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Henry County Bancshares 10-K

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| (in thousands, except share and per share amounts)                                                                                                                                      |   | 2010   |    |   | 2009   |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|---------|--------|--------|--------|
|                                                                                                                                                                                    |   |   |    |   |   |   |
| Assets                                                                                                                                                                                  |   |   |    |   |   |   |
|                                                                                                                                                                                    |   |   |    |   |   |   |
| Cash and due from banks                                                                                                                                                                 |   | $      | 8,812   |   |   | $      | 11,887 |   |
| Interest-bearing excess Federal Reserve balances                                                                                                                                        |   |   | 22,100  |   |   |   | 25,700 |   |
| Interest-bearing deposits in banks                                                                                                                                                      |   |   | 1,510   |   |   |   | 635 |   |
| Securities available for sale, at fair value                                                                                                                                            |   |   | 67,215  |   |   |   | 72,177 |   |
| Securities held to maturity (fair value approximates $378 and $705)                                                                                                                     |   |   | 375     |   |   |   | 695 |   |
| Restricted equity securities, at cost                                                                                                                                                   |   |   | 1,194   |   |   |   | 1,266 |   |
| Loans held for sale                                                                                                                                                                     |   |   | -       |   |   |   | 499 |   |
|                                                                                                                                                                                    |   |   |    |   |   |   |   |   |
| Loans                                                                                                                                                                                   |   |   | 380,242 |   |   |   | 434,891 |   |
| Less allowance for loan losses                                                                                                                                                          |   |   | 10,824  |   |   |   | 13,324 |   |
| Loans, net                                                                                                                                                                              |   |   | 369,418 |   |   |   | 421,567 |   |
|                                                                                                                                                                                    |   |   |    |   |   |   |   |   |
| Premises and equipment                                                                                                                                                                  |   |   | 9,034   |   |   |   | 9,481 |   |
| Foreclosed properties                                                                                                                                                                   |   |   | 79,451  |   |   |   | 49,732 |   |
| Income taxes receivable                                                                                                                                                                 |   |   | 266     |   |   |   | 17,457 |   |
| Other assets                                                                                                                                                                            |   |   | 4,504   |   |   |   | 3,552 |   |
| Total assets                                                                                                                                                                            |   | $      | 563,879 |   |   | $      | 614,648 |   |
|                                                                                                                                                                                    |   |   |    |   |   |   |   |   |
| Liabilities and Stockholders’ Equity                                                                                                                                              |   |   |    |   |   |   |   |   |
|                                                                                                                                                                                    |   |   |    |   |   |   |   |   |
| Deposits                                                                                                                                                                                |   |   |    |   |   |   |   |   |
| Noninterest-bearing                                                                                                                                                                     |   | $      | 60,047  |   |   | $      | 59,831 |   |
| Interest-bearing                                                                                                                                                                        |   |   | 484,616 |   |   |   | 526,270 |   |
| Total deposits                                                                                                                                                                          |   |   | 544,663 |   |   |   | 586,101 |   |
|                                                                                                                                                                                    |   |   |    |   |   |   |   |   |
| Other borrowings                                                                                                                                                                        |   |   | 755     |   |   |   | 1,436 |   |
| Other liabilities                                                                                                                                                                       |   |   | 3,180   |   |   |   | 3,784 |   |
| Total liabilities                                                                                                                                                                       |   |   | 548,598 |   |   |   | 591,321 |   |
|                                                                                                                                                                                    |   |   |    |   |   |   |   |   |
| Commitments and contingencies (Note 12)                                                                                                                                                 |   |   |    |   |   |   |   |   |
|                                                                                                                                                                                    |   |   |    |   |   |   |   |   |
| Stockholders’ equity                                                                                                                                                              |   |   |    |   |   |   |   |   |
| Preferred stock, no par value; 10,000,000 shares authorized; none issued Common stock, par value $.10 and $2.50, respectively; 50,000,000 shares authorized; 14,388,749.6 shares issued |   |   | 1,439   |   |   |   | 35,972 |   |
| Capital surplus                                                                                                                                                                         |   |   | 35,273  |   |   |   | 740 |   |
| Accumulated deficit                                                                                                                                                                     |   |   | (19,200 | )      |   |   | (12,491 | ) |
| Accumulated other comprehensive income                                                                                                                                                  |   |   | 88      |   |   |   | 1,425 |   |
| Less cost of treasury stock, 143,060 shares                                                                                                                                             |   |   | (2,319  | )      |   |   | (2,319 | ) |
| Total stockholders’ equity                                                                                                                                                        |   |   | 15,281  |   |   |   | 23,327 |   |
| Total liabilities and stockholders’ equity                                                                                                                                        |   | $      | 563,879 |   |   | $      | 614,648 |   |

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| (in thousands, except share and per share amounts)         |   | 2010   |       |   | 2009   |   |       | 2008   |   |
|------------------------------------------------------------|--------|--------|------------|--------|--------|--------|------------|--------|--------|
|                                                       |   |   |       |   |   |   |       |   |   |
| Interest income                                            |   |   |       |   |   |   |       |   |   |
| Loans                                                      |   | $      | 17,892     |   |   | $      | 18,587     |   |   | $ | 31,538 |   |
| Taxable securities                                         |   |   | 1,832      |   |   |   | 2,370      |   |   |   | 3,641 |   |
| Nontaxable securities                                      |   |   | 156        |   |   |   | 300        |   |   |   | 355 |   |
| Deposits in banks                                          |   |   | 42         |   |   |   | 12         |   |   |   | 38 |   |
| Federal Reserve balances                                   |   |   | 72         |   |   |   | 57         |   |   |   | - |   |
| Federal funds sold                                         |   |   | -          |   |   |   | 23         |   |   |   | 212 |   |
| Total interest income                                      |   |   | 19,994     |   |   |   | 21,349     |   |   |   | 35,784 |   |
|                                                       |   |   |       |   |   |   |       |   |   |   |   |   |
| Interest expense                                           |   |   |       |   |   |   |       |   |   |   |   |   |
| Deposits                                                   |   |   | 9,947      |   |   |   | 14,700     |   |   |   | 19,371 |   |
| Other borrowings                                           |   |   | 13         |   |   |   | 52         |   |   |   | 257 |   |
| Total interest expense                                     |   |   | 9,960      |   |   |   | 14,752     |   |   |   | 19,628 |   |
|                                                       |   |   |       |   |   |   |       |   |   |   |   |   |
| Net interest income                                        |   |   | 10,034     |   |   |   | 6,597      |   |   |   | 16,156 |   |
| Provision for loan losses                                  |   |   | 1,169      |   |   |   | 39,168     |   |   |   | 24,286 |   |
| Net interest income (loss) after provision for loan losses |   |   | 8,865      |   |   |   | (32,571    | )      |   |   | (8,130 | ) |
|                                                       |   |   |       |   |   |   |       |   |   |   |   |   |
| Other operating income                                     |   |   |       |   |   |   |       |   |   |   |   |   |
| Service charges on deposit accounts                        |   |   | 1,817      |   |   |   | 1,602      |   |   |   | 1,362 |   |
| Other service charges and fees                             |   |   | 1,071      |   |   |   | 813        |   |   |   | 942 |   |
| Securities gains (losses), net                             |   |   | 987        |   |   |   | (275       | )      |   |   | - |   |
| Mortgage banking income                                    |   |   | 13         |   |   |   | 455        |   |   |   | 377 |   |
| Total other operating income                               |   |   | 3,888      |   |   |   | 2,595      |   |   |   | 2,681 |   |
|                                                       |   |   |       |   |   |   |       |   |   |   |   |   |
| Other expenses                                             |   |   |       |   |   |   |       |   |   |   |   |   |
| Salaries and employee benefits                             |   |   | 5,244      |   |   |   | 6,654      |   |   |   | 7,340 |   |
| Occupancy and equipment expenses                           |   |   | 1,479      |   |   |   | 1,570      |   |   |   | 1,698 |   |
| Foreclosed properties, net                                 |   |   | 7,914      |   |   |   | 5,145      |   |   |   | 3,559 |   |
| FDIC and regulatory                                        |   |   | 2,709      |   |   |   | 1,888      |   |   |   | 527 |   |
| Other operating expenses                                   |   |   | 1,887      |   |   |   | 2,528      |   |   |   | 2,346 |   |
| Total other expenses                                       |   |   | 19,233     |   |   |   | 17,785     |   |   |   | 15,470 |   |
|                                                       |   |   |       |   |   |   |       |   |   |   |   |   |
| Loss before income taxes                                   |   |   | (6,480     | )      |   |   | (47,761    | )      |   |   | (20,919 | ) |
|                                                       |   |   |       |   |   |   |       |   |   |   |   |   |
| Income tax expense (benefit)                               |   |   | 229        |   |   |   | (11,109    | )      |   |   | (6,572 | ) |
|                                                       |   |   |       |   |   |   |       |   |   |   |   |   |
| Net loss                                                   |   | $      | (6,709     | )      |   | $      | (36,652    | )      |   | $ | (14,347 | ) |
|                                                       |   |   |       |   |   |   |       |   |   |   |   |   |
| Loss per share                                             |   | $      | (0.47      | )      |   | $      | (2.57      | )      |   | $ | (1.01 | ) |
|                                                       |   |   |       |   |   |   |       |   |   |   |   |   |
| Weighted average shares outstanding                        |   |   | 14,245,690 |   |   |   | 14,245,690 |   |   |   | 14,245,715 |   |

