive Officer since that time.  Other Public Company Directorships:    None 
Additional Information:    As a result of his extensive business experience and ties to the community, Mr. Spinks brings
leadership, business management, entrepreneurial, and sales and marketing experience to the Board. In addition, Mr. Spinks professional experience as a business owner provides the board with business insight and analytical skills that are
necessary to manage the companys affairs in this difficult economic environment. Mr. Spinks serves and has served on various not-for-profit and community organization boards in our market area, developing relationships beneficial to us.
Additionally, Mr. Spinks serves on the Audit Committee to two such organizations. Mr. Spinks is a graduate of the University of Tennessee.
|J. David Wasson, Jr.             |  |              |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|Age
Director Since Term Expiring |  | 65 1979 2012 |  | Business Experience:    Mr. Wasson has been President and Chief Executive Officer of Laurens Electric
Cooperative, Inc., a member-owned rural electric cooperative in Upstate, South Carolina, since 1974.  Other Public Company Directorships:    None                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          



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| |  |  |  |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |  |  |  |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  |  |  |  | Additional Information:    Through his service as Chief Executive Officer of Laurens Electric over the
past 35 years, Mr. Wasson brings leadership and business management experience to the Board. Mr. Wasson possesses financial management expertise that he gained through his position and as a member of the audit committee of a nonpublic entity, as
well as a current member of the Companys Audit Committee. As a member of the Board since 1979, Mr. Wasson has extensive knowledge and experience regarding our business. In addition, Mr. Wasson provides unique insight into the
Companys Laurens County market. Mr. Wasson is a graduate of Clemson University and earned a graduate degree from the University of South Carolina.



Other than Messrs. Dixon and Erwin, whose information appears
above in the list of directors, the following provides information regarding our other executive officer:



|             |  |    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|------------ |  | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Roy D. Jones |  |    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|Age          |  | 42 |  | Business Experience:Mr. Jones has served as Chief Accounting Officer of Palmetto Bancshares, Inc. and
The Palmetto Bank since November 2010. In addition, Mr. Jones was appointed Chief Financial Officer of Palmetto Bancshares, Inc. and The Palmetto Bank in February 2011. Prior to being hired by the Company, Mr. Jones was employed by The South
Financial Group most recently as Executive Vice PresidentDirector of Finance and Investor Relations. While at The South Financial Group, Mr. Jones also served in the role of Senior Vice PresidentDirector of Money Markets and Derivatives.
Between 2001 and 2004, Mr. Jones served as Chief Financial Officer and Senior Vice PresidentCorporate Development for CNB Florida Bancshares, Inc. (acquired by The South Financial Group in 2004). Mr. Jones served in various capacities for Bank
of America from 1997 until 2001. Prior to his service with Bank of America, he served in financial reporting roles for two companies. Mr. Jones began his career with Price Waterhouse LLP in 1990.
 Additional Information:Mr. Jones has extensive
accounting and financial reporting expertise from his years of business experience and has worked with small community banks to some of the largest national banks. His background has provided him with substantial banking, regulatory, management and
financial reporting, and risk management experience. Mr. Jones received a Bachelor of Business Administration with a major in accounting from the University of North Florida and a Master of Accounting degree from the University of Florida and is a
Certified Public Accountant in both Florida and South Carolina.



Family Relationships



There are no family relationships among members of our Board of Directors.



Section 16(a) Beneficial Ownership Reporting Compliance



Section 16(a) of the Securities Exchange Act of 1934 and related regulations require our directors,
executive officers, and anyone holding more than 10% of our common stock to report their initial ownership of our common stock and any changes in that ownership to the SEC. We are required to disclose in this proxy statement the failure to file
these reports by any reporting person when due. Except as described in this paragraph, all reporting persons of the Company satisfied these filing requirements with regard to initial ownership and ownership change reporting relative to 2010. As a
result of nontimely communication of the transaction, one Form 4 was not filed timely to report a sale by John D. Hopkins, Jr. As a result of an EDGAR OnlineForms Management error, required Form 4s were not filed timely to report one transaction
ownership change for



82



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Michael D. Glenn; John T. Gramling, II; L. Leon Patterson; L. Stewart Spinks; and J. David Wasson, Jr. and to report two transaction ownership changes for Lee S. Dixon and Samuel L. Erwin. In
each case, the reports were subsequently filed immediately after becoming aware of the transactions or the submission errors.



Codes of Ethics



Each member of the Board is held to the standards outlined in the Code of Ethics for Executive Management and Senior Financial Officers,
which states our policy and standards for ethical conduct and our expectation that all subjected parties will act in a manner that serves the best interests of the Company. We also expect all of our employees to adhere to the highest possible
standards of ethics and business conduct with other employees, customers, shareholders, and the communities we serve and to comply with all applicable laws, rules, and regulations that govern our businesses. Accordingly, we have in effect a code of
ethics for all employees.



Shareholders and other
interested persons may view our codes of ethics on our website, www.palmettobank.com.



Audit Committee



The registrant has a separately designated Audit Committee established by the Board for the purpose of overseeing the accounting and financial reporting processes and the audits of the financial
statements of the Company. Current members of this committee include L. Stewart Spinks, John P. Sullivan, and J. David Wasson.



Audit Committee Financial Expert



The Board has determined that John P. Sullivan, currently a member of the Audit Committee, is an audit committee financial
expert as defined in Item 407(d)(5) of the SECs Regulation S-K under the Securities Exchange Act of 1934. Mr. Sullivan is Independent as defined in Item 407(a) of Regulation S-K. Mr. Sullivan was appointed
to serve on the Audit Committee on October 12, 2010 and was determined by the Audit Committee to be a financial expert on December 10, 2010.



Prior to the determination that Mr. Sullivan was an audit committee financial expert, the Board of Directors determined
that the Audit Committee did not have an Audit Committee financial expert nor did its membership include an independent individual who qualified as an Audit Committee financial expert. The Board did, however, believe that the members of the Audit
Committee at that time were capable of satisfying their Audit Committee responsibilities based on their experience and background. Additionally, the Board believed that Lee S. Dixon is a financial expert, as that term is defined by applicable SEC
rules, with such expertise being part of the rationale for appointing Mr. Dixon to the Board of Directors in 2009; however, as a member of management Mr. Dixon is not an independent director and therefore does not meet the requirements to
be considered an audit committee financial expert within the meaning of Item 407(d)(5)(ii) of Regulation S-K.



|ITEM 11. | EXECUTIVE COMPENSATION
|-------- | ----------------------



As described in the Explanatory Note at the beginning of this Amendment, the following executive compensation information is provided to
meet the technical requirements of Part III of Form 10-K. Additional compensation information will be included in our definitive proxy statement filed in relation to our annual meeting of shareholders, currently scheduled for May 19, 2011.



