**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-Q**

 

**(MARKONE)**

 

**x****     ****QUARTERLY REPORT PURSUANT TO SECTION 13OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the Quarterly Period ended March 31, 2010**

 

**OR**

 

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

 

**For the Transition Period from               to               **

 

**Commission File No. ****000-51896**

 

**COMMUNITYSOUTH FINANCIAL CORPORATION**

(Exact name of registrant as specified in its charter)

 

| **South  Carolina**          | ** ** | **20-0934786**      |
|------------------------------|------------|---------------------|
| (State or other jurisdiction |       | (I.R.S. Employer    |
| of incorporation)            |       | Identification No.) |

 

**6602 Calhoun Memorial Highway**

**Easley,South Carolina 29640**

(Address of principal executive offices)

 

**(864) 306-2540**

(Registrant’s telephone number, including area code)

 

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Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.  Yes x  No o

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 ofthis chapter) during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post suchfiles).     o  Yes   o No

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reportingcompany.  See the definitions of “large accelerated filer,” “acceleratedfiler” and “smaller reporting company” in Rule 12b-2 of the Exchange Act).

 

| Large accelerated filer o                   |   | Accelerated filer o         |
|---------------------------------------------|--------|-----------------------------|
|                                        |   |                        |
| Non-accelerated o                           |   | Smaller reporting company x |
| (do not check if smaller reporting company) |   |                        |

 

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

 

Indicatethe number of shares outstanding of each of the issuer’s classes of commonstock, as of the latest practicable date: 4,698,697 shares of common stock,$0.01 par value per share, were issued and outstanding as of May 14, 2010.

 

 

 

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**Part I- Financial Information**

 

## **Item 1. FinancialStatements**.

## ** **

**CONSOLIDATED BALANCE SHEETS**

(dollars in thousands)

** **
| ** **                                                                                                                                                | ** ** | **March 31, 2010** | ** ** | **December 31, 2009** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|----------------------------|------------|
| ** **                                                                                                                                                | ** ** | **(Unaudited)**         | ** ** | **(Audited)**              | ** ** |
| **Assets**                                                                                                                                                | ** ** | ** **              | ** ** | ** **                 | ** ** |
|                                                                                                                                                      |       |                    |       |                       |       |
| Cash and cash  equivalents                                                                                                                                |       |                    |       |                       |       |
| Cash and due from bank                                                                                                                                    |       | $                       | 7,781      |                       | $          | 6,876 |   |
| Federal funds sold                                                                                                                                        |       | 10,285                  |       | 31,043                     |       |
| Total cash and cash  equivalents                                                                                                                          |       | 18,066                  |       | 37,919                     |       |
| Investment securities,  available for sale                                                                                                                |       | 158,481                 |       | 103,638                    |       |
| Other investments, at  cost                                                                                                                               |       | 1,599                   |       | 1,599                      |       |
| Loans, net of allowance  for loan losses of $12,941 at March 31, 2010 and $12,963 at  December 31, 2009                                         |       | 246,798                 |       | 262,141                    |       |
| Accrued interest  receivable                                                                                                                              |       | 1,129                   |       | 1,440                      |       |
| Property and equipment,  net                                                                                                                              |       | 3,708                   |       | 3,867                      |       |
| Other real estate owned                                                                                                                                   |       | 7,586                   |       | 6,703                      |       |
| Repossessed collateral                                                                                                                                    |       | 940                     |       | 942                        |       |
| Other assets                                                                                                                                              |       | 2,545                   |       | 3,285                      |       |
|                                                                                                                                                      |       |                    |       |                       |       |
| Total assets                                                                                                                                              |       | $                       | 440,852    |                       | $          | 421,534 |   |
|                                                                                                                                                      |       |                    |       |                       |       |
| **Liabilities and Shareholders’ Equity**                                                                                                             |       |                    |       |                       |       |
|                                                                                                                                                      |       |                    |       |                       |       |
| **Liabilities**                                                                                                                                           |       |                    |       |                       |       |
| Deposits                                                                                                                                                  |       |                    |       |                       |       |
| Non-interest bearing                                                                                                                                      |       | $                       | 24,551     |                       | $          | 21,829 |   |
| Interest bearing                                                                                                                                          |       | 372,274                 |       | 354,734                    |       |
| Total deposits                                                                                                                                            |       | 396,825                 |       | 376,563                    |       |
| Repurchase agreements                                                                                                                                     |       | 30,000                  |       | 30,000                     |       |
| Subordinated debt                                                                                                                                         |       | 4,325                   |       | 4,325                      |       |
| Accrued interest  payable                                                                                                                                 |       | 1,546                   |       | 1,307                      |       |
| Accrued expenses                                                                                                                                          |       | 648                     |       | 665                        |       |
| Other liabilities                                                                                                                                         |       | 2                       |       | 3                          |       |
|                                                                                                                                                      |       |                    |       |                       |       |
| Total liabilities                                                                                                                                         |       | 433,346                 |       | 412,863                    |       |
|                                                                                                                                                      |       |                    |       |                       |       |
| Commitments and  contingencies                                                                                                                            |       |                    |       |                       |       |
|                                                                                                                                                      |       |                    |       |                       |       |
| **Shareholders’ Equity**                                                                                                                             |       |                    |       |                       |       |
| Preferred stock, par  value $.01 per share 10,000,000 shares authorized, no shares issued                                                                 |       | —                  |       | —                     |       |
| Common stock, par value  $.01 per share 35,000,000 shares authorized, 4,698,697 issued and outstanding  at March 31, 2010 and December 31, 2009 |       | 47                      |       | 47                         |       |
| Additional paid-in  capital                                                                                                                               |       | 29,841                  |       | 29,824                     |       |
| Accumulated other  comprehensive income (loss)                                                                                                            |       | (211                    | )          | (1,134                     | )          |
| Retained deficit                                                                                                                                          |       | (22,171                 | )          | (20,066                    | )          |
| Total shareholders’  equity                                                                                                                          |       | 7,506                   |       | 8,671                      |       |
|                                                                                                                                                      |       |                    |       |                       |       |
| Total liabilities and  shareholders’ equity                                                                                                          |       | $                       | 440,852    |                       | $          | 421,534 |   |

 

The accompanying notes are anintegral part of the consolidated financial statements.

 

2

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**CONSOLIDATED STATEMENTS OF (LOSS)**

**(UNAUDITED)**

(dollars in thousands, except share data)

 
| ** **                                                          | ** ** | **Three months ended**  | ** ** | **Three months ended**  | ** ** |
|---------------------------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                                                          | ** ** | **March 31, 2010** | ** ** | **March 31, 2009** | ** ** |
| **Interest  income**                                                |       |                    |       |                    |       |
| Interest  and fees on loans                                         |       | $                       | 3,543      |                    | $          | 4,370 |   |
| Interest  and dividends on investments                              |       | 674                     |       | 563                     |       |
| Total  interest income                                              |       | 4,217                   |       | 4,933                   |       |
|                                                                |       |                    |       |                    |       |
| **Interest  expense**                                               |       | 2,337                   |       | 2,080                   |       |
| ** **                                                          |       |                    |       |                    |       |
| Net  interest income                                                |       | 1,880                   |       | 2,853                   |       |
|                                                                |       |                    |       |                    |       |
| **Provision  for loan losses**                                      |       | 1,000                   |       | 1,305                   |       |
| ** **                                                          |       |                    |       |                    |       |
| Net  interest income after provision for loan losses                |       | 880                     |       | 1,548                   |       |
|                                                                |       |                    |       |                    |       |
| **Non-interest  income**                                            |       |                    |       |                    |       |
| Mortgage  origination revenue                                       |       | 163                     |       | 62                      |       |
| Gain  on sale of securities                                         |       | 54                      |       | 520                     |       |
| Other                                                               |       | 205                     |       | 232                     |       |
| Total  non-interest income                                          |       | 422                     |       | 814                     |       |
| ** **                                                          |       |                    |       |                    |       |
| **Non-interest  expense**                                           |       |                    |       |                    |       |
| Salaries  and benefits                                              |       | 1,395                   |       | 1,239                   |       |
| Data  processing                                                    |       | 216                     |       | 222                     |       |
| Occupancy                                                           |       | 182                     |       | 171                     |       |
| Depreciation                                                        |       | 176                     |       | 180                     |       |
| Equipment  maintenance and rental                                   |       | 77                      |       | 42                      |       |
| Advertising                                                         |       | 36                      |       | 36                      |       |
| Professional  fees                                                  |       | 354                     |       | 91                      |       |
| Office  supplies                                                    |       | 23                      |       | 23                      |       |
| Telephone                                                           |       | 35                      |       | 37                      |       |
| FDIC  assessments                                                   |       | 402                     |       | 96                      |       |
| Loss  on sale of other real estate owned and repossessed collateral |       | 15                      |       | —                  |       |
| Other                                                               |       | 496                     |       | 279                     |       |
| Total  non-interest expense                                         |       | 3,407                   |       | 2,416                   |       |
|                                                                |       |                    |       |                    |       |
| **Loss  before income taxes**                                       |       | (2,105                  | )          | (54                     | )          |
|                                                                |       |                    |       |                    |       |
| **Income  tax benefit**                                             |       | —                  |       | (18                     | )          |
| ** **                                                          |       |                    |       |                    |       |
| **Net  loss**                                                       |       | $                       | (2,105     | )                       | $          | (36 | ) |
| ** **                                                          |       |                    |       |                    |       |
| **Loss  per share**                                                 |       |                    |       |                    |       |
| Basic                                                               |       | $                       | (0.45      | )                       | $          | (0.01 | ) |
| Diluted                                                             |       | $                       | (0.45      | )                       | $          | (0.01 | ) |
|                                                                |       |                    |       |                    |       |
| **Weighted  average shares outstanding**                            |       |                    |       |                    |       |
| Basic                                                               |       | 4,698,697               |       | 4,698,697               |       |
| Diluted                                                             |       | 4,698,697               |       | 4,698,697               |       |

 

The accompanying notes are an integral part ofthe consolidated financial statements.