----

| (in thousands)                                                                                      |   | 2010   |   |   | 2009   |   |    | 2008   |   |
|-----------------------------------------------------------------------------------------------------|--------|--------|--------|--------|--------|--------|---------|--------|--------|
|                                                                                                |   |   |   |   |   |   |    |   |   |
| Net loss                                                                                            |   | $      | (6,709 | )      |   | $      | (36,652 | )      |   | $ | (14,347 | ) |
|                                                                                                |   |   |   |   |   |   |    |   |   |   |   |   |
| Other comprehensive income (loss), net of tax:                                                      |   |   |   |   |   |   |    |   |   |   |   |   |
|                                                                                                |   |   |   |   |   |   |    |   |   |   |   |   |
| Unrealized holding gains (losses) on investment securities available for sale arising during period |   |   | (350   | )      |   |   | 230     |   |   |   | 535 |   |
|                                                                                                |   |   |   |   |   |   |    |   |   |   |   |   |
| Reclassification adjustment for gains on sale of securities available for sale realized             |   |   | (987   | )      |   |   | -       |   |   |   | - |   |
|                                                                                                |   |   |   |   |   |   |    |   |   |   |   |   |
| Associated income taxes                                                                             |   |   | -      |   |   |   | 406     |   |   |   | (182 | ) |
|                                                                                                |   |   |   |   |   |   |    |   |   |   |   |   |
| Total other comprehensive (loss) income, net of tax                                                 |   |   | (1,337 | )      |   |   | 636     |   |   |   | 353 |   |
|                                                                                                |   |   |   |   |   |   |    |   |   |   |   |   |
| Total comprehensive loss                                                                            |   | $      | (8,046 | )      |   | $      | (36,016 | )      |   | $ | (13,994 | ) |

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|                                                                       |   |   |    |   |    |   |   | Retained     |   |   | Accumulated   |   |   |     |   |   |                |   |
|----------------------------------------------------------------------------|--------|--------|---------|--------|---------|--------|--------|--------------|--------|--------|---------------|--------|--------|----------|--------|--------|---------------------|--------|
|                                                                       |   |   |    |   |    |   |   | Earnings     |   |   | Other         |   |   |     |   |   | Total               |   |
|                                                                       |   | Common |    |   |    |   |   | (Accumulated |   |   | Comprehensive |   |   | Treasury |   |   | Stockholders’ |   |
| (in thousands)                                                             |   | Stock  |    |   | Surplus |   |   | Deficit)     |   |   | Income        |   |   | Stock    |   |   | Equity              |   |
|                                                                       |   |   |    |   |    |   |   |         |   |   |          |   |   |     |   |   |                |   |
| Balance, December 31, 2007                                                 |   | $      | 35,972  |   |    | $      | 740    |         |   | $      | 40,645        |   |   | $        | 436    |   |                | $      | (2,258 | ) |   | $ | 75,535 |   |
| Net loss                                                                   |   |   | -       |   |    |   | -      |         |   |   | (14,347       | )      |   |     | -      |   |                |   | - |   |   |   | (14,347 | ) |
| Cash dividends declared, $.15 per share                                    |   |   | -       |   |    |   | -      |         |   |   | (2,137        | )      |   |     | -      |   |                |   | - |   |   |   | (2,137 | ) |
| Purchase of treasury stock                                                 |   |   | -       |   |    |   | -      |         |   |   | -             |   |   |     | -      |   |                |   | (61 | ) |   |   | (61 | ) |
| Other comprehensive income                                                 |   |   | -       |   |    |   | -      |         |   |   | -             |   |   |     | 353    |   |                |   | - |   |   |   | 353 |   |
| Balance, December 31, 2008                                                 |   | $      | 35,972  |   |    | $      | 740    |         |   | $      | 24,161        |   |   | $        | 789    |   |                | $      | (2,319 | ) |   | $ | 59,343 |   |
| Net loss                                                                   |   |   | -       |   |    |   | -      |         |   |   | (36,652       | )      |   |     | -      |   |                |   | - |   |   |   | (36,652 | ) |
| Other comprehensive income                                                 |   |   | -       |   |    |   | -      |         |   |   | -             |   |   |     | 636    |   |                |   | - |   |   |   | 636 |   |
|                                                                       |   |   |    |   |    |   |   |         |   |   |          |   |   |     |   |   |                |   |   |   |   |   |   |   |
| Balance, December 31, 2009                                                 |   | $      | 35,972  |   |    | $      | 740    |         |   | $      | (12,491       | )      |   | $        | 1,425  |   |                | $      | (2,319 | ) |   | $ | 23,327 |   |
| Net loss                                                                   |   |   | -       |   |    |   | -      |         |   |   | (6,709        | )      |   |     | -      |   |                |   | - |   |   |   | (6,709 | ) |
| Change in par value of common stock from $2.50 per share to $.10 per share |   |   | (34,533 | )      |    |   | 34,533 |         |   |   | -             |   |   |     | -      |   |                |   | - |   |   |   | - |   |
| Other comprehensive loss                                                   |   |   | -       |   |    |   | -      |         |   |   | -             |   |   |     | (1,337 | )      |                |   | - |   |   |   | (1,337 | ) |
| Balance, December 31, 2010                                                 |   | $      | 1,439   |   |    | $      | 35,273 |         |   | $      | (19,200       | )      |   | $        | 88     |   |                | $      | (2,319 | ) |   | $ | 15,281 |   |

----

| (in thousands)                                                                  |   | 2010   |    |   | 2009   |   |    | 2008   |   |
|---------------------------------------------------------------------------------|--------|--------|---------|--------|--------|--------|---------|--------|--------|
|                                                                            |   |   |    |   |   |   |    |   |   |
| Operating Activities                                                            |   |   |    |   |   |   |    |   |   |
| Net loss                                                                        |   | $      | (6,709  | )      |   | $      | (36,652 | )      |   | $ | (14,347 | ) |
| Adjustments to reconcile net loss to net cash provided by operating activities: |   |   |    |   |   |   |    |   |   |   |   |   |
| Depreciation                                                                    |   |   | 467     |   |   |   | 519     |   |   |   | 679 |   |
| Decrease (increase) in loans held for sale                                      |   |   | 499     |   |   |   | (499    | )      |   |   | 950 |   |
| Provision for loan losses                                                       |   |   | 1,169   |   |   |   | 39,168  |   |   |   | 24,286 |   |
| Write off (collection) of interest reserve loans                                |   |   | (1,337  | )      |   |   | 2,410   |   |   |   | - |   |
| Impairment losses on foreclosed properties                                      |   |   | 4,349   |   |   |   | 2,554   |   |   |   | 2,911 |   |
| Gains on sale of securities available for sale                                  |   |   | (987    | )      |   |   | -       |   |   |   | - |   |
| Impairment losses on restricted equity securities                               |   |   | -       |   |   |   | 275     |   |   |   | - |   |
| Deferred income taxes                                                           |   |   | -       |   |   |   | 6,383   |   |   |   | (2,494 | ) |
| Net losses on sale of foreclosed properties                                     |   |   | 222     |   |   |   | 1,219   |   |   |   | 324 |   |
| Gain on the sale of premises and equipment                                      |   |   | (98     | )      |   |   | -       |   |   |   | - |   |
| Decrease in interest receivable                                                 |   |   | 610     |   |   |   | 942     |   |   |   | 3,992 |   |
| Decrease in interest payable                                                    |   |   | (594    | )      |   |   | (585    | )      |   |   | (745 | ) |
| Decrease (increase) in income taxes receivable                                  |   |   | 17,191  |   |   |   | (11,336 | )      |   |   | (5,712 | ) |
| Net other operating activities                                                  |   |   | 251     |   |   |   | 843     |   |   |   | 267 |   |
| Net cash provided by operating activities                                       |   |   | 15,033  |   |   |   | 5,241   |   |   |   | 10,111 |   |
|                                                                            |   |   |    |   |   |   |    |   |   |   |   |   |
| Investing Activities                                                            |   |   |    |   |   |   |    |   |   |   |   |   |
| Purchases of securities available for sale                                      |   |   | (63,692 | )      |   |   | (54,193 | )      |   |   | (50,790 | ) |
| Proceeds from maturities of securities available for sale                       |   |   | 44,864  |   |   |   | 42,702  |   |   |   | 78,586 |   |
| Proceeds from sale of securities available for sale                             |   |   | 23,440  |   |   |   | -       |   |   |   | - |   |
| Proceeds from maturities of securities held to maturity                         |   |   | 320     |   |   |   | 2,666   |   |   |   | 804 |   |
| Retirement of restricted equity securities                                      |   |   | 72      |   |   |   | 102     |   |   |   | 254 |   |
| Net decrease (increase) in excess Federal Reserve balances                      |   |   | 3,600   |   |   |   | (25,700 | )      |   |   | - |   |
| Net decrease (increase) in federal funds sold                                   |   |   | -       |   |   |   | 14,300  |   |   |   | (4,800 | ) |
| Net decrease (increase) in interest-bearing deposits in banks                   |   |   | (875    | )      |   |   | 865     |   |   |   | 1,232 |   |
| Net decrease in loans                                                           |   |   | 13,401  |   |   |   | 9,515   |   |   |   | 8,384 |   |
| Additions to foreclosed properties                                              |   |   | (474    | )      |   |   | (249    | )      |   |   | - |   |
| Proceeds from sale of foreclosed properties                                     |   |   | 3,277   |   |   |   | 8,360   |   |   |   | 1,944 |   |
| Proceeds from sale of premises and equipment                                    |   |   | 104     |   |   |   | -       |   |   |   | - |   |
| Purchase of premises and equipment                                              |   |   | (26     | )      |   |   | (224    | )      |   |   | (114 | ) |
| Net cash provided by (used in) investing activities                             |   |   | 24,011  |   |   |   | (1,856  | )      |   |   | 35,500 |   |
|                                                                            |   |   |    |   |   |   |    |   |   |   |   |   |
| Financing Activities                                                            |   |   |    |   |   |   |    |   |   |   |   |   |
| Net decrease in deposits                                                        |   |   | (41,438 | )      |   |   | (4,375  | )      |   |   | (35,374 | ) |
| Net repayments of other borrowings                                              |   |   | (681    | )      |   |   | (1,162  | )      |   |   | (10,826 | ) |
| Dividends paid                                                                  |   |   | -       |   |   |   | -       |   |   |   | (2,137 | ) |
| Purchase of treasury stock                                                      |   |   | -       |   |   |   | -       |   |   |   | (61 | ) |
| Net cash used in financing activities                                           |   |   | (42,119 | )      |   |   | (5,537  | )      |   |   | (48,398 | ) |
|                                                                            |   |   |    |   |   |   |    |   |   |   |   |   |
| Net decrease in cash and due from banks                                         |   |   | (3,075  | )      |   |   | (2,152  | )      |   |   | (2,787 | ) |
|                                                                            |   |   |    |   |   |   |    |   |   |   |   |   |
| Cash and due from banks, beginning of year                                      |   |   | 11,887  |   |   |   | 14,039  |   |   |   | 16,826 |   |
|                                                                            |   |   |    |   |   |   |    |   |   |   |   |   |
| Cash and due from banks, end of year                                            |   | $      | 8,812   |   |   | $      | 11,887  |   |   | $ | 14,039 |   |