83



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Executive Management Compensation



Summary Compensation Table



The table below summarizes the compensation and benefits
paid to the Companys named executive officers during 2010. The table is comprised of those who served as the Companys principal executive officer during the year and the Companys two most highly compensated executive officers at
December 31, 2010.



|                           |  |      |      |  |            |  |         |                    |  |  |                                            |  |  |                                |        |  |                              |  |         |           |  |  |        |  |  |  |         | 
|-------------------------- |  | ---- | ---- |  | ---------- |  | ------- | ------------------ |  |  | ------------------------------------------ |  |  | ------------------------------ | ------ |  | ---------------------------- |  | ------- | --------- |  |  | ------ |  |  |  | ------- | 
|Name and PrincipalPosition |  | Year |      |  | Salary ($) |  |         | StockAwards($) (1) |  |  | NonequityIncentive PlanCompensation($) (2) |  |  | Change in PensionValue ($) (3) |        |  | All OtherCompensation($) (4) |  |         | Total ($) | 
|Lee S. Dixon*              |  |      | 2010 |  |            |  | 250,000 |                    |  |  |                                           |  |  |                                |       |  |                              |  |        |           |  |  | 19,793 |  |  |  | 269,793 | 
|                           |  |      | 2009 |  |            |  | 126,923 |                    |  |  | 164,625                                    |  |  |                                |       |  |                              |  |        |           |  |  | 86,735 |  |  |  | 378,283 | 
|                           |  |      |      |  |            |  |        
|Samuel L. Erwin*           |  |      | 2010 |  |            |  | 275,000 |                    |  |  |                                           |  |  |                                |       |  |                              |  |        |           |  |  | 25,904 |  |  |  | 300,904 | 
|                           |  |      | 2009 |  |            |  | 190,835 |                    |  |  | 219,500                                    |  |  |                                |       |  |                              |  |        |           |  |  | 85,198 |  |  |  | 495,533 | 
|                           |  |      |      |  |            |  |        
|L. Leon Patterson*         |  |      | 2010 |  |            |  | 250,000 |                    |  |  |                                           |  |  |                                |       |  |                              |  | 243,652 |           |  |  | 51,381 |  |  |  | 545,033 | 
|                           |  |      | 2009 |  |            |  | 414,423 |                    |  |  |                                           |  |  |                                |       |  |                              |  | 165,711 |           |  |  | 80,548 |  |  |  | 660,682 | 
|                           |  |      | 2008 |  |            |  | 387,500 |                    |  |  |                                           |  |  |                                | 38,750 |  |                              |  |        |           |  |  | 74,857 |  |  |  | 501,107 | 



|* |  | See Item 10 above for discussion regarding the principal positions during 2010 of Mr. Dixon, Mr. Erwin, and Mr. Patterson.
|- |  | --------------------------------------------------------------------------------------------------------------------------

|1. |  | The 2009 stock awards included for each individual above consists of restricted stock awards granted under our 2008 Restricted Stock Plan. The value for each of these
awards is its grant date fair value calculated by multiplying the number of shares subject to the award by the market price per share on the date such award was granted, computed in accordance with Financial Accounting Standards Board Accounting
Standards Codification Topic 718. The following table summarizes the number of restricted stock awards granted, the grant date and the per share fair value used to calculate the total grant date fair value for the stock awards reported.
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                |  |            |        |  |            |  |            |                         |  |  |                                |  |  |  |         | 
|--------------- |  | ---------- | ------ |  | ---------- |  | ---------- | ----------------------- |  |  | ------------------------------ |  |  |  | ------- | 
|Name            |  | # ofShares |        |  | Grant Date |  |            | Per Share fairValue
($) |  |  | Total Grant DateFair Value
($) | 
|Lee S. Dixon    |  |            | 7,500  |  |            |  | 10/20/2009 |                         |  |  | 21.95                          |  |  |  | 164,625 | 
|Samuel L. Erwin |  |            | 10,000 |  |            |  | 10/20/2009 |                         |  |  | 21.95                          |  |  |  | 219,500 | 



For more information about our restricted stock awards refer to our Financial Statements and Supplementary Data included under
Part II, Item 8 of this Annual Report on Form 10-K for the year ended December 31, 2010.

|2. |  | For purposes of the summary compensation table, all nonequity incentive compensation amounts included for a particular year were actually paid in the first quarter of
the following year. In light of the negative financial results experienced since 2009, among other things, the Company eliminated the corporate component of the cash incentive compensation plan for all officers relative to 2009 and 2010. As a
result, no incentive compensation was paid under this plan relative to 2009 and 2010.
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|3. |  | The following table summarizes the composition in the change in pension value during 2010.
|-- |  | ------------------------------------------------------------------------------------------



|                  |  |                              |        |  |                 |  |         |                  |  |  |         | 
|----------------- |  | ---------------------------- | ------ |  | --------------- |  | ------- | ---------------- |  |  | ------- | 
|Name              |  | ChangeDue toDiscountRate ($) |        |  | OtherChanges($) |  |         | Total Change ($) | 
|L. Leon Patterson |  |                              | 75,835 |  |                 |  | 167,817 |                  |  |  | 243,652 | 



Other Changes in Mr. Pattersons pension during 2010 was the result of the deferral of his benefit beyond normal retirement age.



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|4. |  | The following table summarizes the compensation components included within the All Other Compensation column of the Summary Compensation Table for 2010. Other
compensation typically available to all of the Companys employees is excluded from this table. Such exclusions from the following table include medical and dental benefits, life insurance, long-term disability coverage, paid time off, and
other benefits that are offered to all employees.
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                  |  |                    |       |  |                                       |  |       |                      |  |  |             |  |  |                                                     |       |  |                       |  |   |       |  |  |        |  |  |  |        | 
|----------------- |  | ------------------ | ----- |  | ------------------------------------- |  | ----- | -------------------- |  |  | ----------- |  |  | --------------------------------------------------- | ----- |  | --------------------- |  | - | ----- |  |  | ------ |  |  |  | ------ | 
|Name              |  | ClubMemberships(1) |       |  | Personal Use ofCompanyAutomobiles (2) |  |       | PhysicalExaminations |  |  | 401(k)Match |  |  | AmountsGrossed Up /Reimbursedfor thePayment ofTaxes |       |  | InsurancePremiums (3) |  |   | Total | 
|Lee S. Dixon      |  |                    |      |  |                                       |  | 4,578 |                      |  |  |            |  |  |                                                     | 8,515 |  |                       |  |  |       |  |  | 6,700  |  |  |  | 19,793 | 
|Samuel L. Erwin   |  |                    | 5,092 |  |                                       |  | 4,427 |                      |  |  |            |  |  |                                                     | 9,581 |  |                       |  | 8 |       |  |  | 6,796  |  |  |  | 25,904 | 
|L. Leon Patterson |  |                    | 6,458 |  |                                       |  | 2,936 |                      |  |  | 600         |  |  |                                                     | 6,750 |  |                       |  |  |       |  |  | 34,637 |  |  |  | 51,381 | 