 

3

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**CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’EQUITY**

**For the three-month periods ended March 31,2010 and March 31, 2009**

**(UNAUDITED)**

(dollars in thousands, except share amounts)

** **
| ** **                                                  | ** ** | **Common Stock** | ** ** | **Additional  Paid-in** | ** ** | **Accumulated  Other   Comprehensive** | ** ** | **Retained  Earnings** | ** ** | **Total  Shareholders’** | ** ** | **Total  Comprehensive** | ** ** |
|-------------------------------------------------------------|------------|------------------|------------|-------------------------|------------|----------------------------------------|------------|------------------------|------------|-------------------------------|------------|--------------------------|------------|
| ** **                                                  | ** ** | **Shares**       | ** ** | **Amount**              | ** ** | **Capital**                            | ** ** | **Income (Loss)**      | ** ** | **(Deficit)**                 | ** ** | **Equity**               | ** ** | **Loss** | ** ** |
| Balance at  December 31, 2009                          |       | 4,698,697        |       | $                       | 47         |                                   | $          | 29,824                 |       | $                             | (1,134     | )                        | $          | (20,066 | ) | $ | 8,671 |   |   |   |
|                                                        |       |             |       |                    |       |                                   |       |                   |       |                          |       |                     |       |   |   |
| Net loss                                                    |       | —           |       | —                  |       | —                                 |       | —                 |       | (2,105                        | )          | (2,105                   | )          | $ | (2,105 | ) |
|                                                        |       |             |       |                    |       |                                   |       |                   |       |                          |       |                     |       |   |   |
| Other comprehensive  income (loss):                         |       |             |       |                    |       |                                   |       |                   |       |                          |       |                     |       |   |   |
|                                                        |       |             |       |                    |       |                                   |       |                   |       |                          |       |                     |       |   |   |
| Unrealized income on  securities, net of income taxes of $0 |       | —           |       | —                  |       | —                                 |       | 915                    |       | —                        |       | 915                      |       | 915 |   |
|                                                        |       |             |       |                    |       |                                   |       |                   |       |                          |       |                     |       |   |   |
| Reclassification of  realized losses                        |       | —           |       | —                  |       | —                                 |       | 8                      |       | —                        |       | 8                        |       | 8 |   |
|                                                        |       |             |       |                    |       |                                   |       |                   |       |                          |       |                     |       |   |   |
| Total comprehensive  loss                                   |       |             |       |                    |       |                                   |       |                   |       |                          |       |                     |       | $ | (1,182 | ) |
|                                                        |       |             |       |                    |       |                                   |       |                   |       |                          |       |                     |       |   |   |
| Stock option  compensation                                  |       | —           |       | —                  |       | 17                                     |       | —                 |       | —                        |       | 17                       |       |   |   |
|                                                        |       |             |       |                    |       |                                   |       |                   |       |                          |       |                     |       |   |   |
| Balance at  March 31, 2010                             |       | 4,698,697        |       | $                       | 47         |                                   | $          | 29,841                 |       | $                             | (211       | )                        | $          | (22,171 | ) | $ | 7,506 |   |   |   |

 
| ** **                                                 | ** ** | **Common Stock** | ** ** | **Additional  Paid-in** | ** ** | **Accumulated  Other  Comprehensive** | ** ** | **Retained********Earnings** | ** ** | **Total********Shareholders’** | ** ** | **Total  Comprehensive** | ** ** |
|------------------------------------------------------------|------------|------------------|------------|-------------------------|------------|---------------------------------------|------------|------------------------------|------------|-------------------------------------|------------|--------------------------|------------|
| ** **                                                 | ** ** | **Shares**       | ** ** | **Amount**              | ** ** | **Capital**                           | ** ** | **Income**                   | ** ** | **(Deficit)**                       | ** ** | **Equity**               | ** ** | **Loss** | ** ** |
| Balance  at December 31, 2008                         |       | 4,698,697        |       | $                       | 47         |                                  | $          | 29,760                       |       | $                                   | 491        |                     | $          | (1,770 | ) | $ | 28,528 |   |   |   |
|                                                       |       |             |       |                    |       |                                  |       |                         |       |                                |       |                     |       |   |   |
| Net  loss                                                  |       | —           |       | —                  |       | —                                |       | —                       |       | (36                                 | )          | (36                      | )          | $ | (36 | ) |
|                                                       |       |             |       |                    |       |                                  |       |                         |       |                                |       |                     |       |   |   |
| Other  comprehensive income(loss):                         |       |             |       |                    |       |                                  |       |                         |       |                                |       |                     |       |   |   |
|                                                       |       |             |       |                    |       |                                  |       |                         |       |                                |       |                     |       |   |   |
| Unrealized  loss on securities, net of income taxes of $63 |       | —           |       | —                  |       | —                                |       | (692)                        |       | —                              |       | (692)                    |       | (692) |   |
|                                                       |       |             |       |                    |       |                                  |       |                         |       |                                |       |                     |       |   |   |
| Reclassification  of realized losses                       |       | —           |       | —                  |       | —                                |       | 342                          |       | —                              |       | 342                      |       | 342 |   |
|                                                       |       |             |       |                    |       |                                  |       |                         |       |                                |       |                     |       |   |   |
| Total  comprehensive loss                                  |       |             |       |                    |       |                                  |       |                         |       |                                |       |                     |       | $ | (386 | ) |
|                                                       |       |             |       |                    |       |                                  |       |                         |       |                                |       |                     |       |   |   |
| Stock  option compensation                                 |       | —           |       | —                  |       | 17                                    |       | —                       |       | —                              |       | 17                       |       |   |   |
|                                                       |       |             |       |                    |       |                                  |       |                         |       |                                |       |                     |       |   |   |
| Balance  at March 31, 2009                            |       | 4,698,697        |       | $                       | 47         |                                  | $          | 29,777                       |       | $                                   | 141        |                     | $          | (1,806 | ) | $ | 28,159 |   |   |   |
|                                                       |       |             |       |                    |       |                                  |       |                         |       |                                |       |                     |       |   |   |

 

The accompanying notes are an integral part ofthe consolidated financial statements.

 

4

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**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(UNAUDITED)**

(in thousands)

 
| ** **                                                                                 | ** ** | **Three Months  ended** | ** ** | **Three Months  ended** | ** ** |
|--------------------------------------------------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                                                                                 | ** ** | **March 31,**      | ** ** | **March 31,**      | ** ** |
| ** **                                                                                 | ** ** | **2010**                | ** ** | **2009**                | ** ** |
| **Operating activities**                                                                   |       |                    |       |                    |       |
| Net loss                                                                                   |       | $                       | (2,105     | )                       | $          | (36 | ) |
| Adjustments to  reconcile net loss to net cash provided by (used in) operating activities: |       |                    |       |                    |       |
| Provision for loan  losses                                                                 |       | 1,000                   |       | 1,305                   |       |
| Stock option  compensation                                                                 |       | 17                      |       | 17                      |       |
| Appreciation of  bank-owned life insurance                                                 |       | —                  |       | (48                     | )          |
| Gain on sale of  securities                                                                |       | (54                     | )          | (520                    | )          |
| Depreciation                                                                               |       | 176                     |       | 180                     |       |
| Loss on sale of other  real estate owned and repossessed collateral                        |       | 15                      |       | —                  |       |
| Deferred income tax  benefit                                                               |       | —                  |       | (10                     | )          |
| Income tax refund                                                                          |       | 1,027                   |       | —                  |       |
| Decrease in accrued  interest receivable                                                   |       | 311                     |       | 164                     |       |
| Increase (decrease) in  accrued interest payable                                           |       | 239                     |       | (737                    | )          |
| Increase (decrease) in  accrued expenses                                                   |       | (17                     | )          | 49                      |       |
| Increase in other  assets                                                                  |       | (288                    | )          | (1,699                  | )          |
| Decrease in other  liabilities                                                             |       | (1                      | )          | (1                      | )          |
|                                                                                       |       |                    |       |                    |       |
| Net cash provided by  (used in) operating activities                                       |       | 320                     |       | (1,336                  | )          |
|                                                                                       |       |                    |       |                    |       |
| **Investing activities**                                                                   |       |                    |       |                    |       |
| Net decrease in loans  outstanding                                                         |       | 12,920                  |       | 4,298                   |       |
| Sale of bank owned life  insurance                                                         |       | —                  |       | 4,576                   |       |
| Purchase of investment  securities                                                         |       | (80,000                 | )          | (60,696                 | )          |
| Sale/call/maturity of  investment securities                                               |       | 26,134                  |       | 58,651                  |       |
| Purchases of FHLB stock                                                                    |       | —                  |       | (19                     | )          |
| Purchase of property  and equipment                                                        |       | (16                     | )          | (153                    | )          |
| Sale of other real  estate owned and repossessed collateral                                |       | 527                     |       | —                  |       |
|                                                                                       |       |                    |       |                    |       |
| Net cash provided by  (used in) investing activities                                       |       | (40,435                 | )          | 6,657                   |       |
|                                                                                       |       |                    |       |                    |       |
| **Financing activities**                                                                   |       |                    |       |                    |       |
| Net increase in deposit  accounts                                                          |       | 20,262                  |       | 24,782                  |       |
| Repayment of FHLB                                                                          |       | —                  |       | (25,000                 | )          |
| Repayment of Bank of  Tennessee advance                                                    |       | —                  |       | (1,570                  | )          |
|                                                                                       |       |                    |       |                    |       |
| Net cash provided by  (used in) financing activities                                       |       | 20,262                  |       | (1,788                  | )          |
|                                                                                       |       |                    |       |                    |       |
| Net increase (decrease)  in cash and cash equivalents                                      |       | (19,853                 | )          | 3,533                   |       |
|                                                                                       |       |                    |       |                    |       |
| **CASH AND CASH EQUIVALENTS,  BEGINNING OF PERIOD**                                        |       | 37,919                  |       | 9,876                   |       |
|                                                                                       |       |                    |       |                    |       |
| **CASH AND CASH EQUIVALENTS, END  OF PERIOD**                                              |       | $                       | 18,066     |                    | $          | 13,409 |   |
|                                                                                       |       |                    |       |                    |       |
| **SUPPLEMENTAL  DISCLOSURE OF CASH FLOW INFORMATION**                                      |       |                    |       |                    |       |
| Cash paid for (received  from):                                                            |       |                    |       |                    |       |
| Interest                                                                                   |       | $                       | 2,098      |                    | $          | 1,343 |   |
| Income taxes                                                                               |       | $                       | (1,027     | )                       | $          | — |   |
| **Schedule  of non-cash transactions**                                                     |       |                    |       |                    |       |
| Unrealized gains  (losses) on investment securities, net of income taxes                   |       | $                       | 915        |                    | $          | (692 | ) |
| Loans charged-off  (recovered)                                                             |       | $                       | 1,022      |                    | $          | (20 | ) |
| Transfers to other real  estate owned                                                      |       | $                       | (1,423     | )                       | $          | (1,270 | ) |

 

The accompanying notes are an integral part ofthe consolidated financial statements.

 

5

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**CommunitySouth Financial Corporation**

 

**Notes to Unaudited Consolidated FinancialStatements**

 

**NOTE 1 — NATURE OF BUSINESS AND BASIS OFPRESENTATION**

 

**Business Activity and Organization —**CommunitySouth Financial Corporation (the“Company”) is a South Carolina corporation organized for the purpose of owningand controlling all of the capital stock of CommunitySouth Bank and Trust (the “Bank”).  The Bank is a state chartered bank organizedunder the laws of South Carolina.  Frominception on March 20, 2004 through January 18, 2005, the Companyengaged in organizational and pre-opening activities necessary to obtainregulatory approvals and to prepare its subsidiary, the Bank, to commencebusiness as a financial institution.  TheCompany received approval from the Federal Deposit Insurance Corporation (“FDIC”),the Federal Reserve Board (“FRB”) and the South Carolina State Board ofFinancial Institutions in January 2005.

 

The Bank began operations on January 18, 2005.  The Bank primarily is engaged in the businessof accepting deposits insured by the FDIC, and providing commercial, consumerand mortgage loans to the general public.

 

The Company sold 4,681,069 shares of common stock at $6.40 per share inan initial public offering that was completed on February 15, 2005 (asadjusted for all stock splits).  Theoffering raised $29,430,810, net of offering costs.  The directors and officers of the Companypurchased 659,531 shares at $6.40 per share for a total of $4,221,000.