----

| (in thousands)                                    |   | 2010   |    |   | 2009   |   |   | 2008   |   |
|---------------------------------------------------|--------|--------|---------|--------|--------|--------|--------|--------|--------|
|                                              |   |   |    |   |   |   |   |   |   |
| Supplemental Disclosures of Cash Flow Information |   |   |    |   |   |   |   |   |   |
|                                              |   |   |    |   |   |   |   |   |   |
| Cash paid (received) for:                         |   |   |    |   |   |   |   |   |   |
| Interest                                          |   | $      | 10,554  |   |   | $      | 15,337 |   |   | $ | 20,373 |   |
|                                              |   |   |    |   |   |   |   |   |   |   |   |   |
| Income taxes                                      |   | $      | (16,923 | )      |   | $      | (6,122 | )      |   | $ | 1,480 |   |
|                                              |   |   |    |   |   |   |   |   |   |   |   |   |
| Noncash transactions                              |   |   |    |   |   |   |   |   |   |   |   |   |
| Other real estate acquired in settlement of loans |   | $      | 41,149  |   |   | $      | 43,466 |   |   | $ | 14,111 |   |
| Receivable acquired in settlement of loan         |   | $      | 1,823   |   |   | $      | -      |   |   | $ | - |   |
| Financed sales of foreclosed properties           |   | $      | 4,056   |   |   | $      | 248    |   |   |   | 928 |   |

----

| 1)   | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
|----------------|--------------------------------------------|

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| 1)   | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued |
|----------------|-------------------------------------------------------|

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| 1)   | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued |
|----------------|-------------------------------------------------------|

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| 1)   | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued |
|----------------|-------------------------------------------------------|

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| 1)   | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued |
|----------------|-------------------------------------------------------|

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| 1)   | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued |
|----------------|-------------------------------------------------------|

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| 1)   | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued |
|----------------|-------------------------------------------------------|

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| 1)   | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued |
|----------------|-------------------------------------------------------|

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| 1)   | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued |
|----------------|-------------------------------------------------------|

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| 1)   | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued |
|----------------|-------------------------------------------------------|

----

| 2)   | RECENT OPERATING LOSSES AND IMPACT ON CAPITAL |
|----------------|-----------------------------------------------|

----

| 3) | SECURITIES |
|----|------------|

|                               |   |      |   |   | Gross      |   |   | Gross      |   |   | Estimated |   |
|------------------------------------|--------|-----------|--------|--------|------------|--------|--------|------------|--------|--------|-----------|--------|
|                               |   | Amortized |   |   | Unrealized |   |   | Unrealized |   |   | Fair      |   |
| (in thousands)                     |   | Cost      |   |   | Gains      |   |   | Losses     |   |   | Value     |   |
|                               |   |      |   |   |       |   |   |       |   |   |      |   |
| December 31, 2010:                 |   |      |   |   |       |   |   |       |   |   |      |   |
| U.S. Government sponsored agencies |   | $         | 8,280  |   |       | $      | 28     |       |   | $      | (51       | )      |   | $ | 8,257 |   |
| State and municipal securities     |   |      | 23,372 |   |       |   | 158    |       |   |   | (324      | )      |   |   | 23,206 |   |
| Mortgage-backed securities         |   |      | 35,475 |   |       |   | 392    |       |   |   | (115      | )      |   |   | 35,752 |   |
|                               |   | $         | 67,127 |   |       | $      | 578    |       |   | $      | (490      | )      |   | $ | 67,215 |   |
|                               |   |      |   |   |       |   |   |       |   |   |      |   |   |   |   |   |
| December 31, 2009:                 |   |      |   |   |       |   |   |       |   |   |      |   |   |   |   |   |
| U.S. Government sponsored agencies |   | $         | 29,581 |   |       | $      | 216    |       |   | $      | (108      | )      |   | $ | 29,689 |   |
| State and municipal securities     |   |      | 10,461 |   |       |   | 169    |       |   |   | (85       | )      |   |   | 10,545 |   |
| Mortgage-backed securities         |   |      | 30,710 |   |       |   | 1,284  |       |   |   | (51       | )      |   |   | 31,943 |   |
|                               |   | $         | 70,752 |   |       | $      | 1,669  |       |   | $      | (244      | )      |   | $ | 72,177 |   |

|                           |   |      |   |   |       | Gross  |   |       | Gross  |   |   | Estimated |   |
|--------------------------------|--------|-----------|--------|--------|------------|--------|--------|------------|--------|--------|--------|-----------|--------|
|                           |   | Amortized |   |   | Unrealized |   |   | Unrealized |   |   | Fair   |      |
| (in thousands)                 |   | Cost      |   |   | Gains      |   |   | Losses     |   |   | Value  |      |
|                           |   |      |   |   |       |   |   |       |   |   |   |      |   |   |   |   |
| December 31, 2010              |   |      |   |   |       |   |   |       |   |   |   |      |   |   |   |   |
| State and municipal securities |   | $         | 375    |   |       | $      | 3      |       |   | $      | -      |      |   | $ | 378 |   |
|                           |   |      |   |   |       |   |   |       |   |   |   |      |   |   |   |   |
| December 31, 2009:             |   |      |   |   |       |   |   |       |   |   |   |      |   |   |   |   |
| State and municipal securities |   | $         | 695    |   |       | $      | 11     |       |   | $      | (1     | )         |   | $ | 705 |   |

----

| 3) | SECURITIES, continued |
|----|-----------------------|

|                                   |   | Securities Available for |   |       | Securities Held to |   |
|----------------------------------------|--------|--------------------------|--------|------------|--------------------|--------|
|                                   |   | Sale                     |   |       | Maturity           |   |
|                                   |   | Amortized                |   | Estimated  |               |   | Amortized |   | Estimated |   |
| (in thousands)                         |   | Cost                     |   | Fair Value |               |   | Cost |   | Fair Value |   |
|                                   |   |                     |   |       |               |   |   |   |   |   |   |   |
| Due in one year or less                |   | $                        | 2,235  |       |               | $      | 2,253 |   |   | $ | 175 |   |   | $ | 178 |   |
| Due after one year through five years  |   |                     | 4,266  |       |               |   | 4,361 |   |   |   | 200 |   |   |   | 200 |   |
| Due after five years through ten years |   |                     | 14,717 |       |               |   | 14,489 |   |   |   | - |   |   |   | - |   |
| After ten years                        |   |                     | 10,434 |       |               |   | 10,360 |   |   |   | - |   |   |   | - |   |
| Mortgage-backed securities             |   |                     | 35,475 |       |               |   | 35,752 |   |   |   | - |   |   |   | - |   |
|                                   |   | $                        | 67,127 |       |               | $      | 67,215 |   |   | $ | 375 |   |   | $ | 378 |   |

| (in thousands)                                    |   | 2010   |   |   | 2009   |   |   | 2008   |   |
|---------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
|                                              |   |   |   |   |   |   |   |   |   |
| Proceeds from sales                               |   | $      | 23,440 |   |   | $      | -      |   |   | $ | - |   |
|                                              |   |   |   |   |   |   |   |   |   |   |   |   |
| Gross gains on sale                               |   | $      | 987    |   |   | $      | -      |   |   | $ | - |   |
| Impairment losses on restricted equity securities |   |   | -      |   |   |   | (275   | )      |   |   | - |   |
| Net gains (losses)                                |   | $      | 987    |   |   | $      | (275   | )      |   | $ | - |   |