| | (1) |  | In addition to memberships to civic, professional, and industry organization dues for memberships directly related to their job responsibilities, certain senior
executives are also provided with memberships to country clubs and social organizations to be used for both personal and business purposes as this provides the recipient with the ongoing opportunity to network with other community leaders, customers
and shareholders. Because it is difficult to allocate such membership dues between personal and business purposes, included in the table above is 100% of memberships to country clubs and social organizations paid by the Company on the named
executives officers behalf during 2010.
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) |  | Historically, each member of the Companys senior management was provided with the use of a Company-owned automobile. The intended use of the automobiles was
primarily for business purposes. However, personal use of such automobiles was permitted and was considered a perquisite. In April 2010, the Company eliminated all Company provided automobiles by selling the remaining automobiles to the officers
based on the fair values of the automobiles and selling any automobiles not purchased by the officers in the open market. The amount included in the Personal Use of Company Automobiles column in the above table represents the value of the personal
use of the vehicle from January 1, 2010 until the time the car was purchased by the executive from the Company.
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Since the Company no longer provides employer owned cars to employees, as part of the transition to eliminate employer-owned automobiles,
employees with employer owned cars, at his or her option, were given the option to purchase the employer provided vehicle from the Company at the Kelly Blue Book Value minus a $2,500 discount. This discount was offered to the employees as an
incentive to purchase the automobiles so that the Company did not have to incur the time and cost of taking possession of the cars and selling them. Each named executive officer purchased his employer-owned car from the Company during
2010.

| | (3) |  | The Company paid the following insurance premiums during 2010 with respect to life insurance and deferred compensation agreements for the benefit of named executive
officers.
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                  |  |                |        |  |                  |  |        |                        |  |  |        | 
|----------------- |  | -------------- | ------ |  | ---------------- |  | ------ | ---------------------- |  |  | ------ | 
|Name              |  | Long-Term Care |        |  | SupplementalLife |  |        | TotalInsurancePremiums | 
|Lee S. Dixon      |  |                | 6,700  |  |                  |  |       |                        |  |  | 6,700  | 
|Samuel L. Erwin   |  |                | 6,796  |  |                  |  |       |                        |  |  | 6,796  | 
|L. Leon Patterson |  |                | 14,337 |  |                  |  | 20,300 |                        |  |  | 34,637 | 



Mr. Patterson retired from the Company effective December 31, 2010. As part of his retirement, the Company will pay his life
insurance premium for 2011 which is currently estimated to be $6,950, after which the Company will cease paying this premium.



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Outstanding Equity Awards at Fiscal Year-End



The following table summarizes unexercised options, stock
that has not vested, and equity incentive compensation plan awards for each named executive officer outstanding as of December 31, 2010.



|                  |  |                                                     |   |  |                          |  |   |                       |  |  |                                                         |  |  |                                                   |       |  |  |  |        | 
|----------------- |  | --------------------------------------------------- | - |  | ------------------------ |  | - | --------------------- |  |  | ------------------------------------------------------- |  |  | ------------------------------------------------- | ----- |  |  |  | ------ | 
|                  |  | OPTION AWARDS                                       |   |  | STOCK AWARDS             | 
|Name              |  | Number ofSecuritiesUnderlyingUnexercisedOptions (#) |   |  | Option ExercisePrice
($) |  |   | OptionExpiration Date |  |  | Number ofShares or Unitsof Stock thathave not Vested(#) |  |  | Market Valueof Shares orUnits that havenot Vested |      
|Lee S. Dixon      |  |                                                     |  |  |                          |  |  |                       |  |  |                                                        |  |  |                                                   | 6,000 |  |  |  | 15,600 | 
|Samuel L. Erwin   |  |                                                     |  |  |                          |  |  |                       |  |  |                                                        |  |  |                                                   | 8,000 |  |  |  | 20,800 | 
|L. Leon Patterson |  |                                                     |  |  |                          |  |  |                       |  |  |                                                        |  |  |                                                   |      |  |  |  |       | 



Messers Dixons and Erwins stock awards were granted on October 20, 2009 and vest in five equal annual installments the
first of which was July 1, 2010. Market value of shares of common stock that have not vested as of December 31, 2010 was calculated based on the last five trades of the stock facilitated by the Company through the Private Trading System as
of that date. For more information about the Private Trading System, refer to Related Shareholder Matters and Issuer Purchases of Equity Securities included under Part II, Item 5 of this Annual Report on Form 10-K.



Employment and Severance Agreements



Related to the implementation of the executive management
transition plan during 2009, the Board of Directors approved and the Company entered into employment agreements with Mr. Erwin and Mr. Dixon on November 24, 2009. The Company entered into these agreements to retain these executives
and to optimally align the interests of the shareholders and executives. The Company recognizes that the leadership and contribution to the well-being of the Company by Mr. Erwin and Mr. Dixon is substantial. Therefore, the Board desired
to provide for their continued employment to reinforce and encourage their continued dedication to the Company.



Pursuant to the terms of the employment agreements, unless terminated earlier, each employment agreement provides for a three-year term of
employment. Each agreement will automatically extend for an additional year beginning on the third anniversary of the agreement unless written notice is given by either the Company or the executive within six months prior to the termination date.



Each employment agreement may be terminated for
death, disability, and with or without cause by the Company or the executive. If the Company terminates Mr. Erwin or Mr. Dixon without cause, the Company will pay severance compensation to the executive in an amount equal to 100% of his
then current annual base salary. Provided the Company has not provided Mr. Erwin or Mr. Dixon with written notice of the termination of this provision, if required, upon the occurrence of a change in control, each executive is entitled to
a lump sum cash payment in an amount equal to his then current annual base salary (as defined under Section 280G of the Internal Revenue Code (the Code)) multiplied by two plus any bonus earned or accrued through the date of change
in control. In addition, any restrictions on any outstanding equity incentive awards granted to the executives will lapse and such incentive awards will immediately become 100% percent vested. If any severance payments are deemed to constitute
excess parachute payments within the meaning of Section 280G of the Code, then such payments shall be reduced to an amount the value of which is $1.00 less than the maximum amount that could be paid to the Executive without the
compensation being treated as excess parachute payments under Section 280G.



Each employment agreement also contains provisions relating to non-solicitation of customers and personnel and non-competition during the term of employment and 12 months thereafter, as well as provision
relating to the protection of confidential information and trade secrets. These non-solicitation and non-compete provisions do not apply following a change of control.



86



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Retirement Plans



The following discussion describes the terms of the Companys material retirement plans. For additional
discussion, see Part II, Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations and Part II, Item 8. Financial Statements and Supplementary Data included in this Annual
Report on Form 10-K.



Defined Benefit Pension
Plan



Historically, the Company offered a
noncontributory, defined benefit pension plan that covered all full-time employees having at least twelve months of continuous service and having attained age 21. During the fourth quarter 2007 the Company froze the pension plan and therefore ceased
accruing pension benefits for employees in the plan. Although no previously accrued benefits were lost, employees no longer accrue benefits for services subsequent to 2007.