 

**Basis of Presentation —**The accompanying financial statementshave been prepared in accordance with generally accepted accounting principlesin the United States of America and to general practices in the bankingindustry for interim financial information and with the instructions to Form 10-Q.  Accordingly, they do not include all theinformation and footnotes required by generally accepted accounting principlesfor complete financial statements.  Inthe opinion of management, all adjustments (consisting of normal recurringaccruals) considered necessary for a fair presentation have been included.  Operating results for the three-month periodended March 31, 2010 are not necessarily indicative of the results thatmay be expected for the year ending December 31, 2010.  For further information, refer to the auditedconsolidated financial statements and footnotes included in the Company’s Form 10-Kfor the year ended December 31, 2009 as filed with the Securities andExchange Commission (the “SEC”).

 

**NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

**Principles of Consolidation —**The consolidated financial statements include the accounts of CommunitySouth Financial Corporation, the parent company, and CommunitySouth Bank and Trust, its wholly owned subsidiary, and All Seasons Properties, LLC, a subsidiary of the Bank, which was formed in 2009 for the purpose of holding and marketing repossessed assets. All significant intercompany items have been eliminated in the consolidated financial statements.

 

**Management’s Estimates** — The preparation of consolidatedfinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of income and expenses during the reportingperiod.  Actual results could differ fromthose estimates.

 

**DisclosureRegarding Segments**— The Company reports as one operating segment, as management reviews theresults of operations of the Company as a single enterprise.

 

**Cash andCash Equivalents**—For purposes of reporting cash flows, cash and cash equivalents include cash onhand, amounts due from banks, short-term interest bearing deposits and federalfunds sold.  Cash and cash equivalentshave an original maturity of three months or less.

 

**Concentrations of Credit Risk** — Financial instruments, whichpotentially subject the Company to concentrations of credit risk, consistprincipally of loans receivable, investment securities, federal funds sold andamounts due from banks.

 

6

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The Company makes loans to individuals and small businesses for variouspersonal and commercial purposes primarily in the upstate region of SouthCarolina.  The Company’s loan portfoliois not concentrated in loans to any single borrower or to a relatively smallnumber of borrowers.  The Bank does havea concentration of loans classified as commercial real estate. These loans areespecially susceptible to being adversely effected by the current economicdownturn. The current downturn in the real estate market has resulted in anincrease in loan delinquencies, defaults and foreclosures, and we believe thesetrends are likely to continue.  In somecases, this downturn has resulted in a significant impairment to the value ofour collateral and our ability to sell the collateral upon foreclosure, andthere is a risk that this trend will continue. The commercial real estate collateral in each case provides an alternatesource of repayment in the event of default by the borrower and may deterioratein value during the time the credit is extended.  If real estate values continue to decline, itis also more likely that we would be required to increase our allowance forloan losses.

 

In addition to monitoring potential concentrations of loans toparticular borrowers or groups of borrowers, industries and geographic regions,management monitors exposure to credit risk that could arise from potentialconcentrations of lending products and practices such as loans that subjectborrowers to substantial payment increases (e.g. principal deferral periods,loans with initial interest-only periods, etc), and loans with highloan-to-value ratios.  Additionally,there are industry practices that could subject the Company to increased creditrisk should economic conditions change over the course of a loan’s life.  For example, the Company makes variable rateloans and fixed rate principal-amortizing loans with maturities prior to theloan being fully paid (i.e. balloon payment loans).  These loans are underwritten and monitored tomanage the associated risks.  Managementhas determined that there is no concentration of credit risk associated withits lending policies or practices.

 

The Company’s investment portfolio consists of both marketable andnon-marketable equity securities. Management believes credit risk associated with the equity securities isnot significant. The Company places its deposits and correspondent accountswith and sells its federal funds to high quality institutions.  Management believes credit risk associatedwith correspondent accounts is not significant.

 

**Investment Securities** — The Company classifies investments in equity and debt securities in three categories:

 

1.               *Available for sale securities*: These are securities that are notclassified as either held to maturity or as trading securities.  Thesesecurities are reported at fair market value.  Unrealized gains and lossesare reported, net of income taxes, as separate components of shareholders’equity (accumulated other comprehensive income).

2.               *Held to maturity securities*: These are investment securities thatthe Company has the ability and intent to hold until maturity.  Thesesecurities are stated at cost, adjusted for amortization of premiums and theaccretion of discounts.

3.               *Trading securities*: These are securities that are boughtand held principally for the purpose of selling in the near future. Trading securities are reported at fair market value, and related unrealizedgains and losses are recognized in the income statement.  The Company hasno trading securities.

 

Gains or losses on dispositions of investment securities are based onthe differences between the net proceeds and the adjusted carrying amount ofthe securities sold, using the specific identification method.  Premiums and discounts are amortized or accrued into interest income by amethod that approximates a level yield.

 

**Other Investments —**The Bank, as a member institution, isrequired to own stock investments in the Federal Home Loan Bank of Atlanta (the“FHLB”).  Investment in the FHLB is acondition of borrowing from the FHLB, and the stock is pledged to collateralizesuch borrowings.  No ready market existsfor the stock and it has no quoted market value.  However, redemption of these stocks hashistorically been at par value.  At March 31,2010 and December 31, 2009, the Company’s investment in FHLB stock was$1,599,300.  The dividend received onthis stock is included in interest and dividends on investments.

 

**Loans Receivable** — Loans are stated at their unpaidprincipal balance less an allowance for loan losses and net deferred loanorigination fees.  Interest income is computedusing the simple interest method and is recorded in the period earned. Loanorigination fees collected and certain loan origination costs are deferred andthe net amount is accreted as income using a method that approximates the levelyield method over the life of the related loans.

 

7

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Loans are considered to be impaired when, in management’s judgment andbased on current information, the full collection of principal and interestbecomes doubtful according to the contractual terms of the loan agreement.  A loan is also considered impaired if itsterms are modified in a troubled debt restructuring.  Loans are generally placed on non-accrualstatus when principal or interest becomes 90 days past due, or when payment infull is not anticipated.  Additionally, impaired loans are typicallyplaced in non-performing status if it is determined that the entire balanceof  principal and interest of the loancannot be repaid, and future payments are applied to principal until such timeas collection of the obligation is no longer doubtful. Interest accrual resumesonly when loans return to performing status. To return to performing status, loans must be fully current, and continuedtimely payments must be a reasonable expectation.  When a loan is placed on non-accrual status,interest accrued but not received is generally reversed against interestincome.  Cash receipts on non-accrual loans are not recorded as interest income,but are used to reduce principal.

 

The Company identifies impaired loans through its normal internal loanreview process.  Loans on the Company’spotential problem loan list are considered potentially impaired loans.  These loans are evaluated in determiningwhether all outstanding principal and interest are expected to becollected.  Loans are not consideredimpaired if a minimal payment delay occurs and all amounts due, includingaccrued interest at the contractual interest rate for the period of delay, areexpected to be collected.  Management hasdetermined that the Company had $43,858,000 and $34,158,000 in impaired loansat March 31, 2010 and December 31, 2009, respectively.

 

**Allowancefor Loan Losses** —The allowance for loan losses is established as losses are estimated to haveoccurred through a provision for loan losses charged to earnings.  Loan losses are charged against the allowancewhen management believes the uncollectability of a loan balance isconfirmed.  Subsequent recoveries, ifany, are credited to the allowance.

 

The allowance for loan losses is evaluated on a regular basis bymanagement and is based upon management’s periodic review of the collectabilityof the loans in light of historical experiences, the nature and volume of theloan portfolio, adverse situations that may affect the borrower’s ability torepay, estimated value of any underlying collateral and prevailing economicconditions.  This evaluation isinherently subjective as it requires estimates that are susceptible tosignificant revision as more information becomes available.

 

The allowance consists of specific, general and unallocatedcomponents.  The specific componentrelates to loans that are classified as either doubtful, substandard or specialmention.  For such loans that are alsoclassified as impaired, an allowance is established when the discounted cashflows (or collateral value or observable market price) of the impaired loan islower than the carrying value of the loan. The general component coversnon-classified loans and is based on historical loss experience adjusted forqualitative factors.  An unallocatedcomponent is maintained to cover uncertainties that could affect management’sestimate of probable losses.  Theunallocated component of the allowance reflects the margin of imprecisioninherent in the underlying assumptions used in the methodologies for estimatingspecific and general losses in the portfolio.

 

A loan is considered impaired when, based on current information andevents, it is doubtful that the Company will be able to collect the scheduledpayments of principal or interest when due according to the contractual termsof the loan agreement.  Factorsconsidered by management in determining impairment include payment status,collateral value, and the probability of collecting scheduled principal andinterest payments due.  Loans thatexperience insignificant payment delays and payment shortfalls generally arenot classified as impaired.  Managementdetermines the significance of payment delays and payment shortfalls on acase-by-case basis, taking into consideration all of the circumstancessurrounding the loan and the borrower, including the length of the delay, thereasons for the delay, the borrower’s prior payment record and the amount ofthe shortfall in relation to the principal and interest owed.  Impairment is measured on a loan by loanbasis for large loans by either the present value of expected future cash flowsdiscounted at the loan’s effective interest rate, the loan’s obtainable marketprice, or the fair value of the collateral if the loan is collateral dependent.

 

Large groups of smaller balance homogeneous loans are collectivelyevaluated for impairment.  Accordingly,the Company does not separately identify smaller loans for impairmentdisclosures, unless such loans are the subject of a restructuring agreement.

 

**Bank-Owned Life Insurance** — As of March 31,2010, the Company has no remaining bank-owned life insurance policies.  The Company made the decision to sell these policiesin 2009 in order to help reduce assets, thereby improving the Bank’s risk basedcapital ratio. During the first quarter of 2009, the Company began the processof divesting of its key employee life insurance policies by selling policies atno gain or loss.  Income from thesepolicies and changes in the net cash surrender value were recorded innon-interest income. The final policy was sold in April 2009.

 

**Advertising—** Advertising,promotional, and other business development costs generally are expensed asincurred.  External costs incurred inproducing media advertising are expensed the first time the advertising takesplace.  External costs relating to directmailing costs are expensed in the period in which the direct mailings are sent.

 

8

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**Property and Equipment** — Premises, furniture and equipment arestated at cost, less accumulated depreciation. Depreciation expense is computed using the straight-line method, basedon the estimated useful lives for furniture and equipment of 5 to 10years.  Leasehold improvements areamortized over the life of the lease. Maintenance and repairs are charged to current expense.  The costs of major renewals and improvementsare capitalized.

 

**Mortgage Origination Revenue**— The Bankoffers residential loan origination services to its customers in its immediatemarket area.  The loans are offered onterms and prices offered by the Bank’s correspondents and are closed in thename of the Bank with preapproval from the correspondents.  The Bank receives fees for services it providesin conjunction with the origination services it provides.  The fees are recognized at the time the loansare sold to the Bank’s correspondent.

 

**Income Taxes** — The consolidated financial statements have been prepared on the accrual basis.  When income and expenses are recognized in different periods for financial reporting purposes versus for the purposes of computing income taxes currently payable, deferred taxes are provided on such temporary differences.