----

| 3) | SECURITIES, continued |
|----|-----------------------|

|                         |   | December 31, |   |
|------------------------------|--------|--------------|--------|
| (in thousands)               |   | 2010         |   |   | 2009 |   |
|                         |   |         |   |   |   |   |
| Federal Home Loan Bank stock |   | $            | 1,194  |   |   | $ | 1,266 |   |

|   |                                  |   | Less Than 12 Months |   |   | 12 Months or More |   |
|--------|---------------------------------------|--------|---------------------|--------|--------|-------------------|--------|
|   |                                  |   | Estimated           |   |   | Unrealized        |   |   | Estimated |   |   | Unrealized |   |
|   | (in thousands)                        |   | Fair Value          |   |   | Losses            |   |   | Fair Value |   |   | Losses |   |
|   |                                  |   |                |   |   |              |   |   |   |   |   |   |   |
|   | December 31, 2010                     |   |                |   |   |              |   |   |   |   |   |   |   |
|   | U. S. Government sponsored agencies   |   | $                   | 2,960  |   |              | $      | 51 |   |   | $ | - |   |   | $ | - |   |
|   | State and municipal securities        |   |                | 10,258 |   |              |   | 324 |   |   |   | - |   |   |   | - |   |
|   | Mortgage-backed securities            |   |                | 12,537 |   |              |   | 115 |   |   |   | - |   |   |   | - |   |
|   | Total temporarily impaired securities |   | $                   | 25,755 |   |              | $      | 490 |   |   | $ | - |   |   | $ | - |   |
|   |                                  |   |                |   |   |              |   |   |   |   |   |   |   |   |   |   |   |
|   | December 31, 2009                     |   |                |   |   |              |   |   |   |   |   |   |   |   |   |   |   |
|   | U. S. Government sponsored agencies   |   | $                   | 5,888  |   |              | $      | 108 |   |   | $ | - |   |   | $ | - |   |
|   | State and municipal securities        |   |                | 2,923  |   |              |   | 85 |   |   |   | - |   |   |   | - |   |
|   | Mortgage-backed securities            |   |                | 2,019  |   |              |   | 51 |   |   |   | - |   |   |   | - |   |
|   | Total temporarily impaired securities |   | $                   | 10,830 |   |              | $      | 244 |   |   | $ | - |   |   | $ | - |   |

----

| 3) | SECURITIES, continued |
|----|-----------------------|

|   |                                  |   | Less Than 12 Months |   |   | 12 Months or More |   |
|--------|---------------------------------------|--------|---------------------|--------|--------|-------------------|--------|
|   |                                  |   | Estimated           |   |   | Unrealized        |   |   | Estimated |   |   | Unrealized |   |
|   | (in thousands)                        |   | Fair Value          |   |   | Losses            |   |   | Fair Value |   |   | Losses |   |
|   |                                  |   |                |   |   |              |   |   |   |   |   |   |   |
|   | December 31, 2010                     |   |                |   |   |              |   |   |   |   |   |   |   |
|   | Total temporarily impaired securities |   | $                   | -      |   |              | $      | - |   |   | $ | - |   |   | $ | - |   |
|   |                                  |   |                |   |   |              |   |   |   |   |   |   |   |   |   |   |   |
|   | December 31, 2009                     |   |                |   |   |              |   |   |   |   |   |   |   |   |   |   |   |
|   | State and municipal securities        |   |                | -      |   |              |   | - |   |   |   | 249 |   |   |   | 1 |   |
|   | Total temporarily impaired securities |   | $                   | -      |   |              | $      | - |   |   | $ | 249 |   |   | $ | 1 |   |

----

| 4) | LOANS |
|----|-------|

|   |                               |   | December 31, |    |
|--------|------------------------------------|--------|--------------|---------|
|   | (in thousands)                     |   | 2010         |    |   | 2009 |   |
|   |                               |   |         |    |   |   |   |
|   | Commercial                         |   | $            | 4,162   |   |   |   | 6,430 |   |
|   | Commercial real estate             |   |         |    |   |   |   |   |   |
|   | Land, development and construction |   |         | 130,539 |   |   |   | 179,547 |   |
|   | Other                              |   |         | 106,152 |   |   |   | 111,939 |   |
|   | Churches                           |   |         | 79,706  |   |   |   | 80,964 |   |
|   | Residential real estate            |   |         | 48,741  |   |   |   | 43,654 |   |
|   | Consumer                           |   |         | 10,955  |   |   |   | 12,392 |   |
|   | Total                              |   |         | 380,255 |   |   |   | 434,926 |   |
|   |                               |   |         |    |   |   |   |   |   |
|   | Deferred loan fees                 |   |         | (13     | ) |   |   | (35 | ) |
|   | Allowance for loan losses          |   |         | (10,824 | ) |   |   | (13,324 | ) |
|   | Loans, net                         |   | $            | 369,418 |   |   | $ | 421,567 |   |

|   |                                       |   | Years Ended December 31, |   |
|--------|--------------------------------------------|--------|--------------------------|--------|
|   | (in thousands)                             |   | 2010                     |   |   | 2009 |   |   | 2008 |   |
|   |                                       |   |                     |   |   |   |   |   |   |   |
|   | Balance, beginning of year                 |   | $                        | 13,324 |   |   | $ | 17,730 |   |   | $ | 7,657 |   |
|   |                                       |   |                     |   |   |   |   |   |   |   |   |   |   |
|   | Provision for loan losses                  |   |                     | 1,169  |   |   |   | 39,168 |   |   |   | 24,286 |   |
|   |                                       |   |                     |   |   |   |   |   |   |   |   |   |   |
|   | Loans charged off                          |   |                     | (8,044 | ) |   |   | (43,697 | ) |   |   | (14,220 | ) |
|   |                                       |   |                     |   |   |   |   |   |   |   |   |   |   |
|   | Recoveries of loans previously charged off |   |                     | 4,375  |   |   |   | 123 |   |   |   | 7 |   |
|   |                                       |   |                     |   |   |   |   |   |   |   |   |   |   |
|   | Balance, end of year                       |   | $                        | 10,824 |   |   | $ | 13,324 |   |   | $ | 17,730 |   |

----

| 4) | LOANS, continued |
|----|------------------|

|   |                                            |   |       |   |   | Commercial  |   |    | Residential |   |   |     |   |   |        |   |   |   |   |
|--------|-------------------------------------------------|--------|------------|--------|--------|-------------|--------|---------|-------------|--------|--------|----------|--------|--------|-------------|--------|--------|--------|--------|
|   | (in thousands)                                  |   | Commercial |   |   | Real Estate |   |    | Real Estate |   |   | Consumer |   |   | Unallocated |   |   | Total  |   |
|   | Allowance for loan losses:                      |   |       |   |   |        |   |    |        |   |   |     |   |   |        |   |   |   |   |
|   | Ending allowance balance attributable to loans: |   |       |   |   |        |   |    |        |   |   |     |   |   |        |   |   |   |   |
|   | Individually evaluated for impairment           |   | $          | -      |   |        | $      | 5,754   |        |   | $      | 14       |   |   | $           | -      |   |   | $      | - |   |   | $ | 5,768 |   |
|   | Collectively evaluated for impairment           |   |       | 15     |   |        |   | 3,713   |        |   |   | 449      |   |   |        | 107    |   |   |   | 772 |   |   |   | 5,056 |   |
|   | Total ending allowance balance                  |   | $          | 15     |   |        | $      | 9,467   |        |   | $      | 463      |   |   | $           | 107    |   |   | $      | 772 |   |   | $ | 10,824 |   |
|   |                                            |   |       |   |   |        |   |    |        |   |   |     |   |   |        |   |   |   |   |   |   |   |   |   |   |
|   | Loans:                                          |   |       |   |   |        |   |    |        |   |   |     |   |   |        |   |   |   |   |   |   |   |   |   |   |
|   | Individually evaluated for impairment           |   | $          | 2,014  |   |        | $      | 111,544 |        |   | $      | 10,747   |   |   | $           | -      |   |   | $      | - |   |   | $ | 124,305 |   |
|   | Collectively evaluated for impairment           |   |       | 2,148  |   |        |   | 204,840 |        |   |   | 37,994   |   |   |        | 10,955 |   |   |   | - |   |   |   | 255,937 |   |
|   | Total loans                                     |   | $          | 4,162  |   |        | $      | 316,384 |        |   | $      | 48,741   |   |   | $           | 10,955 |   |   | $      | - |   |   | $ | 380,242 |   |