The Companys defined benefit pension plan operates in
the same manner for all participants. Under the Companys defined benefit pension plan, a participants normal retirement benefit is calculated using 1.15% of the individuals final averaged monthly compensation, multiplied by his or
her years of credited service (not to exceed 35 years), plus 0.65% of his or her final average monthly compensation in excess of his or her current covered compensation, multiplied by his or her years of credited service (not to exceed 35 years).
Covered compensation is computed based on the individuals Form W-2 wages reduced by overtime and incentive compensation, if applicable.



For purposes of the above formula, final average monthly compensation refers to the participants monthly
compensation averaged over his or her highest paid five consecutive calendar years of service. For funding purposes, a normal retirement benefit is treated as being payable in the form of a life annuity with 60 guaranteed monthly payments. A
participant in the defined benefit pension plan may work past the age of 65. However, after this date and prior to the age of 701/2, the participant may not begin receiving monthly retirement benefits until employment is terminated. A
participant may retire before reaching his or her normal retirement date if the participant is within 10 years of his or her normal retirement date and the individual has reached age 55 and has 15 years of service. An individual who qualifies for
and elects early retirement, whose age and years of service with the Company total 90 years or greater will receive benefit payments based on his or her accrued benefit at the time early retirement is elected. An individual who qualifies for and
elects early retirement, whose age and years of service with the Company do not total 90 years or greater, will receive benefit payments based on his or her accrued benefit at the time early retirement is elected reduced by 1/30thper year for each year between the year early retirement is elected
and the year the individual will reach 65 years of age.



The defined benefit pension plan does not allow participants to obtain extra years of credited service except through actual years of service with the Company.



Defined Contribution 401(k) Plan



Employees are given the opportunity to participate in the
Companys 401(k) plan which is designed to supplement an employees retirement income. Under the 401(k) plan, participants are able to defer a portion of their salary into the plan. The Company matches employee contributions at a rate of
$0.60 per dollar up to 6% of an employees eligible compensation. Matching contributions are contributed to the plan prior to the end of each plan year.



87



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Director Compensation



The table below provides information on 2010 compensation for nonemployee directors. The Company offers
reimbursement to directors for expenses incurred in their Board service, including the cost of attending Board and committee meetings. Effective January 1, 2010, no employee directors receive compensation for their Board service. In addition,
Mr. Erwin and Mr. Dixon did not receive any director compensation for their service during 2009.



|                     |  |                                |        |  |                 |  |       |                           |  |  |           |  |  |  |        | 
|-------------------- |  | ------------------------------ | ------ |  | --------------- |  | ----- | ------------------------- |  |  | --------- |  |  |  | ------ | 
|Name                 |  | Fees Earned orPaid in Cash ($) |        |  | Stock Awards($) |  |       | All OtherCompensation ($) |  |  | Total ($) | 
|W. Fred Davis, Jr.   |  |                                | 25,000 |  |                 |  |      |                           |  |  |          |  |  |  | 25,000 | 
|David P. George, Jr. |  |                                | 20,500 |  |                 |  |      |                           |  |  |          |  |  |  | 20,500 | 
|Michael D. Glenn     |  |                                | 28,000 |  |                 |  |      |                           |  |  |          |  |  |  | 28,000 | 
|Robert B. Goldstein  |  |                                | 4,500  |  |                 |  | 2,600 |                           |  |  |          |  |  |  | 7,100  | 
|John T. Gramling, II |  |                                | 25,000 |  |                 |  |      |                           |  |  |          |  |  |  | 25,000 | 
|John D. Hopkins, Jr. |  |                                | 28,000 |  |                 |  |      |                           |  |  |          |  |  |  | 28,000 | 
|James J. Lynch       |  |                                | 4,500  |  |                 |  | 2,600 |                           |  |  |          |  |  |  | 7,100  | 
|Sam B. Phillips, Jr. |  |                                | 25,000 |  |                 |  |      |                           |  |  | 3,120     |  |  |  | 28,120 | 
|Albert V. Smith      |  |                                | 20,500 |  |                 |  |      |                           |  |  |          |  |  |  | 20,500 | 
|Ann B. Smith         |  |                                | 25,000 |  |                 |  |      |                           |  |  |          |  |  |  | 25,000 | 
|E. Keith Snead, III  |  |                                | 25,000 |  |                 |  |      |                           |  |  |          |  |  |  | 25,000 | 
|Jane S. Sosebee      |  |                                | 28,000 |  |                 |  |      |                           |  |  |          |  |  |  | 28,000 | 
|L. Stewart Spinks    |  |                                | 28,000 |  |                 |  |      |                           |  |  |          |  |  |  | 28,000 | 
|John P. Sullivan     |  |                                | 4,500  |  |                 |  | 2,600 |                           |  |  |          |  |  |  | 7,100  | 
|J. David Wasson, Jr. |  |                                | 28,000 |  |                 |  | 5,200 |                           |  |  |          |  |  |  | 33,200 | 



In connection with our Private Placement, the Company was required to reduce the size of the Board from 15 members to 11 members upon
consummation of the private placement. As part of this reduction, two of our directors whose terms expired at the 2010 Annual Meeting of Shareholders, David P. George, Jr. and Albert V. Smith, concluded not to stand for reelection. As a result,
these two directors ceased to be directors after August 6, 2010. Further, on October 12, 2010, W. Fred Davis, Jr.; John T. Gramling, II; Sam B. Phillips, Jr.; Ann B. Smith; and Edward K. Snead, III notified the Company and the Bank of
their decision to retire from the Boards effective October 12, 2010. Prior to the closing of the private placement, the Company agreed to appoint two designees of CapGen Financial Partners (CapGen) and one designee of Patriot
Financial Partners, L.P. and Patriot Financial Partners, Parallel, L.P. (collectively, Patriot) to serve on the Boards of Directors of each of the Company and the Bank. As such, on October 12, 2010, CapGen designated John P.
Sullivan and Robert B. Goldstein to serve on the Boards, and Patriot designated James J. Lynch to serve on the Boards. For additional discussion of our Private Placement, see Part II, Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations and Part II, Item 8. Financial Statements and Supplementary Data included in this Annual Report on Form 10-K.



To assist in the determination of compensation to our
directors, in 2010 the Company engaged a national benefits consulting firm to perform a review of the director compensation, including a peer comparison to other banks of similar asset size and business activities. The compensation paid to our
directors in 2010 is consistent with the results of the review. However, effective January 1, 2011, the annual retainer of $10,000 paid to be our directors will be paid in common stock of the Company and Committee chairs and the Lead Director
will be paid incremental annual retainers in cash for the additional time required to fulfill the duties and responsibilities of those roles.



Cash Compensation to Directors.



During 2010, members of the Board received monthly cash fees of $1,500. In addition, members as of January 1, 2010 received an annual
cash retainer of $10,000 for services provided as directors including, but not limited to, committee membership and related responsibilities. Directors of the Company also serve on the Board of the Bank. Directors receive no additional compensation
related to their service on the Banks Board.