 

The Company has analyzed filing positions in all of the federal and state jurisdictions where it is required to file income tax returns, as well as all open tax years in these jurisdictions. The Company believes that its income tax filing positions taken or expected to be taken in an its tax returns will more likely than not be sustained upon audit by the taxing authorities and does not anticipate any adjustments that will result in a material adverse impact on the Company’s financial condition, results of operations, or cash flow. Therefore, no reserves for uncertain income tax positions have been recorded.

 

Deferred tax assets and liabilities are recognized for the expected future tax consequences of events that have been recognized in the consolidated financial statements or tax returns.  Income taxes are the sum of amounts currently payable to taxing authorities and the net changes in income taxes payable or refundable in future years.  Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be realized or settled.  Income taxes deferred to future years are determined utilizing an asset and liability approach.  This method gives consideration to the future tax consequences associated with differences between financial accounting and tax bases of certain assets and liabilities which are principally the allowance for loan losses, depreciable premises and equipment, and net operating loss carry-forwards.  As of March 31, 2010 and December 31, 2009, due to the Company’s recent financial results, the uncertainty involved in projecting near-term profitability, and evaluation of appropriate tax planning strategies, management has provided a 100% valuation allowance for these deferred tax assets.  This valuation allowance reflects management’s estimate that the deferred tax assets are not more-than-likely-than-not to be realized.

 

**Earnings (loss) Per Share** — Basic earnings (loss) per sharerepresents the net income (loss) allocated to shareholders divided by theweighted-average number of common shares outstanding during the period.  Diluted earnings per share reflect the impactof additional common shares that would have been outstanding if dilutivepotential common shares had been issued. Potential common shares that may be issued by the Company relate to bothoutstanding warrants and stock options, and are determined using the treasurystock method.

 

**Stock—based Compensation** — The Company has adopted the fair valuerecognition provisions to account for compensation costs under its stock optionplans.  The Company previously utilizedthe intrinsic value method.  Under theintrinsic value method, no compensation costs were recognized for the Company’sstock options because the option exercise price in its plans equaled the marketprice on the date of grant.

 

# **The Company elected to use the modified prospectivemethod to account for the transition from the intrinsic value method to thefair value recognition method.  Under themodified prospective method, compensation cost is recognized from the adoptiondate forward for all new stock options granted and for any outstanding unvestedawards as if the fair value method had been applied to those awards as of thedate of grant.**

# ** **

**Off-Balance Sheet FinancialInstruments** — Inthe ordinary course of business, the Company enters into off-balance sheetfinancial instruments consisting of commitments to extend credit and letters ofcredit.  These financial instruments arerecorded in the financial statements when they become payable by the customer.

 

**Recently Issued Accounting Standards —**The following is a summary of recentauthoritative pronouncements that could impact the accounting, reporting, and /or disclosure of financial information by the Company.

 

InJanuary 2010, fair value guidance was amended to require disclosures forsignificant amounts transferred in and out of Levels 1 and 2 and the reasonsfor such transfers and to require that gross amounts of purchases, sales,issuances and settlements be provided in the Level 3 reconciliation.  The new disclosures are effective for theCompany for the current quarter and have been reflected in the Fair Valuefootnote.

 

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Guidancerelated to subsequent events was amended in February 2010 to remove therequirement for an SEC filer to disclose the date through which subsequentevents were evaluated.  The amendmentswere effective upon issuance and had no significant impact on the Company’sfinancial statements.

 

Otheraccounting standards that have been issued or proposed by the FASB or otherstandards-setting bodies are not expected to have a material impact on theCompany’s financial position, results of operations or cash flows.

 

**Risks and Uncertainties** — In the normal course of its business,the Company encounters two significant types of risk: economic andregulatory.  There are three maincomponents of economic risk:  interest raterisk, credit risk and market risk.  TheCompany is subject to interest rate risk to the degree that itsinterest-bearing liabilities mature or reprice at different speeds, or ondifferent bases, than its interest-earning assets.  Credit risk is the risk of default on theCompany’s loan portfolio that results from the borrower’s inability orunwillingness to make contractually required payments.  Market risk reflects changes in the value ofcollateral underlying loans receivable and the valuation of real estate held bythe Company.

 

The Company is subject to the regulations of various governmentalagencies.  These regulations can and dochange significantly from period to period. The Company also undergoes periodic examinations by the regulatoryagencies, which may subject it to further changes with respect to assetvaluations, amounts of required loss allowances and operating restrictions fromthe regulators’ judgments based on information available to them at the time oftheir examination.  On June 29,2009, the Bank entered into a Memorandum of Understanding (the “MOU”) with theSouth Carolina Board of Financial Institutions and the FDIC.  In addition, on February 23, 2010 theBank entered into a Consent Order (the “Consent Order”) with these sameregulators which supersedes the MOU. Additionally, on March 1, 2010, the Company entered into amemorandum of understanding with the Federal Reserve Bank of Richmond, whichcontains provisions similar to the articles in the Bank’s Consent Order withthe South Carolina Board of Financial Institutions and the FDIC.  Please see Note 3 for more details regardingthese regulatory agreements.

 

**Reclassifications** - Certain captions and amounts in theprior financial statements were reclassified to conform with the 2010presentation.  Such reclassifications hadno effect on previously reported net income or shareholders’ equity.

 

**NOTE 3 — REGULATORY ACTIONS AND GOING CONCERNCONSIDERATIONS**

 

***Memorandumof Understanding***

 

As a result of the issuesstemming from the economic downturn, on June 29, 2009 the Bank enteredinto the MOU with the South Carolina Board of Financial Institutions and theFDIC.  The MOU required the Bank to,among other things, (1) submit a capital plan to the supervisoryauthorities for returning to a “well-capitalized” designation; (2) developspecific plans and proposals for the reduction and improvement of assets whichare subject to adverse classification and past due loans; (3) implement aplan to decrease the concentration of commercial real estate loans; (4) developand implement an adequate loan review program; and (5) review overallliquidity objectives and develop plans and procedures aimed at improvingliquidity and reducing reliance on volatile liabilities to fund longer-termassets.  In addition, the Bank may notpay dividends without the prior written consent of each supervisoryauthority.  Since entering into the MOU,the Bank has been actively pursuing the corrective actions required by the MOUin an effort to ensure that the requirements of the MOU are met in a timelymanner.

 

In addition, in mid-February 2010the Bank received a supervisory letter from the FDIC dated February 11,2010, which provided for additional restrictions and mandatory actions to betaken by the Bank.  These restrictionsand actions were all substantially addressed and superseded by the subsequentConsent Order discussed in the subsection below.  However, in order to comply with thesupervisory letter, the Bank was required to prepare and submit to the FDIC acapital restoration plan no later than April 2, 2010, which submissiondate was sooner than a similar requirement under the Consent Order.  The Bank submitted its capital restorationplan to the FDIC on April 2, 2010.

 

***ConsentOrder***

 

Following the FDIC’ssafety and soundness examination of the Bank in the fourth quarter of 2009, theBank entered into the Consent Order with the FDIC and the South Carolina Boardof Financial Institutions on February 23, 2010.  The Consent Order, which supersedes the MOU,conveys specific actions needed to address certain findings from the FDIC’sReport of Examination and to address the Bank’s current financial condition,primarily related to capital planning, liquidity/funds management, policy andplanning issues, management oversight, loan concentrations and classifications,and non-performing loans.

 

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Specifically, the ConsentOrder requires the Bank to, among other things,

 

·                  establish, within 30 days from theeffective date of the Consent Order, a plan to monitor compliance with theConsent Order, which shall be monitored by the Bank’s board of directors.  A plan to monitor compliance with the ConsentOrder was established by the Bank’s board of directors at a meeting held on March 16,2010.  Pursuant to the plan, the boardcreated and appointed four of its members to serve on a consent ordercompliance committee to monitor the Bank’s compliance with the ConsentOrder.  The committee has met five timessince its creation on March 16, 2010;

 

·                  ensure the Bank has qualified managementin place to carry out the policies of the Bank’s board of directors and operatethe Bank in a safe and sound manner.  Amanagement plan, which includes organizational structure and managementassessment, was approved by the Bank’s board of directors and submitted to thesupervisory authorities on April 12, 2010;

 

·                  achieve and maintain, within 120 daysfrom the effective date of the Consent Order, Total Risk Based capital at leastequal to 10% of risk-weighted assets and Tier 1 capital at least equal to 8% oftotal assets.  At this time, we do notbelieve that we will be able to meet these minimum capital requirements within120 days from the effective date of the Consent Order.  If this were to occur, then within 30 days ofsuch determination the Bank would be required to submit a written plan to theFDIC describing the means and timing by which the Bank will increase suchratios up to or in excess of the established minimums;

 

·                  develop, within 45 days from theeffective date of the Consent Order, a written analysis and assessment of theBank’s management and staffing needs. The Bank prepared a written analysis and assessment of its managementand staffing needs and submitted this analysis to the supervisory authoritieson April 12, 2010;

 

·                  establish, within 60 days from theeffective date of the Consent Order, a comprehensive policy for determining theadequacy of the Bank’s allowance for loan and lease losses, which must providefor a review of the Bank’s allowance for loan and lease losses at least onceeach calendar quarter.  The Bank’s boardof directors and consent order compliance committee reviewed and approved acomprehensive policy for determining the adequacy of the Bank’s allowance forloan and lease losses, and this policy was submitted to the supervisoryauthorities prior to the April 27, 2010 deadline;

 

·                  enhance, within 60 days from theeffective date of the Consent Order, the Bank’s written plan for the reductionof classified assets, which shall include, among other things, a reduction ofthe Bank’s risk position in each asset in excess of $250,000 that is classifiedas “Substandard” or “Doubtful.”  A planto reduce the Bank’s classified assets was reviewed and approved by the Bank’sboard of directors and consent order compliance committee on April 20,2010.  The plan was submitted to thesupervisory authorities on the April 27, 2010 deadline;

 

·                  not extend any additional credit to anyborrower who has a loan or other extension of credit from the Bank that hasbeen charged off or classified, in whole or in part, “loss” or “doubtful” andis uncollected.  In addition, the Bankmay not extend any additional credit to any borrower who has a loan or otherextension of credit from the Bank that has been classified, in whole or inpart, “substandard” and is uncollected, unless the Bank’s board of directorsdetermines that failure to extend further credit to a particular borrower wouldbe detrimental to the best interests of the Bank.  The Bank has not knowingly extended, directlyor indirectly, any additional credit to, or for the benefit of, any borrowerwho was a loan or other extension of credit from the Bank that has been chargedoff or classified, in whole or in part, “loss” or “doubtful” and isuncollected;

 

·                  perform, within 45 days from theeffective date of the Consent Order, a risk segmentation analysis with respectto the Bank’s Concentrations of Credit and a written plan to systematicallyreduce any segment of the portfolio that is an undue concentration ofcredit.  The Bank performed a risksegmentation analysis with respect to its concentrations of credit, and thisanalysis was reviewed and approved by the consent order compliance committee onApril 6, 2010 and by the Bank’s board of directors on April 8, 2010.This analysis was submitted to the supervisory authorities by the April 12,2010 deadline;

 

·                  revise, within 60 days from the effectivedate of the Consent Order, the Bank’s internal loan review and grading systemto provide for the periodic review of the Bank’s loan portfolio in order toidentify and categorize the 