----

| 4) | LOANS, continued |
|----|------------------|

|   |                                          |   | December 31, |    |
|--------|-----------------------------------------------|--------|--------------|---------|
|   | (amounts in thousands)                        |   | 2010         |    |   | 2009 |   |
|   |                                          |   |         |    |   |   |   |
|   | Impaired loans without a valuation reserve    |   | $            | 90,655  |   |   | $ | 94,382 |   |
|   | Impaired loans with a valuation reserve       |   |         | 33,650  |   |   |   | 20,334 |   |
|   | Total impaired loans                          |   | $            | 124,305 |   |   | $ | 114,716 |   |
|   |                                          |   |         |    |   |   |   |   |   |
|   | Valuation allowance related to impaired loans |   | $            | 5,768   |   |   | $ | 5,284 |   |

|   | (in thousands)                               |   | 2010   |    |   | 2009   |   |    | 2008   |   |
|--------|----------------------------------------------|--------|--------|---------|--------|--------|--------|---------|--------|--------|
|   |                                         |   |   |    |   |   |   |    |   |   |
|   | Interest income recognized during impairment |   | $      | 398     |   |   | $      | 206     |   |   | $ | 875 |   |
|   | Cash-basis interest income recognized        |   |   | 349     |   |   |   | 68      |   |   |   | 4 |   |
|   | Average investment in impaired loans         |   |   | 123,884 |   |   |   | 105,966 |   |   |   | 68,561 |   |

----

| 4) | LOANS, continued |
|----|------------------|

|   |                                |   | Unpaid    |    |   |       |   |    | Allowance for |   |
|--------|-------------------------------------|--------|-----------|---------|--------|------------|--------|---------|---------------|--------|
|   |                                |   | Principal |    |   | Recorded   |   |    | Loan Losses   |   |
|   | (in thousands)                      |   | Balance   |    |   | Investment |   |    | Allocated     |   |
|   | With no related allowance recorded: |   |      |    |   |       |   |    |          |   |
|   | Commercial                          |   | $         | 2,014   |   |       | $      | 2,014   |          |   | $ | - |   |
|   | Commercial real estate              |   |      |    |   |       |   |    |          |   |   |   |   |
|   | Land, development and construction  |   |      | 71,871  |   |       |   | 49,277  |          |   |   | - |   |
|   | Other                               |   |      | 28,522  |   |       |   | 28,522  |          |   |   | - |   |
|   | Churches                            |   |      | 1,018   |   |       |   | 1,018   |          |   |   | - |   |
|   | Residential real estate             |   |      | 9,926   |   |       |   | 9,824   |          |   |   | - |   |
|   | With an allowance recorded:         |   |      |    |   |       |   |    |          |   |   |   |   |
|   | Commercial                          |   |      | -       |   |       |   | -       |          |   |   | - |   |
|   | Commercial real estate              |   |      | -       |   |       |   | -       |          |   |   | - |   |
|   | Land, development and construction  |   |      | 34,179  |   |       |   | 32,577  |          |   |   | 5,696 |   |
|   | Other                               |   |      | 150     |   |       |   | 150     |          |   |   | 58 |   |
|   | Churches                            |   |      | -       |   |       |   | -       |          |   |   | - |   |
|   | Residential real estate             |   |      | 923     |   |       |   | 923     |          |   |   | 14 |   |
|   | Total                               |   | $         | 148,603 |   |       | $      | 124,305 |          |   | $ | 5,768 |   |

----

| 4) | LOANS, continued |
|----|------------------|

|   |                               |   |       |   |   | Past Due      |   |
|--------|------------------------------------|--------|------------|--------|--------|---------------|--------|
|   |                               |   |       |   |   | Loans over    |   |
|   |                               |   |       |   |   | 90 days still |   |
|   | (in thousands)                     |   | Nonaccrual |   |   | Accruing      |   |
|   |                               |   |       |   |   |          |   |
|   | Commercial                         |   | $          | 2,198  |   |          | $      | 113 |   |
|   | Commercial real estate:            |   |       |   |   |          |   |   |   |
|   | Land, development and construction |   |       | 60,404 |   |          |   | 87 |   |
|   | Other                              |   |       | 20,081 |   |          |   | 565 |   |
|   | Churches                           |   |       | 754    |   |          |   | - |   |
|   | Residential real estate            |   |       | 3,904  |   |          |   | 258 |   |
|   | Consumer                           |   |       | 96     |   |          |   | 22 |   |
|   |                               |   | $          | 87,437 |   |          | $      | 1,045 |   |

|   |                               |   | 30-59    |   |   | 60-89    |   |   | Greater than |   |   |     |   |   |      |    |   |   |   |
|--------|------------------------------------|--------|----------|--------|--------|----------|--------|--------|--------------|--------|--------|----------|--------|--------|-----------|---------|--------|--------|--------|
|   |                               |   | Days     |   |   | Days     |   |   | 90 Days      |   |   | Total    |   |   | Loans Not |    |   |   |   |
|   | (in thousands)                     |   | Past Due |   |   | Past Due |   |   | Past Due     |   |   | Past Due |   |   | Past Due  |    |   | Total  |   |
|   |                               |   |     |   |   |     |   |   |         |   |   |     |   |   |      |    |   |   |   |   |   |
|   | Commercial                         |   | $        | 67     |   |     | $      | 14     |         |   | $      | 2,311    |   |   | $         | 2,392   |   |   | $      | 1,770 |   |   | $ | 4,162 |   |
|   | Commercial Real Estate:            |   |     |   |   |     |   |   |         |   |   |     |   |   |      |    |   |   |   |   |   |   |   |   |   |
|   | Land, development and construction |   |     | 19,828 |   |     |   | 2,548  |         |   |   | 59,005   |   |   |      | 81,381  |   |   |   | 49,158 |   |   |   | 130,539 |   |
|   | Other                              |   |     | 3,975  |   |     |   | 3,130  |         |   |   | 19,792   |   |   |      | 26,897  |   |   |   | 79,242 |   |   |   | 106,139 |   |
|   | Churches                           |   |     | 772    |   |     |   | -      |         |   |   | 273      |   |   |      | 1,045   |   |   |   | 78,661 |   |   |   | 79,706 |   |
|   | Residential real estate            |   |     | 1,329  |   |     |   | 268    |         |   |   | 4,000    |   |   |      | 5,597   |   |   |   | 43,144 |   |   |   | 48,741 |   |
|   | Consumer                           |   |     | 33     |   |     |   | 38     |         |   |   | 118      |   |   |      | 189     |   |   |   | 10,766 |   |   |   | 10,955 |   |
|   | Total                              |   | $        | 26,004 |   |     | $      | 5,998  |         |   | $      | 85,499   |   |   | $         | 117,501 |   |   | $      | 262,741 |   |   | $ | 380,242 |   |

----

| 4) | LOANS, continued |
|----|------------------|

|   |                               |   |   |    |   | Special |   |   |        |   |   |     |   |
|--------|------------------------------------|--------|--------|---------|--------|---------|--------|--------|-------------|--------|--------|----------|--------|
|   | (in thousands)                     |   | Pass   |    |   | Mention |   |   | Substandard |   |   | Doubtful |   |
|   |                               |   |   |    |   |    |   |   |        |   |   |     |   |
|   | Commercial                         |   | $      | 1,736   |   |    | $      | 145    |        |   | $      | 2,281    |   |   | $ | - |   |
|   | Commercial real estate:            |   |   |    |   |    |   |   |        |   |   |     |   |   |   |   |   |
|   | Land, development and construction |   |   | 29,780  |   |    |   | 18,341 |        |   |   | 82,418   |   |   |   | - |   |
|   | Other                              |   |   | 60,999  |   |    |   | 15,067 |        |   |   | 30,073   |   |   |   | - |   |
|   | Churches                           |   |   | 74,134  |   |    |   | 4,034  |        |   |   | 1,538    |   |   |   | - |   |
|   | Residential real estate            |   |   | 31,849  |   |    |   | 5,432  |        |   |   | 11,460   |   |   |   | - |   |
|   | Consumer                           |   |   | 10,721  |   |    |   | 16     |        |   |   | 218      |   |   |   | - |   |
|   |                               |   | $      | 209,219 |   |    | $      | 43,035 |        |   | $      | 127,988  |   |   | $ | - |   |