88



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Messers Goldstein and Sullivan retain 20% of the monthly director fees while CapGen retains
80%. Patriot retains 100% of the monthly director fees relative to Mr. Lynchs service as a member of the Board.



Equity Compensation to Directors.



Directors are eligible to participate in the 2008 Restricted Stock Plan. When the Board and shareholders approved the Plan, the guidelines
for restricted stock awards included the following related to directors:



|                                              |  |  |              | 
|--------------------------------------------- |  |  | ------------ | 
|Appointment of new directors to the Board     |  |  | 1,000 shares | 
|Re-election of sitting directors to the Board |  |  | 2,000 shares | 



These are general guidelines for restricted stock awards under the plan, actual grants must still be approved by the Compensation
Committee.



The term and conditions of grants to
directors under these plans are the same as for grants to employees. Shares of restricted stock granted under the 2008 Restricted Stock Plan are subject to restrictions requiring continuous service for a specified time period following the date of
grant. During this period, the holder is entitled to full voting rights and dividends.



All shares issued under the 2008 Restricted Stock Plan through December 31, 2010 have a five year vesting period and have the right to both vote and receive dividends. Awards under this plan are not
transferrable except by will, by the laws of descent and distribution, and pursuant to a qualified domestic relations order as defined by the Internal Revenue Code or in Title I of the Employee Retirement Income Security Act, or the rules of the
plan. With regard to termination of service, grants under this equity incentive compensation plan contain the following provisions:



| |  |  | If the termination is voluntary, the participant will be entitled to retain all vested shares of restricted stock but will forfeit any unvested shares
of restricted stock;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | If termination is due to the participants disability, the participant will receive the vested shares of restricted stock and the unvested shares
of restricted stock (the remaining shares will vest immediately upon the participants disability);
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | If termination is due to the participants death, the participant will receive only the vested shares of restricted stock and the unvested shares
of restricted stock will be forfeited; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In the event of a change in control (as defined by the plan), all unvested shares of restricted stock will fully vest immediately.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------



Messers Goldstein, Lynch, and
Sullivan were each granted 1,000 restricted stock awards during 2010 as a result of their election to the Board. Mr. Wasson was granted 2,000 restricted stock awards during 2010 because of his re-election to the Board in 2009 at which time no
restricted stock awards were granted.



For awards
of stock, the aggregate grant date fair value is computed in accordance with the Financial Accounting Standards Board Accounting Standards Codification Topic 718. All such awards were granted on November 22, 2010 at which time the fair value of
the Companys common stock was $2.60 per share based the last five trades of the stock facilitated by the Company through the Private Trading System.



All Other Compensation to Directors.



Sam B. Phillips, Jr. was re-elected to the Board by the shareholders in 2009 and therefore normally would have received a restricted stock
award grant of 2,000 shares at that time. Subsequently, Mr. Phillips retired from the Board on October 12, 2010 at which time he would have been vested in 400 shares. Since he was no longer a director at the time the restricted stock
grants were made by the Board on November 22, 2010, the amount included in the All Other Compensation column of the Director Compensation table above represents the economic value of the vested shares based on the stock price at the date of
grant in May 2009 which was paid to Mr. Phillips in cash in December 2010.



89



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|ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS
|-------- | ----------------------------------------------------------------------------------------------



Security Ownership of Management



The following table shows how many shares of common stock
our current directors and nominees for director, our executive officers named in the Summary Compensation Table above (our named executive officers), and all directors and executive officers as a group owned on February 22, 2011 and the number
of shares they had the right to acquire within 60 days of that date. This table also shows, as of February 22, 2011, the number of common stock units credited to the accounts of our nonemployee directors, named executive officers, and all
directors and executive officers as a group under the terms of the applicable benefit available to them.



|                                                       |                       |                                    |            |                      |  |  |                                                     |  |  |       |       |  |                           |  |            |  |  |  |      |  
|------------------------------------------------------ | --------------------- | ---------------------------------- | ---------- | -------------------- |  |  | --------------------------------------------------- |  |  | ----- | ----- |  | ------------------------- |  | ---------- |  |  |  | ---- | -
|Name (1)                                               |                       | Amount and Nature of Ownership (1) |           
|                                                       | (a)                   |                                    |            | (b)                  |  |  | (c)                                                 |  |  | (d)   |       |  |                           | 
|                                                       | Common StockOwned (2) |                                    |            | CommonStockUnits (3) |  |  | OptionsExercisablewithin 60 daysof February 22,2011 |  |  | Total |       |  | Percent ofCommonStock (4) | 
|Nonemployee Directors and Director Nominees            |                       |                                    |            |                      |  |  |                                                     |  |  |       |       |  |                           |  |            |  |  |  |      |  
|Michael D. Glenn                                       |                       |                                    | 30,191     |                      |  |  |                                                    |  |  |       |      |  |                           |  | 30,191     |  |  |  | (5   | )
|Robert B. Goldstein (6)                                |                       |                                    | 22,879,382 |                      |  |  | 800                                                 |  |  |       |      |  |                           |  | 22,880,182 |  |  |  | 45.3 | %
|John D. Hopkins, Jr.                                   |                       |                                    | 177,180    |                      |  |  |                                                    |  |  |       | 1,000 |  |                           |  | 178,180    |  |  |  | (5   | )
|James J. Lynch (7)                                     |                       |                                    | 9,678,475  |                      |  |  | 800                                                 |  |  |       |      |  |                           |  | 9,679,275  |  |  |  | 19.2 | %
|Jane S. Sosebee                                        |                       |                                    | 11,605     |                      |  |  |                                                    |  |  |       | 5,000 |  |                           |  | 16,605     |  |  |  | (5   | )
|L. Stewart Spinks                                      |                       |                                    | 44,407     |                      |  |  |                                                    |  |  |       | 3,000 |  |                           |  | 47,407     |  |  |  | (5   | )
|John P. Sullivan (6)                                   |                       |                                    | 22,879,382 |                      |  |  | 800                                                 |  |  |       |      |  |                           |  | 22,880,182 |  |  |  | 45.3 | %
|J. David Wasson, Jr.                                   |                       |                                    | 47,491     |                      |  |  | 2,000                                               |  |  |       |      |  |                           |  | 49,491     |  |  |  | (5   | )
|                                                       |                       |                                    |            |                      | 
|Named Executive Officers                               |                       |                                    |            |                      |  |  |                                                     |  |  |       |       |  |                           |  |            |  |  |  |      |  
|Lee S. Dixon*                                          |                       |                                    | 68,537     |                      |  |  | 6,000                                               |  |  |       |      |  |                           |  | 74,537     |  |  |  | (5   | )
|Samuel L. Erwin*                                       |                       |                                    | 70,307     |                      |  |  | 8,000                                               |  |  |       |      |  |                           |  | 78,307     |  |  |  | (5   | )
|L. Leon Patterson*                                     |                       |                                    | 577,726    |                      |  |  |                                                    |  |  |       |      |  |                           |  | 577,726    |  |  |  | (5   | )
|                                                       |                       |                                    |            |                      | 
|Directors and Executive Officers as a Group(12 people) |                       |                                    | 33,589,347 |                      |  |  | 21,900                                              |  |  |       | 9,000 |  |                           |  | 33,620,247 |  |  |  | 66.6 | %