 

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Bank’sloans, and other extensions of credit which are carried on the Bank’s books asloans, on the basis of credit quality. The Bank revised and updated its internal loan review plan, which wasreviewed and approved by the Bank’s board of directors and the consent ordercompliance committee on April 20, 2010. The plan was submitted to thesupervisory authorities prior to the April 27, 2010 deadline;

 

·                  formulate and implement, within 60 daysfrom the effective date of the Consent Order, a profit plan and comprehensivebudget for all categories of income and expense, which must address, atminimum, goals and strategies for improving and sustaining the earnings of theBank, the major areas in and means by which the Bank will seek to improve theBank’s operating performance, and the operating assumptions that form the basisfor and adequately support major projected income and expense components of theplan.  The Bank created a profit plan andbudget for all categories of income and expense, which includes adjustmentswhere the Bank either exceeded budget or had budget shortfalls in order toprovide realistic projections going forward. The profit plan and budget were reviewed and approved by the Bank’sboard of directors on April 20, 2010 and were submitted to the supervisoryauthorities prior to the April 27, 2010 deadline;

 

·                  enhance, within 60 days from theeffective date of the Consent Order, the Bank’s written funds management planaddressing liquidity, contingent funding, and asset liability management.  The Bank’s funds management plan, whichaddresses liquidity, contingent funding, and asset liability management, wasreviewed and approved by the Bank’s board of directors and the consent ordercompliance committee on April 20, 2010 and was submitted to thesupervisory authorities prior to the April 27, 2010 deadline;

 

·                  not accept, renew, or rollover anybrokered deposits.  The Bank must developand submit to the FDIC, within 30 days from the effective date of the ConsentOrder, a plan for eliminating its reliance on brokered deposits.  A plan was approved by the Bank’s board ofdirectors and consent order compliance committee on March 24, 2010 and wassubmitted to the FDIC on March 25, 2010. Since entering into the Consent Order, the Bank has not accepted,renewed, or rolled-over any brokered deposits;

 

·                  not offer an effective yield in excess of75 basis points over interest paid on deposits (including brokered deposits, ifapproval is granted for the Bank to accept them) of comparable size andmaturity in either the Bank’s normal market area or in the market area in whichsuch deposits would otherwise be accepted. However, on April 1, 2010, we applied for and received adetermination from the FDIC that our market areas were all high interest rateareas.  As a result, we have permissionto pay deposit rates of up to 75 basis points over the local rates (assumingthe local rates exceed the applicable non-local rates) and on non-localdeposits gathered in our normal market area even if these rates exceednon-local rates by more than 75 basis points;

 

·                  not declare or pay any dividends orbonuses or make any distributions of interest, principal, or other sums onsubordinated debentures without the prior approval of the supervisoryauthorities.  Since entering into theConsent Order, the Bank has not declared or paid any dividends or bonuses ormade any distributions of interest, principal, or other sums on subordinateddebentures; and

 

·                  furnish, within 45 days from theeffective date of the Consent Order and within 45 days of the end of eachquarter thereafter, written progress reports to the supervisory authoritiesdetailing the form and manner of any actions taken to secure compliance withthe Consent Order.  The Bank hasfurnished written progress reports to the supervisory authorities as requiredby the Consent Order.

 

Additionally, on March 1,2010, the Company entered into an informal agreement with the Federal ReserveBank of Richmond.  The informal agreementcontains provisions similar to those in the Bank’s MOU with the FDIC and theSouth Carolina Board of Financial Institutions, including a requirement thatthe Company obtain the prior written approval of the Federal Reserve Bank ofRichmond before (1) declaring or paying any dividends, (2) directlyor indirectly accepting dividends or any other form of payment representing areduction in capital from the Bank, (3) making any distributions ofinterest, principal or other sums on subordinated debentures or trust preferredsecurities, (4) directly or indirectly, incurring, increasing orguaranteeing any debt, and (5) directly or indirectly, purchasing orredeeming any shares of its stock. Pursuant to our plans to preserve capital and to inject more capitalinto the Bank, the Company has no plans to undertake any of the foregoingactivities.

 

***Going ConcernConsiderations***

 

The going concernassumption is a fundamental principle in the preparation of financialstatements. It is the responsibility of management to assess the Company’sability to continue as a going concern. In assessing this assumption, theCompany has 

 

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taken into account allavailable information about the future, which is at least, but is not limitedto, twelve months from the balance sheet date of March 31, 2010. TheCompany has a history of profitable operations and sufficient sources ofliquidity to meet its short-term and long-term funding needs. However, the Bank’sfinancial condition has suffered during 2009 and the first quarter of 2010 fromthe extraordinary effects of what may ultimately be the worst economic downturnsince the Great Depression.

 

The effects of thecurrent economic environment are being felt across many industries, withfinancial services and residential real estate being particularly hard hit. Theeffects of the economic downturn have been particularly severe during the last150 days. The Bank, with a loan portfolio consisting of a concentration incommercial real estate loans including residential construction and developmentloans, has seen a decline in the value of the collateral securing its portfolioas well as rapid deterioration in its borrowers’ cash flow and ability to repaytheir outstanding loans to the Bank. As a result, the Bank’s level ofnonperforming assets has increased substantially during 2009 and in the firstquarter of 2010. For the year ended December 31, 2009 and for the quarterended March 31, 2010, the Bank recorded a $17 million and $1 millionprovision, respectively, to increase the allowance for loan losses to a levelwhich, in managements’ best judgment, adequately reflected the increased riskinherent in the loan portfolio as of the year end and quarter end periods, respectively.

 

The Company and the Bankoperate in a highly-regulated industry and must plan for the liquidity needs ofeach entity separately. A variety of sources of liquidity are available to theBank to meet its short-term and long-term funding needs. Although a number ofthese sources have been limited following execution of the Consent Order withthe FDIC and the South Carolina Board of Financial Institutions, management hasprepared forecasts of these sources of funds and the Bank’s projected uses offunds during 2010 in an effort to ensure that the sources available aresufficient to meet the Bank’s projected liquidity needs for this period.

 

The Company relies ondividends from the Bank as its primary source of liquidity. The Company is alegal entity separate and distinct from the Bank. Various legal limitationsrestrict the Bank from lending or otherwise supplying funds to the Company tomeet its obligations, including paying dividends. In addition, the terms of theConsent Order described above will further limit the Bank’s ability to paydividends to the Company to satisfy its funding needs.

 

The Company will alsoneed to raise additional capital to increase capital levels to meet thestandards set forth by the FDIC. As a result of the recent downturn in thefinancial markets, the availability of many sources of capital (principally tofinancial services companies) has become significantly restricted or has becomeincreasingly costly as compared to the prevailing market rates prior to thevolatility. Management cannot predict when or if the capital markets willreturn to more favorable conditions. Management is actively evaluating a numberof capital sources, asset reductions and other balance sheet managementstrategies to ensure that the Bank’s projected level of regulatory capital cansupport its balance sheet.

 

There can be noassurances that the Company will be successful in its efforts to raiseadditional capital during 2010. An equity financing transaction would result insubstantial dilution to the Company’s current shareholders and could adverselyaffect the market price of the Company’s common stock. It is difficult topredict if these efforts will be successful, either on a short-term orlong-term basis. Should these efforts be unsuccessful, due to the regulatoryrestrictions which exist that restrict cash payments between the Bank and theCompany, the Company may be unable to realize its assets and discharge itsliabilities in the normal course of business.

 

As a result of management’sassessment of the Company’s ability to continue as a going concern, theaccompanying consolidated financial statements for the Company have beenprepared on a going concern basis, which contemplates the realization of assetsand the discharge of liabilities in the normal course of business for theforeseeable future, and does not include any adjustments to reflect thepossible future effects on the recoverability or classification of assets.

 

**NOTE 4 — INVESTMENT SECURITIES**

 

# **The amortized costs and fairvalues of investment securities are as follows (in thousands):**

 
| ** **                     | ** ** | **Amortized** | ** **  | **Gross  Unrealized** | ** ** | **Fair**   | ** ** |
|--------------------------------|------------|---------------|-------------|-----------------------|------------|------------|------------|
| **As of  March 31, 2010** | ** ** | **Cost**      | ** **  | **Gains**             | ** ** | **Losses** | ** ** | **Value** | ** ** |
| **Available  for sale**        |       |          |        |                  |       |       |       |   |   |
| US treasuries                  |       | $             | 80,000      |                  | $          | —     |       | $ | — |   | $ | 80,000 |   |
| Mortgage-backed                |       | 78,592        |        | 118                   |       | 329        |       | 78,381 |   |
| Marketable  securities         |       | 100           |        | —                |       | —     |       | 100 |   |
| Total available  for sale      | ** ** | **$**         | **158,692** | ** **            | **$**      | 118        | ** ** | **$** | 329 | ** ** | **$** | **158,481** | ** ** |

 

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| ** **                        | ** ** | **Amortized** | ** **  | **Gross  Unrealized** | ** ** | **Fair**   | ** ** |
|-----------------------------------|------------|---------------|-------------|-----------------------|------------|------------|------------|
| **As of  December 31, 2009** | ** ** | **Cost**      | ** **  | **Gains**             | ** ** | **Losses** | ** ** | **Value** | ** ** |
| **Available  for sale**           |       |          |        |                  |       |       |       |   |   |
| Mortgage-backed                   |       | 104,672       |        | 77                    |       | (1,211     | )          | 103,538 |   |
| Marketable  securities            |       | 100           |        | —                |       | —     |       | 100 |   |
| Total available  for sale         | ** ** | **$**         | **104,772** | ** **            | **$**      | **77**     | ** ** | **$** | — | ** ** | **$** | **103,638** | ** ** |
|                                   |            |               |             |                       |            |            |            |  |  |  |  |  |  |

 

The table below summarizes gross unrealized losses on investmentsecurities and the fair market value of the related securities, aggregated byinvestment category and length of time that individual securities have been ina continuous unrealized loss position, at March 31, 2010 (in thousands).

 
| ** **                     | ** ** | **Less  than 12 months** | ** ** | **12  months or longer** | ** ** | **Total** | ** ** |
|--------------------------------|------------|--------------------------|------------|--------------------------|------------|-----------|------------|
| ** **                     | ** ** | **Fair**                 | ** ** | **Unrealized**           | ** ** | **Fair**  | ** ** | **Unrealized** | ** ** | **Fair** | ** ** | **Unrealized** | ** ** |
| **As of  March 31, 2010** | ** ** | **Value**                | ** ** | **Loss**                 | ** ** | **Value** | ** ** | **Loss** | ** ** | **Value** | ** ** | **Loss** | ** ** |
| **Available  for sale**        |       |                     |       |                     |       |      |       |   |   |   |   |   |   |
| Mortgage-backed                |       | $                        | 58,275     |                     | $          | 329       |       | $ | — |   | $ | — |   | $ | 58,275 |   | $ | 329 |   |
| Total available  for sale      | ** ** | **$**                    | **58,275** | ** **               | **$**      | **329**   | ** ** | **$** | **—** | ** ** | **$** | **—** | ** ** | **$** | **58,275** | ** ** | **$** | **329** | ** ** |

 

**NOTE 5 — LEASES**

 

The Company leases branch locations in Spartanburg,Mauldin, Anderson, Greer and Greenville as well as the loan operations centerin Easley. The initial lease terms range from three to ten years with variousrenewal options. The minimum future rental payments under non-cancelableoperating leases having remaining terms in excess of one year, for each of thenext five years and in the aggregate are (dollars in thousands):

 
| 2010                                  |       | $     | 240       |       |
|---------------------------------------|------------|-------|-----------|------------|
| 2011                                  |       | 329   |      |
| 2012                                  |       | 343   |      |
| 2013                                  |       | 348   |      |
| 2014                                  |       | 353   |      |
| Thereafter                            |       | 606   |      |
| Total minimum future  rental payments | ** ** | **$** | **2,219** | ** ** |

 

Theloan operations center in Easley is leased from a partnership in which aCompany director has a partnership interest.