----

| 5) | FORECLOSED PROPERTIES |
|----|-----------------------|

|   |                                       |   | Years Ended December 31, |   |
|--------|--------------------------------------------|--------|--------------------------|--------|
|   | (in thousands)                             |   | 2010                     |   |   | 2009 |   |
|   |                                       |   |                     |   |   |   |   |
|   | Balance, beginning of year                 |   | $                        | 49,732 |   |   | $ | 18,398 |   |
|   | Loans transferred to foreclosed properties |   |                     | 41,149 |   |   |   | 43,466 |   |
|   | Capitalized costs to properties            |   |                     | 474    |   |   |   | 249 |   |
|   | Cash sales proceeds                        |   |                     | (3,277 | ) |   |   | (8,360 | ) |
|   | Financed sales                             |   |                     | (4,056 | ) |   |   | (248 | ) |
|   | Loss on sale of properties                 |   |                     | (222   | ) |   |   | (1,219 | ) |
|   | Impairment losses                          |   |                     | (4,349 | ) |   |   | (2,554 | ) |
|   | Balance, end of year                       |   | $                        | 79,451 |   |   | $ | 49,732 |   |

|   |                                     |   | Years Ended December 31, |   |
|--------|------------------------------------------|--------|--------------------------|--------|
|   | (in thousands)                           |   | 2010                     |   |   | 2009 |   |   | 2008 |   |
|   |                                     |   |                     |   |   |   |   |   |   |   |
|   | Net loss on sales of real estate         |   | $                        | 222    |   |   | $ | 1,219 |   |   | $ | 324 |   |
|   | Impairment losses                        |   |                     | 4,349  |   |   |   | 2,554 |   |   |   | 2,911 |   |
|   | Operating expenses, net of rental income |   |                     | 3,343  |   |   |   | 1,372 |   |   |   | 324 |   |
|   |                                     |   | $                        | 7,914  |   |   | $ | 5,145 |   |   | $ | 3,559 |   |

| 6) | PREMISES AND EQUIPMENT |
|----|------------------------|

|                     |   | December 31, |   |
|--------------------------|--------|--------------|--------|
| (in thousands)           |   | 2010         |   |   | 2009 |   |
|                     |   |         |   |   |   |   |
| Land                     |   | $            | 2,668  |   |   | $ | 2,674 |   |
| Buildings                |   |         | 10,447 |   |   |   | 10,447 |   |
| Equipment                |   |         | 5,065  |   |   |   | 5,039 |   |
|                     |   |         | 18,180 |   |   |   | 18,160 |   |
| Accumulated depreciation |   |         | (9,146 | ) |   |   | (8,679 | ) |
|                     |   | $            | 9,034  |   |   | $ | 9,481 |   |

----

| 7) | DEPOSITS |
|----|----------|

| 2011   |   | $      | 236,515 |   |
|--------|--------|--------|---------|--------|
| 2012   |   |   | 54,597  |   |
| 2013   |   |   | 41,174  |   |
| 2014   |   |   | 9,331   |   |
| 2015   |   |   | 17,150  |   |
|   |   | $      | 358,767 |   |

| 8) | OTHER BORROWINGS |
|----|------------------|

|   |                                                                                                                                                       |   | December 31, |   |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------|--------|
|   | (in thousands)                                                                                                                                             |   | 2010         |   |   | 2009 |   |
|   |                                                                                                                                                       |   |         |   |   |   |   |
|   | Advance from Federal Home Loan Bank with interest at 4.00%, payable monthly, with principal due April 19, 2010                                             |   | $            | -      |   |   | $ | 1,000 |   |
|   | Advance from Federal Home Loan Bank with interest at 3.16%, payable monthly, and principal due quarterly with a final principal payment due April 19, 2010 |   |         | -      |   |   |   | 214 |   |
|   | Treasury tax and loan note option account, with interest at .25% less than the federal funds rate, due on demand                                           |   |         | 755    |   |   |   | 222 |   |
|   |                                                                                                                                                       |   |         |   |   |   |   |   |   |
|   |                                                                                                                                                       |   | $            | 755    |   |   | $ | 1,436 |   |

----

| 9)   | EMPLOYEE BENEFIT PLANS |
|----------------|------------------------|

----

| 10)   | INCOME TAXES |
|-----------------|--------------|

|                         |   | Years Ended December 31, |   |
|------------------------------|--------|--------------------------|--------|
| (amounts in thousands)       |   | 2010                     |   |   | 2009 |   |   | 2008 |   |
|                         |   |                     |   |   |   |   |   |   |   |
| Current                      |   |                     |   |   |   |   |   |   |   |
| Federal                      |   | $                        | 268    |   |   | $ | (17,191 | ) |   | $ | (3,526 | ) |
| State                        |   |                     | (39    | ) |   |   | (301 | ) |   |   | (552 | ) |
|                         |   |                     |   |   |   |   |   |   |   |   |   |   |
| Deferred                     |   |                     |   |   |   |   |   |   |   |   |   |   |
| Federal                      |   |                     | (2,205 | ) |   |   | (765 | ) |   |   | (3,523 | ) |
| State                        |   |                     | (386   | ) |   |   | (486 | ) |   |   | (941 | ) |
| Valuation allowance          |   |                     | 2,591  |   |   |   | 7,634 |   |   |   | 1,970 |   |
| Income tax expense (benefit) |   | $                        | 229    |   |   | $ | (11,109 | ) |   | $ | (6,572 | ) |

|                                         |   | Years Ended December 31, |   |
|----------------------------------------------|--------|--------------------------|--------|
| (amounts in thousands)                       |   | 2010                     |   |   | 2009 |   |   | 2008 |   |
|                                         |   |                     |   |   |   |   |   |   |   |
| Income tax benefit at federal statutory rate |   | $                        | (2,268 | ) |   | $ | (16,744 | ) |   | $ | (7,321 | ) |
| Tax-exempt interest                          |   |                     | (55    | ) |   |   | (62 | ) |   |   | (109 | ) |
| State income tax benefit                     |   |                     | (278   | ) |   |   | (1,924 | ) |   |   | (1,190 | ) |
| Valuation allowance                          |   |                     | 2,591  |   |   |   | 7,634 |   |   |   | 1,970 |   |
| Surtax exemption                             |   |                     | -      |   |   |   | 230 |   |   |   | (98 | ) |
| Revision of prior year estimate              |   |                     | 268    |   |   |   | - |   |   |   | - |   |
| Other items, net                             |   |                     | (29    | ) |   |   | (243 | ) |   |   | 176 |   |
| Income tax expense (benefit)                 |   | $                        | 229    |   |   | $ | (11,109 | ) |   | $ | (6,572 | ) |

----

| 10)   | INCOME TAXES, continued |
|-----------------|-------------------------|

|                            |   | December 31, |    |
|---------------------------------|--------|--------------|---------|
| (amounts in thousands)          |   | 2010         |    |   | 2009 |   |
|                            |   |         |    |   |   |   |
| Deferred tax assets:            |   |         |    |   |   |   |
| Loan loss reserves              |   | $            | 4,187   |   |   | $ | 5,154 |   |
| Net operating loss carryforward |   |         | 3,490   |   |   |   | 1,463 |   |
| Deferred compensation           |   |         | 240     |   |   |   | 253 |   |
| Deferred loan fees              |   |         | 5       |   |   |   | 14 |   |
| Foreclosed properties expense   |   |         | 3,429   |   |   |   | 1,915 |   |
| Unused state tax credits        |   |         | 820     |   |   |   | 819 |   |
| Contributions                   |   |         | 4       |   |   |   | 3 |   |
|                            |   |         | 12,175  |   |   |   | 9,621 |   |
| Valuation allowance             |   |         | (12,129 | ) |   |   | (9,089 | ) |
|                            |   |         | 46      |   |   |   | 532 |   |
|                            |   |         |    |   |   |   |   |   |
| Deferred tax liabilities:       |   |         |    |   |   |   |   |   |
| Securities available for sale   |   |         | 36      |   |   |   | 485 |   |
| Depreciation                    |   |         | 10      |   |   |   | 47 |   |
|                            |   |         | 46      |   |   |   | 532 |   |
|                            |   |         |    |   |   |   |   |   |
| Net deferred tax assets         |   | $            | -       |   |   | $ | - |   |

----

| 11)   | RELATED PARTY TRANSACTIONS |
|-----------------|----------------------------|

|   | Balance, beginning of year            |   | $      | 238  |   |
|--------|---------------------------------------|--------|--------|------|--------|
|   | Advances                              |   |   | 468  |   |
|   | Repayments                            |   |   | (155 | )      |
|   | Adjustment to status of related party |   |   | (82  | )      |
|   | Balance, end of year                  |   | $      | 469  |   |

| 12)   | COMMITMENTS AND CONTINGENCIES |
|-----------------|-------------------------------|

|   |                         |   | December 31, |   |
|--------|------------------------------|--------|--------------|--------|
|   | (in thousands)               |   | 2010         |   |   | 2009 |   |
|   |                         |   |         |   |   |   |   |
|   | Standby letters of credit    |   | $            | 2,056  |   |   | $ | 2,671 |   |
|   |                         |   |         |   |   |   |   |   |   |
|   | Commitments to extend credit |   |         | 16,388 |   |   |   | 36,236 |   |
|   |                         |   |         |   |   |   |   |   |   |
|   |                         |   | $            | 18,444 |   |   | $ | 38,907 |   |

----

| 12)   | COMMITMENTS AND CONTINGENCIES, continued |
|-----------------|------------------------------------------|

----

| 13)   | CONCENTRATIONS OF CREDIT RISK |
|-----------------|-------------------------------|

| 14)   | REGULATORY MATTERS |
|-----------------|--------------------|

----

| 14)   | REGULATORY MATTERS, continued |
|-----------------|-------------------------------|