|* |  | Also a director.
|- |  | ----------------

|(1) |  | Unless otherwise stated in the footnotes below, each of the named individuals and each member of the group has sole voting and investment power for all shares of common
stock shown in the table.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | For the following directors, named executive officers, and for all directors and executive officers as a group, the share amounts shown in column (a) of the table
include certain shares over which they may have shared voting and investment power:
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The number of shares of common stock beneficially owned by Mr. Glenn includes 9,500 shares held in an IRA account.
| | - |  | ------------------------------------------------------------------------------------------------------------------



| |  |  | The number of shares of common stock beneficially owned by Mr. Goldstein includes 22,878,412 shares issued to CapGen for which Mr. Goldstein
is a Principal.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The number of shares of common stock beneficially owned by Mr. Hopkins includes 82,000 shares held in an IRA account, 4,000 shares owned by
Mr. Hopkins wife, and 1,000 shares held as custodian for each of his son and daughter.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The number of shares of common stock beneficially owned by Mr. Lynch includes 9,674,429 shares issued to Patriot for which Mr. Lynch is a
Partner.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------



90



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| |  |  | The number of shares of common stock beneficially owned by Ms. Sosebee includes 2,775 held in her name as trustee for the benefit of herself and
4,500 shares held in her husbands name as trustee for the benefit of her husband.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The number of shares of common stock beneficially owned by Mr. Sullivan includes 22,878,412 shares issued to CapGen for which Mr. Sullivan is
Managing Director.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The number of shares of common stock beneficially owned by Mr. Wasson includes 2,400 shares owned with his wife and 28,845 shares held in an IRA
account.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The number of shares of common stock beneficially owned by Mr. Dixon includes 57,692 shares held in an IRA account and 400 shares held as
custodian for each of his two daughters.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The number of shares of common stock beneficially owned by Mr. Erwin includes 1,000 shares held as custodian for each of his two sons.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Of these shares of common stock beneficially owned, 31,490 shares are held in Mr. Pattersons 401(k) account, Mr. Pattersons wife
owns 54,014 shares, and Mr. Pattersons wife and her mother own 20,537 shares.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) |  | The amounts shown include unvested shares of common stock allocated to the account of each individual under the Companys 2008 Restricted Stock Plan as of
February 22, 2011. The following table summarizes the vesting of these shares of common stock:
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                     |  |                                                                                                                                    
|-------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------
|Name                 |  | Vesting Terms                                                                                                                      
|Robert B. Goldstein  |  | 1,000 granted November 22, 2010. 200 vested on November 22, 2010. 200 shares vest annually on November 22 through November 22, 2014
|                     | 
|James J. Lynch       |  | 1,000 granted November 22, 2010. 200 vested on November 22, 2010. 200 shares vest annually on November 22 through November 22, 2014
|                     | 
|John P. Sullivan     |  | 1,000 granted November 22, 2010. 200 vested on November 22, 2010. 200 shares vest annually on November 22 through November 22, 2014
|                     | 
|J. David Wasson, Jr. |  | 2,000 granted November 22, 2010. 400 vest annually on November 22 through November 22, 2013.                                       
|                     | 
|Lee S. Dixon         |  | 7,500 granted October 20, 2009. 1,500 shares vested July 1, 2010. 1,500 shares vest annually on July 1 through July 1, 2012.       
|                     | 
|Samuel L. Erwin      |  | 10,500 granted October 20, 2009. 2,000 shares vested July 1, 2010. 2,000 shares vest annually on July 1 through July 1, 2012.      



|(4) |  | The percentages of total beneficial ownership have been calculated based upon 50,513,722 shares (the shares of common stock outstanding as of February 22, 2011).
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) |  | This director or named executive officer does not beneficially own more than 1% of our outstanding common stock.
|--- |  | ----------------------------------------------------------------------------------------------------------------

|(6) |  | Robert B. Goldstein and John P. Sullivan serve as Principal and Managing Director of CapGen, respectively. Accordingly, securities owned by CapGen are regarded as
being beneficially owned by Robert B. Goldstein and John P. Sullivan. As such, 22,875,336 shares are included in both Mr. Goldsteins and Mr. Sullivans beneficial holdings in the table above. Therefore, the total share
amounts owned by the group of 11 directors and executive officers reflects a reduction of this duplicative amount.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(7) |  | Patriot Financial Partners, GP, L.P. is a general partner of each Patriot Financial Partners, L.P. and Patriot Financial Partners Parallel, L.P. (collectively,
Patriot) and Patriot Financial Partners, GP, LLC is a general partner of Patriot Financial Partners, GP, L.P.. In addition, each of W. Kirk Wycoff, Ira M. Lubert and James J. Lynch are general partners of the Funds and Patriot Financial
Partners, GP, L.P. and members of Patriot Financial Partners, GP, LLC. Accordingly, securities owned by Patriot may be regarded as being beneficially owned by Patriot GP, Patriot LLC and each of W. Kirk Wycoff, Ira M. Lubert and James J.
Lynch..
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



91



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Security Ownership of Certain Beneficial Owners



We inquire of directors regarding their knowledge of
beneficial owners who may own more than five percent of our common stock. In addition, our Secretary reviews ownership records to determine any beneficial owners that may own greater than five percent of our common stock. The following table
summarizes, as of February 22, 2011, persons or groups who beneficially owned more than five percent of the outstanding shares of our common stock.



|                                    |  |                                 |            |  |                       |  |            |                         |  |  |      |  
|----------------------------------- |  | ------------------------------- | ---------- |  | --------------------- |  | ---------- | ----------------------- |  |  | ---- | -
|                                    |  | Common Stock Beneficially Owned |           
|Name and Address of Benficial Owner |  | Shared VotingPower              |            |  | SharedInvestmentPower |  |            | Percent ofCommon Stock* | 
|CapGen Financial Partners           |  |                                 | 22,885,028 |  |                       |  | 22,885,028 |                         |  |  | 45.3 | %
|280 Park Avenue                     |  |                                 |            |  |                       |  |            |                         |  |  |      |  
|40th Floor West, Suite 401          |  |                                 |            |  |                       |  |            |                         |  |  |      |  
|New York, New York 10017            |  |                                 |            |  |                       |  |            |                         |  |  |      |  
|                                    |  |                                 |           
|Patriot Financial Partners, L.P.    |  |                                 | 9,679,275  |  |                       |  | 9,679,275  |                         |  |  | 19.2 | %
|Cira Centre                         |  |                                 |            |  |                       |  |            |                         |  |  |      |  
|2929 Arch Street, 27thFloor         |  |                                 |            |  |                       |  |            |                         |  |  |      |  
|Philadelphia, Pennsylvania 19104    |  |                                 |            |  |                       |  |            |                         |  |  |      |  



|* |  | The percentages of total beneficial ownership have been calculated based upon 50,513,722 shares (the shares of common stock outstanding as of February 22, 2011).
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------



Equity-Based Compensation Plan Information



For information regarding equity-based
compensation awards outstanding and available for future grants at December 31, 2010, see Part II, Item 5 Market For Registrants Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
included in this Annual Report on Form 10-K.



|ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
|-------- | -------------------------------------------------------------------------



Transactions with Related Persons



Lending and Other Ordinary Course Bank Services Transactions.