 

**NOTE 6 — RELATED PARTY TRANSACTIONS**

 

Certain parties (principally certain directors and executive officersof the Company, their immediate families and business interests) (“affiliates”)are loan customers in the normal course of business with the Bank.  These loans are made on substantially thesame terms, including interest rates and collateral, as those prevailing at thetime for comparable transactions with unrelated persons and do not involve morethan the normal risk of collectability.

 

### **NOTE 7 —COMMITMENTS AND CONTINGENCIES**

 

The Company is subject to claims and lawsuits which arise primarily inthe ordinary course of business. Management is not aware of any legal proceedings which would have amaterial adverse effect on the financial position or operating results of theCompany.

 

14

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**NOTE 8 — STOCK-BASED COMPENSATION**

 

Upon completion of theoffering, the Company agreed to issue warrants to the organizing directors forthe purchase of one share of common stock at $6.40 per share for every twoshares purchased in the stock offering, up to a maximum of 15,625 warrants perdirector. The warrants were fully vested 120 days after January 18, 2005and will expire on January 18, 2015. Warrants held by directors of the Company will expire 90 days after thedirector ceases to be a director or officer of the Company (365 days if due todeath or disability). The Company issued a total of 171,404 warrants.  In addition, the Company has adopted a stockoption plan.  As of March 31, 2010the Company has 755,646 outstanding options to employees and directors. On January 16,2006 the Company adopted a resolution that terminated the “evergreen” provisionof the Company 2005 Stock Incentive Plan. As a result, the number of shares ofcommon stock issuable under the plan shall not be further increased in connectionwith any future share issuances by the Company. The exercise price of eachoption is equal to the market price of the Company’s stock on the date ofgrant. The maximum term is ten years, and they typically vest in no greaterthan five years. When necessary, the Company may purchase shares on the openmarket to satisfy share option exercises. During the ensuing year, the Companyis expected to acquire no shares.

 

The table set forth belowsummarizes stock option activity for the Company’s stock compensation plans forthe quarter ended March 31, 2010 as adjusted for all stock splits.

 
| ** **                                 | ** ** | **Stock Options** | ** ** | **Warrants**  | ** ** |
|--------------------------------------------|------------|-------------------|------------|---------------|------------|
| ** **                                 | ** ** | ** **        | ** ** | **Weighted-** | ** ** | ** ** | ** ** | **Weighted-** | ** ** |
| ** **                                 | ** ** | ** **        | ** ** | **Average**   | ** ** | ** ** | ** ** | **Average** | ** ** |
| ** **                                 | ** ** | ** **        | ** ** | **Exercise**  | ** ** | ** ** | ** ** | **Exercise** | ** ** |
| ** **                                 | ** ** | **Number**        | ** ** | **Price**     | ** ** | **Number** | ** ** | **Price** | ** ** |
| **Outstanding  at December 31, 2009** |       | 756,033           |       | $             | 6.99       |   | 171,404 |   | $ | 6.40 |   |
| Granted                                    |       | 100               |       | 0.56          |       | — |   | — |   |
| Forfeited                                  |       | 487               |       | 8.80          |       | — |   | — |   |
| Exercised                                  |       | —            |       | —        |       | — |   | — |   |
| **Outstanding  at March 31, 2010**    | ** ** | **755,646**       | ** ** | **6.98**      | ** ** | **171,404** | ** ** | **6.40** | ** ** |
|                                            |            |                   |            |               |            |  |  |  |  |  |  |

 

The table set forth belowsummarizes non-vested stock options as of March 31, 2010.

 
| ** **                                 | ** ** | ** ** | ** ** | **Fair**  | ** ** |
|--------------------------------------------|------------|------------|------------|-----------|------------|
| ** **                                 | ** ** | **Number** | ** ** | **Value** | ** ** |
| **Outstanding  at December 31, 2009** |       | 48,423     |       | $         | 4.32       |   |
| Granted                                    |       | 100        |       | 0.37      |       |
| Vested                                     |       | 2,097      |       | 6.07      |       |
| Forfeited                                  |       | 383        |       | 3.55      |       |
| **Outstanding  at March 31, 2010**    | ** ** | **46,043** | ** ** | **4.23**  | ** ** |
|                                            |            |            |            |           |            |  |

 

As of March 31,2010, there was $142,358 in total unrecognized compensation cost related tonon-vested share-based compensation arrangements, which is expected to berecognized over a weighted average period of 29 months. As of December 31,2009, there was $159,989 in total unrecognized compensation cost related tonon-vested share-based compensation arrangements, which was expected to berecognized over a weighted average period of 32 months.

 

The fair value of eachoption granted is estimated on the grant date using the Black-Scholesoption-pricing model with the following assumptions for 2010:  dividend yield of 0%, expected term of 10years, risk-free interest rate equal to the 10-year treasury rate on therespective grant date, expected life of 10 years, and expected volatility of51%.  The following assumptions were usedfor the 2009 estimates:  dividend yieldof 0%, expected term of 10 years, risk-free interest rate equal to the 10-yeartreasury rate on the respective grant date, and expected life of 10 years.  Volatility assumed for options granted during2009 ranged from 38% to 51%.

 

The following tablesummarizes information about stock options outstanding under the Company’splans at March 31, 2010 and December 31, 2009.

 
| **March 31,  2010**         | ** ** | **Outstanding** | ** ** | **Exercisable** | ** ** |
|----------------------------------|------------|-----------------|------------|-----------------|------------|
| Number  of options               |       | 755,646         |       | 709,603         |       |
| Weighted  average remaining life |       | 5.22 years      |       | 5.05 years      |       |
| Weighted  average exercise price |       | $               | 6.98       |            | $          | 6.85 |   |
| High  exercise price             |       | $               | 16.80      |            | $          | 16.80 |   |
| Low  exercise price              |       | $               | 0.56       |            | $          | 2.50 |   |

 

15

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| **December 31,  2009**      | ** ** | **Outstanding** | ** ** | **Exercisable** | ** ** |
|----------------------------------|------------|-----------------|------------|-----------------|------------|
| Number  of options               |       | 756,033         |       | 707,610         |       |
| Weighted  average remaining life |       | 5.47 years      |       | 5.29 years      |       |
| Weighted  average exercise price |       | $               | 6.99       |            | $          | 6.83 |   |
| High  exercise price             |       | $               | 16.80      |            | $          | 16.80 |   |
| Low  exercise price              |       | $               | 1.75       |            | $          | 4.55 |   |

 

There were no optionsexercised during the quarter and thus no cash was received related to this typeof transaction. There was no intrinsic value of options exercised during 2010and 2009.

 

At March 31, 2010,all of the 171,404 warrants were exercisable and had an average remaining lifeof 4.80 years. At December 31, 2009, all of the 171,404 warrants wereexercisable and had an average remaining life of 5.05 years.

 

**NOTE 9 — FAIR VALUE OF FINANCIALINSTRUMENTS**

 

GAAP requires disclosureof fair value information, whether or not recognized in the consolidatedbalance sheets, when it is practical to estimate the fair value.  GAAP defines a financial instrument as cash,evidence of an ownership interest in an entity or contractual obligations,which require the exchange of cash, or other financial instruments.  Certain items are specifically excluded fromthe disclosure requirements, including the Company’s common stock, premises andequipment, accrued interest receivable and payable, and other assets and liabilities.

 

The fair value of afinancial instrument is the amount at which the asset or obligation could beexchanged in a current transaction between willing parties, other than in aforced or liquidation sale.  Fair valueestimates are made at a specific point in time based on relevant marketinformation and information about the financial instruments.  Because no market value exists for asignificant portion of the financial instruments, fair value estimates are basedon judgments regarding future expected loss experience, current economicconditions, risk characteristics of various financial instruments, and otherfactors.

 

The Company has usedmanagement’s best estimate of fair value based on the above assumptions.  Thus, the fair values presented may not bethe amounts, which could be realized, in an immediate sale or settlement of theinstrument. In addition, any income taxes or other expenses, which would beincurred in an actual sale or settlement, are not taken into consideration inthe fair values presented.

 

The following methods andassumptions were used to estimate the fair value of significant financialinstruments:

 

***Cash and Duefrom Banks*** -The carrying amount is a reasonable estimate of fair value.

 

***Federal FundsSold*** -Federal funds sold are for a term of one day, and the carrying amountapproximates the fair value.

 

***InvestmentSecurities*** -The fair values of marketable equity securities are valued using quoted fairmarket prices.

 

***OtherInvestments*** -The carrying value of non-marketable equity securities approximates the fairvalue since no ready market exists for the stocks.

 

# ***LoansReceivable***- For certain categories of loans, such as variable rate loans which arerepriced frequently and have no significant change in credit risk, fair valuesare based on the carrying amounts.  Thefair value of other types of loans is estimated by discounting the future cashflows using the current rates at which similar loans would be made to borrowerswith similar credit ratings and for the same remaining maturities.  In order to capture the change in creditrisk, the current allowance for loan losses is also considered when determiningfair value of loans receivable.

# ** **

***Deposits*****- The fair value of demand deposits,savings, and money market accounts is the amount payable on demand at thereporting date.  The fair values ofcertificates of deposit are estimated using a discounted cash flow calculationthat applies current interest rates to a schedule of aggregated expectedmaturities.

 

***RepurchaseAgreements*** -The fair value of repurchase agreements is estimated using a discounted cashflow calculation that applies prevailing market rates for comparable debtinstruments.

 

***SubordinatedDebt*** — Thefair value of subordinated debt is estimated using a discounted cash flowcalculation that applies prevailing market rates for comparableinstruments.  Due to diminishing cashavailable at the holding company level, if we are unable to raise additionalcapital, we may have to discontinue paying interest on the subordinateddebentures after the March 2010 payments due to lack of funds, and ourfair value calculation reflects this.