----

| 14)   | REGULATORY MATTERS, continued |
|-----------------|-------------------------------|

|                      |   |   |   |   |     |   |   |                 |   |   |              |   |   | To Be Well        |   |
|---------------------------|--------|--------|--------|--------|----------|--------|--------|----------------------|--------|--------|-------------------|--------|--------|-------------------|--------|
|                      |   |   |   |   |     |   |   |                 |   |   |              |   |   | Capitalized Under |   |
|                      |   |   |   |   |     |   |   | For Capital Adequacy |   |   | Prompt Corrective |   |
|                      |   | Actual |   |   | Purposes |   |   | Action Provisions    |   |
| (in thousands)            |   | Amount |   |   | Ratio    |   |   | Amount               |   |   | Ratio             |   |   | Amount            |   |   | Ratio |   |
|                      |   |   |   |   |     |   |   |                 |   |   |              |   |   |              |   |   |   |   |
| As of December 31, 2010   |   |   |   |   |     |   |   |                 |   |   |              |   |   |              |   |   |   |   |
| Total Risk-Based Capital  |   |   |   |   |     |   |   |                 |   |   |              |   |   |              |   |   |   |   |
| Consolidated              |   | $      | 21,276 |   |     |   | 4.39   | %                    |   | $      | 38,737            |   |   |              | 8.00   | % |   |   | N/A |   |   |   | N/A |   |
| Bank                      |   | $      | 21,104 |   |     |   | 4.35   | %                    |   | $      | 38,784            |   |   |              | 8.00   | % |   | $ | 48,480 |   |   |   | 10.00 | % |
| Tier I Risk-Based Capital |   |   |   |   |     |   |   |                 |   |   |              |   |   |              |   |   |   |   |   |   |   |   |   |   |
| Consolidated              |   | $      | 15,193 |   |     |   | 3.14   | %                    |   | $      | 19,369            |   |   |              | 4.00   | % |   |   | N/A |   |   |   | N/A |   |
| Bank                      |   | $      | 15,021 |   |     |   | 3.10   | %                    |   | $      | 19,392            |   |   |              | 4.00   | % |   | $ | 29,088 |   |   |   | 6.00 | % |
| Tier I Leverage Capital   |   |   |   |   |     |   |   |                 |   |   |              |   |   |              |   |   |   |   |   |   |   |   |   |   |
| Consolidated              |   | $      | 15,193 |   |     |   | 2.68   | %                    |   | $      | 22,647            |   |   |              | 4.00   | % |   |   | N/A |   |   |   | N/A |   |
| Bank                      |   | $      | 15,021 |   |     |   | 2.65   | %                    |   | $      | 22,665            |   |   |              | 4.00   | % |   | $ | 28,331 |   |   |   | 5.00 | % |
|                      |   |   |   |   |     |   |   |                 |   |   |              |   |   |              |   |   |   |   |   |   |   |   |   |   |
| As of December 31, 2009   |   |   |   |   |     |   |   |                 |   |   |              |   |   |              |   |   |   |   |   |   |   |   |   |   |
| Total Risk-Based Capital  |   |   |   |   |     |   |   |                 |   |   |              |   |   |              |   |   |   |   |   |   |   |   |   |   |
| Consolidated              |   | $      | 28,233 |   |     |   | 5.55   | %                    |   | $      | 40,713            |   |   |              | 8.00   | % |   |   | N/A |   |   |   | N/A |   |
| Bank                      |   | $      | 28,053 |   |     |   | 5.51   | %                    |   | $      | 40,702            |   |   |              | 8.00   | % |   | $ | 50,877 |   |   |   | 10.00 | % |
| Tier 1 Risk-Based Capital |   |   |   |   |     |   |   |                 |   |   |              |   |   |              |   |   |   |   |   |   |   |   |   |   |
| Consolidated              |   | $      | 21,902 |   |     |   | 4.30   | %                    |   | $      | 20,356            |   |   |              | 4.00   | % |   |   | N/A |   |   |   | N/A |   |
| Bank                      |   | $      | 21,722 |   |     |   | 4.27   | %                    |   | $      | 20,351            |   |   |              | 4.00   | % |   | $ | 30,526 |   |   |   | 6.00 | % |
| Tier I Leverage Capital   |   |   |   |   |     |   |   |                 |   |   |              |   |   |              |   |   |   |   |   |   |   |   |   |   |
| Consolidated              |   | $      | 21,902 |   |     |   | 3.38   | %                    |   | $      | 25,917            |   |   |              | 4.00   | % |   |   | N/A |   |   |   | N/A |   |
| Bank                      |   | $      | 21,722 |   |     |   | 3.35   | %                    |   | $      | 25,910            |   |   |              | 4.00   | % |   | $ | 32,387 |   |   |   | 5.00 | % |

| 15)   | FAIR VALUE OF ASSETS AND LIABILITIES |
|-----------------|--------------------------------------|

----

| 15)   | FAIR VALUE OF ASSETS AND LIABILITIES, continued |
|-----------------|-------------------------------------------------|

----

| 15)   | FAIR VALUE OF ASSETS AND LIABILITIES, continued |
|-----------------|-------------------------------------------------|

----

| 15)   | FAIR VALUE OF ASSETS AND LIABILITIES, continued |
|-----------------|-------------------------------------------------|

----

| 15)   | FAIR VALUE OF ASSETS AND LIABILITIES, continued |
|-----------------|-------------------------------------------------|

|                          |   | Fair Value Measurements at December 31, 2010 Using              |   |
|-------------------------------|--------|-----------------------------------------------------------------|--------|
| (in thousands)                |   |  Quoted Pricesin ActiveMarkets forIdenticalAssets(Level 1) |   |   | SignificantOtherObservableInputs(Level 2) |   |   |   SignificantUnobservableInputs(Level 3) |   |   |   TotalCarryingValue |   |
|                          |   |                                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Assets                        |   |                                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Securities available for sale |   | $                                                               | 6,621  |   |   | $ | 60,594 |   |   | $ | - |   |   | $ | 67,215 |   |
| Total assets at fair value    |   | $                                                               | 6,621  |   |   | $ | 60,594 |   |   | $ | - |   |   | $ | 67,215 |   |

|                          |   | Fair Value Measurements at December 31, 2009 Using              |   |
|-------------------------------|--------|-----------------------------------------------------------------|--------|
| (in thousands)                |   |  Quoted Pricesin ActiveMarkets forIdenticalAssets(Level 1) |   |   | SignificantOtherObservableInputs(Level 2) |   |   | SignificantUnobservableInputs(Level 3) |   |   | TotalCarryingValue |   |
|                          |   |                                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Assets                        |   |                                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Securities available for sale |   | $                                                               | 1,211  |   |   | $ | 70,966 |   |   | $ | - |   |   | $ | 72,177 |   |
| Loans held for sale           |   |                                                            | -      |   |   |   | 499 |   |   |   | - |   |   |   | 499 |   |
| Total assets at fair value    |   | $                                                               | 1,211  |   |   | $ | 71,465 |   |   | $ | - |   |   | $ | 72,676 |   |

----

| 15)   | FAIR VALUE OF ASSETS AND LIABILITIES, continued |
|-----------------|-------------------------------------------------|

|              |   |                                                            |   |   |                                      |   |   |                                          |   |   |               |   |   |   |   |   |
|-------------------|--------|-----------------------------------------------------------------|--------|--------|-------------------------------------------|--------|--------|-----------------------------------------------|--------|--------|--------------------|--------|--------|--------|--------|--------|
|              |   | 2010 Fair Value Changes Based On:                               |   |
| (in thousands)    |   |  Quoted Pricesin ActiveMarkets forIdenticalAssets(Level 1) |   |   | SignificantOtherObservableInputs(Level 2) |   |   |   SignificantUnobservableInputs(Level 3) |   |   |  Total Losses |   |
|              |   |                                                            |   |   |                                      |   |   |                                          |   |   |               |   |   |   |   |   |
| Impaired loans    |   | $                                                               | -      |   |                                      | $      | 344    |                                          |   | $      | 3,017              |   |   | $      | 3,361  |   |
| Foreclosed assets |   |                                                            | -      |   |                                      |   | 480    |                                          |   |   | 3,869              |   |   |   | 4,349  |   |
| Total             |   | $                                                               | -      |   |                                      | $      | 824    |                                          |   | $      | 6,886              |   |   | $      | 7,710  |   |

|                  |   | 2009 Fair Value Changes Based On:                               |   |
|-----------------------|--------|-----------------------------------------------------------------|--------|
|   (in thousands) |   |  Quoted Pricesin ActiveMarkets forIdenticalAssets(Level 1) |   |   | SignificantOtherObservableInputs(Level 2) |   |   |   SignificantUnobservableInputs(Level 3) |   |   |   Total Losses |   |
|                  |   |                                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Impaired loans        |   | $                                                               | -      |   |   | $ | 22,013 |   |   | $ | 20,149 |   |   | $ | 42,162 |   |
| Foreclosed assets     |   |                                                            | -      |   |   |   | 42 |   |   |   | 2,512 |   |   |   | 2,554 |   |
| Total                 |   | $                                                               | -      |   |   | $ | 22,055 |   |   | $ | 22,661 |   |   | $ | 44,716 |   |

----

| 15)   | FAIR VALUE OF ASSETS AND LIABILITIES, continued |
|-----------------|-------------------------------------------------|

|                  |   |                                                            |   |   |                                      |   |   |                                          |   |   |         |   |
|-----------------------|--------|-----------------------------------------------------------------|--------|--------|-------------------------------------------|--------|--------|-----------------------------------------------|--------|--------|--------------|--------|
|                  |   | 2008 Fair Value Changes Based On:                               |   |
|   (in thousands) |   |  Quoted Pricesin ActiveMarkets forIdenticalAssets(Level 1) |   |   | SignificantOtherObservableInputs(Level 2) |   |   |   SignificantUnobservableInputs(Level 3) |   |   | Total Losses |   |
|                  |   |                                                            |   |   |                                      |   |   |                                          |   |   |         |   |   |   |   |   |
| Impaired loans        |   | $                                                               | -      |   |                                      | $      | -      |                                          |   | $      | 14,962       |   |   | $ | 14,962 |   |
| Foreclosed assets     |   |                                                            | -      |   |                                      |   | -      |                                          |   |   | 2,911        |   |   |   | 2,911 |   |
| Total                 |   | $                                                               | -      |   |                                      | $      | -      |                                          |   | $      | 17,873       |   |   | $ | 17,873 |   |