During 2010, several of the
individuals included within the Security Ownership of Management table above, which may include some of their respective immediate family members and / or affiliated entities, had loans, other extensions of credit and / or other banking or financial
services transactions (such as deposit, trust, brokerage, custody, transfer agent, or similar services) in the ordinary course of business with our Bank subsidiary. All of these lending, banking, and financial services transactions were on
substantially the same terms, including interest rates, collateral, and repayment, as those available at the time for comparable transactions with persons not related to the Company, and did not involve more than the normal risk of collectability or
present other unfavorable features with the exception of the following:



John T. Gramling, II was a Director with the Company until his retirement in October 2010. Mr. Gramling is an Owner of River Falls Plantation to which the Bank had outstanding loans during 2010 through
three loans, all of which were considered potential problem loans at the time of his retirement. Potential problem loans consist of loans that are generally performing in accordance with contractual terms but for which we have concerns about the
ability of the borrower to continue to comply with repayment. Mr. Gramling was a legal Guarantor on each of these loans. The largest aggregate amount of the loans outstanding during 2010 was $4.7 million. At the time of Mr. Gramlings
retirement from the board, total loans outstanding were $4.2 million. The amount of principal and interest paid on all three loans from January 1 through the date of his retirement from the Board was $559 thousand and $222 thousand,
respectively. The interest rate on the loans ranged from 5.25% to 6.50%.



92



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Top-Tier Bank Holding Company Ownership



As of February 22, 2011, CapGen owns 45.3% of the
Companys outstanding common stock and is considered a top-tier bank holding company for Federal Reserve reporting purposes. As such, CapGen files certain reports with the Federal Reserve reflecting its investment in the Company.



Director Independence



Annually the Board affirmatively determines the independence
of each director and each nominee for election as a director. Under New York Stock Exchange rules, in order for a director to be considered independent, the Board must determine that the director has no direct or indirect material relationship with
the Company (directly or as a partner, shareholder or officer of an organization that has a relationship with the Company). In making its independence determinations, the Board considers the NYSEs bright line standards of
independence1.



The Board considered information in 2010 regarding banking
and financial services, commercial, charitable, familial, and other ordinary course, nonpreferential relationships between each director, his or her respective immediate family members, and / or certain entities affiliated with such directors and
immediate family members, on the one hand, and the Company, on the other, to determine the directors independence from management of the Company. After reviewing the information presented to it and considering the recommendation of the
Corporate Governance and Nominating Committee, the Board determined that during 2010, except for Mr. Dixon, Mr. Erwin, and Mr. Patterson, who were employees of the Company, all current directors and director nominees were independent
under the NYSE rules. Mr. Patterson retired from his position with the Company on December 31, 2010, however under NYSE rules, Mr. Patterson will not be considered independent for a period of 3 years following his retirement.
Currently, nine of the Boards eleven directors are non-management directors of which eight are independent under the NYSE rules.



The Board has considered and determined that the following types of relationships between a director, his or her immediate family members
and / or certain entities affiliated with a director and his or her immediate family members, on the one hand, and the Company, on the other, are not material relationships for purposes of determining whether a director is independent:



| |  |  | A relationship, transaction, or arrangement involving any banking or financial services the Company offers to its customers, if such relationship,
transaction, or arrangement is in the ordinary course of business, is on substantially the same terms as those prevailing for comparable transactions with persons not affiliated with the Company, complies with applicable banking laws, and, to the
extent applicable, if such relationship, transaction or arrangement is with an entity where the director is an employee or an immediate family member is an executive officer, the payments to, or payments received from, the Company for such banking
or financial services are, in any fiscal year, less than the greater of $1 million or 2% of such other entitys consolidated gross revenues;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | A business relationship, transaction, or arrangement involving property or nonfinancial services, or other standard contractual arrangements (including
standard lease agreements for the Companys branch offices or other premises), if such relationship, transaction, or arrangement is in the ordinary course of business, is on substantially the same terms as those prevailing for comparable
transactions with persons not affiliated with the Company, and the payments to, or payments received from, the Company for such property or non-financial services, or under such contractual arrangement, are, in any fiscal year, less than the greater
of $1 million or 2% of such other entitys consolidated gross revenues;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | A relationship, transaction or arrangement with an entity that is providing legal services to the Company, if neither the director nor the immediate
family member performs the services to the Company, and such relationship, transaction or arrangement is otherwise immaterial under the Boards categorical standards;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|1 |  | Since our common stock is not currently traded on any exchange, we elect to comply with the New York Stock Exchanges definition of independence.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------



93



---

| |  |  | Contributions made by the Company or a Company-sponsored charitable foundation to a tax-exempt organization where a director or an immediate family
member of the director serves or is employed as an executive officer, or where a director serves as chairman of the board, if the contributions in any fiscal year, excluding the Companys matching funds, are less than the greater of
$1 million or 2% of the tax-exempt organizations consolidated gross revenues;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Employment by the Company of an immediate family member if the family member was not or is not one of our executive officers, does not reside in the
same home as the director, and we provide compensation and benefits to the person in accordance with our employment and compensation practices applicable to employees holding comparable positions; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Any other relationship, transaction, or arrangement between the Company and an entity where a director or an immediate family member serves solely as a
non-management board member, a member of a trade or other similar association, an advisor or a member of an advisory board, a trustee, a limited partner, an honorary board member or trustee, or in any other similar capacity with such entity, or
where an immediate family member is employed by such entity in a non-executive officer position.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



In connection with making its independence determinations, the Board specifically considered the following relationships and transactions
for which it was determined that neither the director nor, to the extent applicable, his or her immediate family member had a direct or indirect material interest:



| |  |  | The Companys banking subsidiary had ordinary course banking and financial services relationships in 2010 with many of our directors, as well as
some of their respective immediate family members and/or certain entities affiliated with such directors and their immediate family members, all of which were on substantially the same terms, including interest rates, collateral, and repayment, as
those available at the time for comparable transactions with persons not related to the Company, and none of which involved more than the normal risk of collectability or presented other unfavorable features, except as noted below:
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



John T. Gramling, II was
a Director with the Company until his retirement in October 2010. Mr. Gramling is an Owner of River Falls Plantation to which the Bank had outstanding loans during 2010 through three loans, all of which were considered potential problem loans at the
time of his retirement. Potential problem loans consist of loans that are generally performing in accordance with contractual terms but for which we have concerns about the ability of the borrower to continue to comply with repayment. Mr. Gramling
was a legal Guarantor on each of these loans. The largest aggregate amount of the loans outstanding during 2010 was $4.7 million. At the time of Mr. Gramlings retirement from the board, total loans outstanding were $4.2 million. The
amount of principal and interest paid on all three loans from January 1 through the date of his retirement from the Board was $559 thousand and $222 thousand, respectively. The interest rate on the loans ranged from 5.25% to 6.50%.