 

16

----

 

The carryingvalues and estimated fair values of the Company’s financial instruments at March 31,2010 and 2009 are shown in the following tables (dollars in thousands).

 
| ** **                                                          | ** ** | **Carrying** | ** ** | **Estimated**  | ** ** |
|---------------------------------------------------------------------|------------|--------------|------------|----------------|------------|
| ** **                                                          | ** ** | **Amount**   | ** ** | **Fair Value** | ** ** |
| **March 31, 2010**                                        |       |         |       |           |       |
| **Financial Assets**                                                |       |         |       |           |       |
| Cash  and due from banks                                            |       | $            | 7,781      |           | $          | 7,781 |   |
| Federal  funds sold                                                 |       | 10,285       |       | 10,285         |       |
| Investment  securities, available for sale                          |       | 158,481      |       | 158,481        |       |
| Other  investments                                                  |       | 1,599        |       | 1,599          |       |
| Loans,  gross                                                       |       | 259,739      |       | 245,929        |       |
| ** **                                                          |       |         |       |           |       |
| **Financial Liabilities**                                           |       |         |       |           |       |
| Demand  deposit, interest-bearing transaction, and savings accounts |       | $            | 110,021    |           | $          | 110,021 |   |
| Certificates  of deposit and other time deposits                    |       | 286,804      |       | 288,645        |       |
| Repurchase  agreements                                              |       | 30,000       |       | 31,606         |       |
| Subordinated  debt                                                  |       | 4,325        |       | 1,868          |       |
|                                                                |       |         |       |           |       |
| **December 31, 2009**                                          |       |         |       |           |       |
| **Financial Assets**                                                |       |         |       |           |       |
| Cash  and due from banks                                            |       | $            | 6,876      |           | $          | 6,876 |   |
| Federal  funds sold                                                 |       | 31,043       |       | 31,043         |       |
| Investment  securities, available for sale                          |       | 103,638      |       | 103,638        |       |
| Other  investments                                                  |       | 1,599        |       | 1,599          |       |
| Loans,  gross                                                       |       | 275,104      |       | 260,894        |       |
|                                                                |       |         |       |           |       |
| **Financial Liabilities**                                           |       |         |       |           |       |
| Demand  deposit, interest-bearing transaction, and savings accounts |       | $            | 122,712    |           | $          | 122,712 |   |
| Certificates  of deposit and other time deposits                    |       | 253,851      |       | 254,930        |       |
| Repurchase  agreements                                              |       | 30,000       |       | 31,558         |       |
| Subordinated  debt                                                  |       | 4,325        |       | 2,062          |       |

 
| ** **                                   | ** ** | **March 31, 2010** | ** ** | **December 31, 2009** | ** ** |
|----------------------------------------------|------------|-------------------------|------------|----------------------------|------------|
| **(Dollars  in thousands)**                  | ** ** | **Notional  Amount**    | ** ** | **Estimated  Fair Value**  | ** ** | **Notional  Amount** | ** ** | **Estimated  Fair Value** | ** ** |
| ** **                                   |       |                    |       |                       |       |   |   |   |   |
| **Off-Balance Sheet Financial Instruments:** |       |                    |       |                       |       |   |   |   |   |
| ** **                                   |       |                    |       |                       |       |   |   |   |   |
| Commitments  to extend credit                |       | $                       | 11,855     |                       | $          | — |   | $ | 15,451 |   | $ | — |   |
| Standby  Letters of Credit                   |       | $                       | 1,468      |                       | $          | — |   | $ | 1,525 |   | $ | — |   |

# ** **

# **GAAPrequires new disclosure that establishes a framework for measuring fair value,and expands disclosure about fair value measurements.  This disclosure enables the reader of thefinancial statements to assess the inputs used to develop those measurements byestablishing a hierarchy for ranking the quality and reliability of theinformation used to determine fair values. Assets and liabilities carried at fair value will be classified anddisclosed in one of the following three categories:**

# ** **

·                  Level 1:  Quotedmarket prices in active markets for identical assets or liabilities.

 

·                  Level 2: Observable market based inputs or unobservable inputs that arecorroborated by market data.

 

·                  Level 3: Unobservable inputs that are not corroborated by market data.

 

In determining appropriatelevels, the Company performs a detailed analysis of the assets and liabilitiesthat are subject to fair value measurement. At each reporting period, all assets and liabilities for which the fairvalue measurement is based on significant unobservable inputs are classified asLevel 3.

 

The tables below presentthe balances of assets and liabilities measured at fair value on a recurringbasis by level within the valuation hierarchy (as described above) as of March 31,2010.

 

17

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| ** **                                 | ** ** | **March 31, 2010** | ** ** |
|--------------------------------------------|------------|-------------------------|------------|
| **(Dollars  in thousands)**                | ** ** | **Total**               | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
| Investment  securities, available for sale |       | $                       | 158,481    |   | $ | — |   | $ | 158,481 |   | $ | — |   |
|                                            |            |                         |            |  |  |  |  |  |  |  |  |  |  |

 

Certain assets andliabilities are measured at fair value on a nonrecurring basis; that is, theinstruments are not measured at fair value on an ongoing basis but are subjectto fair value adjustments in certain circumstances (for example, when there isevidence of impairment).  The following tablespresent the assets and liabilities carried on the balance sheet by caption andby level within the valuation hierarchy (as described above) as of March 31,2010 for which a nonrecurring change in fair value has been recorded during thethree months ended March 31, 2010.

 
| ** **                                        | ** ** | **Carrying  Value at March 31, 2010** | ** ** |
|---------------------------------------------------|------------|--------------------------------------------|------------|
| **(Dollars  in thousands)**                       | ** ** | **Total**                                  | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
| Impaired  loans, net of allowance for loan losses |       | $                                          | 41,168     |   | $ | — |   | $ | — |   | $ | 41,168 |   |
| Other  real estate owned                          |       | 7,586                                      |       | — |   | — |   | 7,586 |   |
| Repossessed  collateral                           |       | 940                                        |       | — |   | — |   | 940 |   |
|                                                   |            |                                            |            |  |  |  |  |  |  |  |  |  |  |

** **
| ** **                           | ** ** | **Fair Value Measurements Using Significant Unobservable Inputs** | ** ** |
|--------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                           | ** ** | **(Level 3)**                                                     | ** ** |
| **(Dollars  in thousands)**          | ** ** | **Impaired  Loans**                                               | ** ** | **Other Real  Estate Owned** | ** ** | **Repossessed  Collateral** | ** ** | **Total** | ** ** |
| Beginning  balance                   |       | $                                                                 | 34,158     |   | $ | 6,703 |   | $ | 942 |   | $ | 41,803 |   |
| Gains/(losses)  included in earnings |       | —                                                            |       | (14 | ) | (1 | ) | (15 | ) |
| Net  additions                       |       | 7,010                                                             |       | 897 |   | (1 | ) | 7,906 |   |
| Transfers  in/(out) of level 3       |       | —                                                            |       | — |   | — |   | — |   |
| Ending  balance                      |       | $                                                                 | 41,168     |   | $ | 7,586 |   | $ | 940 |   | $ | 49,694 |   |

 

**NOTE 10 — SUBSEQUENT EVENTS**

 

The Bank has evaluatedevents and transactions through our filing date for potential recognition ordisclosure in the consolidated financial statements and has determined thereare no subsequent events to disclose.

 

18

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**Item 2.  Management’s Discussion and Analysis or Planof Operation.**

 

*The following discussion reviewsour results of operations and assesses our financial condition.  You should read the following discussion andanalysis in conjunction with the accompanying consolidated financial statements.  The commentary should be read in conjunctionwith the discussion of forward-looking statements, the financial statements,and the related notes and the other statistical information included in thisreport.  For further information, referto Management’s Discussion and Analysis of Financial Condition and Results ofOperations appearing in the Annual Report on Form 10-K for the year ended December 31,2009.*

 

**DISCUSSION OF FORWARD-LOOKING STATEMENTS**

 

This Report, includinginformation included or incorporated by reference in this document, containsstatements which constitute forward-looking statements within the meaning of Section 27Aof the Securities Act of 1933 and Section 21E of the Securities ExchangeAct of 1934. Forward-looking statements relate to the financial condition,results of operations, plans, objectives, future performance, and business ofthe Company. Forward-looking statements are based on many assumptions andestimates and are not guarantees of future performance. Our actual results maydiffer materially from those anticipated in any forward-looking statements, asthey will depend on many factors about which we are unsure, including manyfactors which are beyond our control. The words “may,” “would,” “could,” “should,”“will,” “expect,” “anticipate,” “predict,” “project,” “potential,” “continue,” “assume,”“believe,” “intend,” “plan,” “forecast,” “goal,” and “estimate,” as well assimilar expressions, are meant to identify such forward-looking statements.Potential risks and uncertainties that could cause our actual results to differmaterially from those anticipated in our forward-looking statements include,but are not limited to, those described under the heading “Risk Factors” in ourAnnual Report on Form 10-K for the year ended December 31, 2009 as filedwith the SEC and the following:

 
| · | our efforts to raise capital or otherwise increase  our regulatory capital ratios;                                                                                                                                                                                                                                                                     |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| · | the effects of our efforts to raise capital on our  balance sheet, liquidity, capital, and profitability;                                                                                                                                                                                                                                              |
| · | our ability to retain our existing customers,  including our deposit relationships;                                                                                                                                                                                                                                                                    |
| · | our ability to comply with the terms of the Consent  Order between the Bank and its supervisory authorities within the time frames  specified;                                                                                                                                                                                                         |
| · | the rate of delinquencies and amounts of loans  charged-off;                                                                                                                                                                                                                                                                                           |
| · | our rapid growth through 2008 and short operating  history;                                                                                                                                                                                                                                                                                            |
| · | reduced earnings due to higher credit losses  generally and specifically because losses in the sectors of our loan  portfolio secured by real estate are greater than expected due to economic  factors, including declining real estate values, decreasing interest rates,  increasing unemployment, or changes in payment behavior or other factors; |
| · | reduced earnings due to higher credit losses because  our loans are concentrated by loan type, industry segment, borrower type, or  location of the borrower or collateral;                                                                                                                                                                            |
| · | the amount of our real estate based loans, and the  weakness in the commercial real estate market;                                                                                                                                                                                                                                                     |
| · | our reliance on available secondary funding sources  such as Federal Reserve Discount Window borrowings, sales of securities and  loans, and secured federal funds lines of credit from correspondent banks, to  meet our liquidity needs;                                                                                                             |
| · | significant increases in competitive pressure in the  banking and financial services industries;                                                                                                                                                                                                                                                       |
| · | changes in the interest rate environment which could  reduce anticipated or actual margins;                                                                                                                                                                                                                                                            |
| · | changes in political conditions or the legislative  or regulatory environment;                                                                                                                                                                                                                                                                         |
| · | general economic conditions, either nationally or  regionally and especially in our primary service area, becoming less  favorable than expected resulting in, among other things, a deterioration in  credit quality;                                                                                                                                 |
| · | changes occurring in business conditions and  inflation;                                                                                                                                                                                                                                                                                               |
| · | changes in technology;                                                                                                                                                                                                                                                                                                                                 |
| · | changes in deposits flows;                                                                                                                                                                                                                                                                                                                             |
| · | changes in monetary and tax policies;                                                                                                                                                                                                                                                                                                                  |
| · | the lack of seasoning of our loan portfolio,  especially given our rapid loan growth through 2008;                                                                                                                                                                                                                                                     |
| · | adequacy of the level of our allowance for loan  losses;                                                                                                                                                                                                                                                                                               |
| · | increased funding costs due to market illiquidity,  increased competition for funding, and/or regulatory requirements;                                                                                                                                                                                                                                 |
| · | the effect of final rules amending Regulation E  that prohibit financial institutions from charging consumer fees for paying  overdrafts on ATM and one-time debit card transactions, unless the consumer  consents or opts-in to the overdraft service for those types of transactions;                                                          |
| · | adverse changes in asset quality and resulting  credit risk-related losses and expenses, including the risk of further  impairment to the value of our collateral on loans for which we have already  taken specific reserves;                                                                                                                         |
| · | loss of consumer confidence and economic disruptions  resulting from terrorist activities or other military actions;                                                                                                                                                                                                                                   |
| · | changes in the securities markets; and                                                                                                                                                                                                                                                                                                                 |

 

19

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| · | other risks and uncertainties detailed from time to  time in our filings with the SEC. |
|--------|----------------------------------------------------------------------------------------|

 

We have based ourforward-looking statements on our current expectations about future events.Although we believe that the expectations reflected in our forward-lookingstatements are reasonable, we cannot guarantee you that these expectations willbe achieved. We undertake no obligation to publicly update or otherwise reviseany forward-looking statements, whether as a result of new information, futureevents, or otherwise.