----

| 15)   | FAIR VALUE OF ASSETS AND LIABILITIES, continued |
|-----------------|-------------------------------------------------|

|                                                                          |   | December 31, 2010 |    |   | December 31, 2009 |   |
|-------------------------------------------------------------------------------|--------|-------------------|---------|--------|-------------------|--------|
|                                                                          |   | Carrying          |    |   | Fair              |   |   | Carrying |   |   | Fair |   |
| (in thousands)                                                                |   | Amount            |    |   | Value             |   |   | Amount |   |   | Value |   |
|                                                                          |   |              |    |   |              |   |   |   |   |   |   |   |
| Financial assets:                                                             |   |              |    |   |              |   |   |   |   |   |   |   |
| Cash, interest-bearing deposits in banks, and excess Federal Reserve balances |   | $                 | 32,422  |   |              | $      | 32,422 |   |   | $ | 38,222 |   |   | $ | 38,222 |   |
| Securities available for sale                                                 |   |              | 67,215  |   |              |   | 67,215 |   |   |   | 72,177 |   |   |   | 72,177 |   |
| Securities held to maturity                                                   |   |              | 375     |   |              |   | 378 |   |   |   | 695 |   |   |   | 705 |   |
| Restricted equity securities                                                  |   |              | 1,194   |   |              |   | 1,194 |   |   |   | 1,266 |   |   |   | 1,266 |   |
| Loans held for sale                                                           |   |              | -       |   |              |   | - |   |   |   | 499 |   |   |   | 499 |   |
| Loans, net                                                                    |   |              | 369,418 |   |              |   | 369,167 |   |   |   | 421,567 |   |   |   | 425,531 |   |
| Accrued interest receivable                                                   |   |              | 1,612   |   |              |   | 1,612 |   |   |   | 2,222 |   |   |   | 2,222 |   |
|                                                                          |   |              |    |   |              |   |   |   |   |   |   |   |   |   |   |   |
| Financial liabilities:                                                        |   |              |    |   |              |   |   |   |   |   |   |   |   |   |   |   |
| Deposits                                                                      |   | $                 | 544,663 |   |              | $      | 549,935 |   |   | $ | 586,101 |   |   | $ | 595,438 |   |
| Other borrowings                                                              |   |              | 755     |   |              |   | 755 |   |   |   | 1,436 |   |   |   | 1,478 |   |
| Accrued interest payable                                                      |   |              | 1,522   |   |              |   | 1,522 |   |   |   | 2,116 |   |   |   | 2,116 |   |

| 16)   | PARENT COMPANY FINANCIAL INFORMATION |
|-----------------|--------------------------------------|

|                                             |   |         |   |   |   |   |
|--------------------------------------------------|--------|--------------|--------|--------|--------|--------|
|                                             |   | December 31, |   |
| (in thousands)                                   |   | 2010         |   |   | 2009   |   |
| Assets                                           |   |         |   |   |   |   |
| Cash                                             |   | $            | 44     |   |   | $      | 48 |   |
| Investment in subsidiaries                       |   |         | 15,109 |   |   |   | 23,147 |   |
| Premises and equipment                           |   |         | 132    |   |   |   | 136 |   |
| Total assets                                     |   | $            | 15,285 |   |   | $      | 23,331 |   |
|                                             |   |         |   |   |   |   |   |   |
| Liabilities and Stockholders’ Equity       |   |         |   |   |   |   |   |   |
| Liabilities                                      |   | $            | 4      |   |   | $      | 4 |   |
| Stockholders’ equity                       |   |         | 15,281 |   |   |   | 23,327 |   |
| Total liabilities and stockholders’ equity |   | $            | 15,285 |   |   | $      | 23,331 |   |

----

| 16)   | PARENT COMPANY FINANCIAL INFORMATION, continued |
|-----------------|-------------------------------------------------|

|   |                                                                                        |   | Years Ended December 31, |   |
|--------|---------------------------------------------------------------------------------------------|--------|--------------------------|--------|
|   | (in thousands)                                                                              |   | 2010                     |   |   | 2009 |   |   | 2008 |   |
|   |                                                                                        |   |                     |   |   |   |   |   |   |   |
|   | Income                                                                                      |   |                     |   |   |   |   |   |   |   |
|   | Dividends from bank subsidiary                                                              |   | $                        | -      |   |   | $ | - |   |   | $ | 2,136 |   |
|   | Rental income                                                                               |   |                     | 4      |   |   |   | 14 |   |   |   | 13 |   |
|   | Total income                                                                                |   |                     | 4      |   |   |   | 14 |   |   |   | 2,149 |   |
|   |                                                                                        |   |                     |   |   |   |   |   |   |   |   |   |   |
|   | Expense                                                                                     |   |                     |   |   |   |   |   |   |   |   |   |   |
|   | Depreciation                                                                                |   |                     | 4      |   |   |   | 5 |   |   |   | 6 |   |
|   | Other expenses                                                                              |   |                     | 8      |   |   |   | 67 |   |   |   | 58 |   |
|   | Total expenses                                                                              |   |                     | 12     |   |   |   | 72 |   |   |   | 64 |   |
|   |                                                                                        |   |                     |   |   |   |   |   |   |   |   |   |   |
|   | Earnings (loss) before income tax benefits and equity in undistributed loss of subsidiaries |   |                     | (8     | ) |   |   | (58 | ) |   |   | 2,085 |   |
|   |                                                                                        |   |                     |   |   |   |   |   |   |   |   |   |   |
|   | Income tax benefits                                                                         |   |                     | -      |   |   |   | - |   |   |   | (20 | ) |
|   |                                                                                        |   |                     |   |   |   |   |   |   |   |   |   |   |
|   | Earnings (loss) before equity in undistributed loss of subsidiaries                         |   |                     | (8     | ) |   |   | (58 | ) |   |   | 2,105 |   |
|   |                                                                                        |   |                     |   |   |   |   |   |   |   |   |   |   |
|   | Equity in undistributed loss of subsidiaries                                                |   |                     | (6,701 | ) |   |   | (36,594 | ) |   |   | (16,452 | ) |
|   |                                                                                        |   |                     |   |   |   |   |   |   |   |   |   |   |
|   | Net loss                                                                                    |   | $                        | (6,709 | ) |   | $ | (36,652 | ) |   | $ | (14,347 | ) |

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| 16)   | PARENT COMPANY FINANCIAL INFORMATION, continued |
|-----------------|-------------------------------------------------|

|   |                                                                                      |   | Years Ended December 31, |   |
|--------|-------------------------------------------------------------------------------------------|--------|--------------------------|--------|
|   | (in thousands)                                                                            |   | 2010                     |   |   | 2009 |   |   | 2008 |   |
|   |                                                                                      |   |                     |   |   |   |   |   |   |   |
|   | OPERATING ACTIVITIES                                                                      |   |                     |   |   |   |   |   |   |   |
|   | Net loss                                                                                  |   | $                        | (6,709 | ) |   | $ | (36,652 | ) |   | $ | (14,347 | ) |
|   | Adjustments to reconcile net loss to net cash (used in) provided by operating activities: |   |                     |   |   |   |   |   |   |   |   |   |   |
|   | Depreciation                                                                              |   |                     | 4      |   |   |   | 5 |   |   |   | 6 |   |
|   | Loss of subsidiaries                                                                      |   |                     | 6,701  |   |   |   | 36,594 |   |   |   | 16,452 |   |
|   | Net other operating activities                                                            |   |                     | -      |   |   |   | 11 |   |   |   | (41 | ) |
|   | Net cash (used in) provided by operating activities                                       |   |                     | (4     | ) |   |   | (42 | ) |   |   | 2,070 |   |
|   |                                                                                      |   |                     |   |   |   |   |   |   |   |   |   |   |
|   | FINANCING ACTIVITIES                                                                      |   |                     |   |   |   |   |   |   |   |   |   |   |
|   | Dividends paid                                                                            |   |                     | -      |   |   |   | - |   |   |   | (2,137 | ) |
|   | Purchase of treasury stock                                                                |   |                     | -      |   |   |   | - |   |   |   | (61 | ) |
|   | Net cash used in financing activities                                                     |   |                     | -      |   |   |   | - |   |   |   | (2,198 | ) |
|   |                                                                                      |   |                     |   |   |   |   |   |   |   |   |   |   |
|   | Net decrease in cash                                                                      |   |                     | (4     | ) |   |   | (42 | ) |   |   | (128 | ) |
|   | Cash at beginning of year                                                                 |   |                     | 48     |   |   |   | 90 |   |   |   | 218 |   |
|   | Cash at end of year                                                                       |   | $                        | 44     |   |   | $ | 48 |   |   | $ | 90 |   |

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