The Board determined that each of the foregoing relationships
satisfied the NYSE bright line independence standards and was immaterial in the determination of Board independence.



94



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|ITEM 14. | PRINCIPAL ACCOUNTING FEES AND SERVICES
|-------- | --------------------------------------



Auditing and Related Fees



The following table summarizes fees paid to Elliott Davis,
LLC or to be paid to Elliott Davis, LLC for professional audit services associated with the audit of our financial statements for the years ended December 31, 2010 and 2009.



|                                  |  |      |         |  |      |   |         | 
|--------------------------------- |  | ---- | ------- |  | ---- | - | ------- | 
|                                  |  | 2010 |         |  | 2009 |  
|Audit Fees (1)                    |  | $    | 221,500 |  |      | $ | 246,895 | 
|Audit-Related Fees (2)            |  |      | 27,720  |  |      |   | 26,400  | 
|                                  |  |      |         |  |      |   |         | 
|Audit Fees and Audit Related Fees |  |      | 249,220 |  |      |   | 273,295 | 
|Tax Fees (3)                      |  |      | 52,575  |  |      |   | 29,138  | 
|All Other Fees (4)                |  |      | 32,101  |  |      |   |        | 
|                                  |  |      |         |  |      |   |         | 
|Total Fees                        |  | $    | 333,896 |  |      | $ | 302,433 | 
|                                  |  |      |         |  |      |   |         | 



|(1) |  | Audit fees include fees for the audit of annual financial statements, the review of quarterly financial statements, and required procedures performed with regard to our
internal controls over financial reporting relative to the applicable year but which may have been paid in the subsequent year.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Audit-related fees consisted of fees for audits of our employee benefit plans relative to the applicable year but which may have been paid in the subsequent year.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | During 2010, tax fees consisted of fees for tax consultation, planning, and compliance services provided in conjunction with the preparation of our tax returns as well
as fees paid in conjunction with tax matters related to the private placement. During 2009, tax fees consisted of fees for tax consultation, planning, and compliance services provided in conjunction with the preparation of our tax returns.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) |  | During 2010, all other fees consisted of audit and tax fees paid relative to the private placement transaction as well as the associated regulatory filings.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------



Audit Committee Preapproval
Policy



The Audit Committee has in place
a Preapproval of Independent Registered Public Accounting Firm Services Policy. The policy addresses the protocol for preapproval of both audit and nonaudit services provided by its independent registered public accounting firm. Generally, the
policy requires that all auditing services and nonaudit services, including nonprohibited tax services provided by its independent registered public accounting firm, be preapproved by the Audit Committee in accordance with the following guidelines:



| |  |  | Preapproval by the Audit Committee must be in advance of the work to be completed;
| | - |  | ----------------------------------------------------------------------------------



| |  |  | The Audit Committee or designated Audit Committee member must perform preapproval, and it cannot delegate the preapproval responsibility to a member of
management;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Audit Committee cannot preapprove services based upon broad, nondetailed descriptions (e.g., tax compliance services), and preapproval requests
must be accompanied by a detailed explanation of each particular service to be provided, so the Audit Committee knows precisely what services it is being asked to preapprove and can make a well reasoned assessment of the impact of the service on the
independent registered public accounting firms independence; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Monetary limits alone may not be established as the only basis for the preapproval of deminimus amounts. There has to be a clear, specific explanation
provided as to what the particular services are to be provided, subject to the monetary limit, to ensure that the Audit Committee is fully informed about each service.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The policy provides that the Audit Committee may delegate to one or more designated members of the Audit
Committee the authority to grant required preapprovals. The decision of any member to whom authority is delegated to preapprove an activity shall be presented to the full Audit Committee at its next scheduled meeting.



95



---

The Audit Committee appoints a member annually to have the authority to grant required preapprovals. The policy also provides for deminimus exceptions to the preapproval requirements. With regard
to the approval of nonauditing services, the Audit Committee considers, when applicable, various factors including, but not limited to, whether it would be beneficial to have the service provided by the independent registered public accounting firm
and whether the service could compromise the independence of the independent registered public accounting firm. The Audit Committee, either in its entirety or through its designee, preapproved all of the engagements for the audit, audit-related
engagements, and tax engagements of Elliott Davis, LLC related to the years ended December 31, 2010 and December 31, 2009. Additionally, during these years, there were no fees billed for professional services described in Paragraph (c)(4)
of Rule 2-01 of Regulation S-X rendered by Elliott Davis, LLC.



96



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PART IV



|ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
|-------- | ------------------------------------------



The following documents are filed as part of this report:



|            |  |                                                                                                        
|----------- |  | -------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                            
|31.1^       |  | Certification of Samuel L. Erwin pursuant to Rule 13a-14(a) of the Securities and Exchange Act of 1934.
|            | 
|31.2^       |  | Certification of Roy D. Jones pursuant to Rule 13a-14(a) of the Securities and Exchange Act of 1934.   



|* |  | Management contract or compensatory plan or arrangement
|- |  | -------------------------------------------------------

|^ |  | Filed with this Amendment No. 1 on Form 10-K/A to the Annual Report on Form 10-K
|- |  | --------------------------------------------------------------------------------



Copies of exhibits are available upon written request to
Corporate Secretary, Palmetto Bancshares, Inc., 306 East North Street, Greenville, SC 20601.



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SIGNATURES



Pursuant to the requirements of Section 13 or 15(d) of
the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



PALMETTO BANCSHARES, INC.



By:

|                                                                 
|-----------------------------------------------------------------
|                                                                 
|/s/    SAMUEL L.
ERWIN                                           
|Samuel L. Erwin
Chief Executive Officer
Palmetto Bancshares, Inc.
|                                                                 
|/s/    ROY D.
JONES                                              
|Roy D. Jones
Chief Financial Officer
Palmetto Bancshares, Inc.   



Date: March 9, 2011



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EXHIBIT INDEX



|            |  |                                                                                                        
|----------- |  | -------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                            
|31.1        |  | Certification of Samuel L. Erwin pursuant to Rule 13a-14(a) of the Securities and Exchange Act of 1934.
|            | 
|31.2        |  | Certification of Roy D. Jones pursuant to Rule 13a-14(a) of the Securities and Exchange Act of 1934.   



99