 

These risks are exacerbatedby the recent developments in national and international financial markets, andwe are unable to predict what impact these uncertain market conditions willhave on us.  During 2008 and 2009 andthus far in 2010, the capital and credit markets continued to experienceextended volatility and disruption. There can be no assurance that these unprecedented recent developmentswill not continue to materially and adversely impact our business, financialcondition, and results of operations, as well as our ability to raise capitalor other funding for liquidity and business purposes.

 

# **Overview**

# ** **

Thefollowing discussion describes our results of operations for the three monthsended March 31, 2010 and also analyzes our financial condition as of March 31,2010.  We received approvals from theFDIC, the FRB, and the South Carolina Board of Financial Institutions during January 2005,and commenced business on January 18, 2005.

 

The Company is a bankholding company headquartered in Easley, South Carolina.  Our subsidiary, the Bank, opened for businesson January 18, 2005.  All SeasonsProperties, LLC, a subsidiary of the Bank, was formed in 2009 for the purposeof holding and marketing repossessed assets. In addition to the main office in Easley, the Bank has five branchlocations in the upstate region of South Carolina.  We opened our Mauldin branch in the fourthquarter of 2005, our Spartanburg branch in the first quarter of 2006, ourAnderson branch in the third quarter of 2006, our Greer branch in the fourth quarterof 2006 and our Greenville branch in the third quarter of 2007.  The Bank provides banking services todomestic markets, principally in the Upstate of South Carolina.  The deposits of the Bank are insured by theFDIC.

 

Like most communitybanks, we derive most of our income from interest we receive on our loans andinvestments.  Our primary source of fundsfor making these loans and investments is our deposits, on which we payinterest.  Consequently, one of the keymeasures of our success is our amount of net interest income, or the differencebetween the income on our interest-earning assets, such as loans andinvestments, and the expense on our interest-bearing liabilities, such asdeposits.  Another key measure is thespread between the yield we earn on these interest-earning assets and the ratewe pay on our interest-bearing liabilities.

 

**Current Economic Environment**

 

Markets in the UnitedStates, including our market areas, have experienced extreme volatility anddisruption for more than 12 months. According to the National Bureau of Economic Research, the United Statesentered into an economic recession in December 2007.  Dramatic slowdowns in the residential housingindustry with falling home prices, increasing foreclosures, and risingunemployment levels have created strains on the loan portfolios of manyfinancial institutions.  Median homesales continued to decline during 2009 and in the first quarter of 2010nationally and in our primary market area, South Carolina.  As a result, the level of foreclosures byhomebuilders and homeowners continued to increase.

 

As a result of thecurrent economic recession, many borrowers are unable to repay their loans, andthe collateral securing these loans has, in some cases, declined below the loanbalance with the drop in real estate values, making it difficult for financialinstitutions to fully recover the principal and interest owed.  In addition, the rapidly deterioratingeconomic conditions in our country have evolved into a crisis of confidence inthe safety and soundness of larger financial institutions, brokerage firms, andinsurance companies, resulting in extreme liquidity pressure throughout theUnited States financial system for all financial companies including communityfinancial institutions such as ours. This pressure has caused many banks to tighten lending standards, whichhas constrained the ability of businesses and consumers to obtain credit.  Anxiety over liquidity and credit risk hasgrown in recent months and banks have curbed lending to each other, furtherlimiting liquidity sources available to financial institutions.

 

20

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**The Effect of the CurrentEconomic Environment on our Bank**

 

Like manyfinancial institutions across the United States and in South Carolina, ouroperations have been adversely affected by the current economic crisis.  Beginning in 2008 and continuing through thefirst quarter of 2010, we recognized that construction, acquisition, anddevelopment real estate projects were slowing, guarantors were becomingfinancially stressed, and increasing credit losses were surfacing.  During the first quarter of 2010,delinquencies over 90 days continued to increase, resulting in an increase innon-accrual loans indicating significant credit quality deterioration andprobable losses.  In particular, loanssecured by real estate, including acquisition, construction, and developmentprojects, demonstrated stress given reduced cash flows of individual borrowers,limited bank financing and credit availability, and slow property sales.  This deterioration manifested itself in ourborrowers in the following ways: (i) the cash flows from underlyingproperties supporting the loans decreased (e.g., slower property sales fordevelopment type projects or lower occupancy rates or rental rates foroperating properties); (ii) cash flows from the borrowers themselves andguarantors were under pressure given illiquid personal balance sheets anddrainage by investing additional personal capital in the projects; and (iii) fairvalues of real estate related assets declined, resulting in lower cash proceedsfrom sales or fair values declining to the point that borrowers were no longerwilling to sell the assets at such deep discounts.

 

As of March 31, 2010,approximately 90.9% of our loans had real estate as a primary or secondarycomponent of collateral.  Included in ourloans secured by real estate, we have approximately $36.2 million ofacquisition and development (“A&D”) loans as of March 31, 2010, mostof which are on properties located in the Upstate of South Carolina and WesternNorth Carolina.  A&D loans are typically comprised of loans toborrowers for real estate to be developed (into properties such assub-divisions or spec houses).  Normally, these loans are repaid with the proceeds from the sale of thedeveloped property.  The greater degree of strain on these types of loansand the significance to our overall loan portfolio has caused us to apply agreater degree of scrutiny in analyzing the ultimate collectability of amountsdue.  The majority of these borrowers are having financialdifficulties.  Our analysis has resultedin a significant provision expense in order to meet the estimated allowance forloan loss reserve requirement.

 

Included in our loanssecured by real estate, we have approximately $37.2 million of acreage andfinished or buildable lot loans as of March 31, 2010.  These loans are comprised of loans toborrowers for raw land and lots in subdivisions that have utilities and are readyto be built on individually but not as part of an entire developmentproject.  These loans are generallyrepaid with the proceeds from the sale of the property.  As with our A&D loans, many of theseborrowers are also experiencing financial difficulties and the greater degreeof strain on these types of loans and the significance to our overall loanportfolio has caused us to apply a greater degree of scrutiny in analyzing theultimate collectability of amounts due. Our analysis has resulted in a significant provision expense in order tomeet the estimated allowance for loan loss reserve requirement.

 

The result of the abovewas an increase in the level of our non-performing assets during the firstquarter of 2010.  As of March 31,2010, our non-performing assets equaled $45.0 million, or 10.2% of assets, ascompared to $42.4 million, or 10.1% of assets, as of December 31,2009.  For the three months ended March 31,2010, we recorded a provision for loan losses of $1,000,000 and net loancharge-offs of $1.0 million, or 0.4% of average loans, as compared to a $1.3million provision for loan losses and net loan recoveries of $20,000, for thethree months ended March 31, 2009. In addition, our net interest margin decreased to 1.83% for the threemonths ended March 31, 2010 from 3.05% for the three months ended March 31,2010.  In total, the above reduced ourfirst quarter 2010 earnings by more than $1.6 million compared to first quarter2009.  As a result, as of March 31,2010, we are deemed to be “significantly undercapitalized.”

 

The adverse economicenvironment has also placed greater pressure on our deposits, as we have beentaking steps to decrease our reliance on brokered deposits, while at the sametime the competition for local deposits among banks in our market has beenincreasing in the past years.  Wegenerally obtained out-of-market time deposits of $100,000 or more throughbrokers with whom we maintain ongoing relationships.  As of March 31, 2010, we had brokereddeposits of $195.9 million, representing 49.36% of our total deposits, of which$79.7 million are scheduled to mature in the third quarter of 2010 and $94.9million are scheduled to mature in the fourth quarter of 2010.  As a result of the limitations on brokereddeposits imposed by the Consent Order and our “significantly undercapitalized”designation, we must find other sources of liquidity to replace these depositsas they mature.  At the end of the fourthquarter of 2009 the Bank started using an internet based certificate of depositgathering service.  We believe this willaid in our sources of funds to replace our brokered deposits.  The Bank’s internet based deposits haveincreased from $1.8 million at December 31, 2009 to $24.5 million as of March 31,2010.  Secondary sources of liquidity mayinclude proceeds from FHLB advances and federal funds lines of credit fromcorrespondent banks.  However, the FHLBhas informed us that due to our financial condition we are not currentlypermitted to receive any more advances. At March 30, 2010, we had federal funds lines of credit withunrelated banks totaling $5.0 million. These lines are available for general corporate purposes but may beterminated at any time based on our financial condition.  Thus, we can make no assurances that this fundingsource will continue to be available to us. As a result, we must 

 

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limit our growth, raiseadditional capital, or sell assets, which could materially and adversely affectour financial condition and results of operations.  Additionally, deposit levels may be affectedby a number of factors, including rates paid by competitors, general interestrate levels, regulatory capital requirements, returns available to customers onalternative investments and general economic conditions.  Because the Bank is not well capitalized, itwould normally be restricted from offering an effective yield on deposits ofmore than 75 basis points over the national rates published by the FDIC weeklyon its website.  However, on April 1,2010, we applied for and received a determination from the FDIC that our marketareas were all high interest rate areas. As a result, we have permission to pay deposit rates of up to 75 basispoints over the local rates (assuming the local rates exceed the applicablenon-local rates) and on non-local deposits gathered in our normal market areaeven if these rates exceed non-local rates by more than 75 basis points.  Nevertheless, if we are unable to attractsufficient deposits to meet our liquidity needs, then the Bank may be placedinto a federal conservatorship or receivership by the FDIC, with the FDICappointed as conservator or receiver.

 

***Memorandumof Understanding***

 

As a result of the issuesstemming from the economic downturn, on June 29, 2009 the Bank enteredinto the MOU with the Commissioner of Banking of the South Carolina Board ofFinancial Institutions and the Regional Director of the FDIC’s Atlanta RegionalOffice.  The MOU required the Bank to,among other things, (1) submit a capital plan to the supervisoryauthorities for returning to a “well-capitalized” designation; (2) developspecific plans and proposals for the reduction and improvement of assets whichare subject to adverse classification and past due loans; (3) implement aplan to decrease the concentration of commercial real estate loans; (4) developand implement an adequate loan review program; and (5) review overallliquidity objectives and develop plans and procedures aimed at improvingliquidity and reducing reliance on volatile liabilities to fund longer-termassets.  In addition, the Bank may notpay dividends without the prior written consent of each supervisory authority.

 

Since entering into theMOU, the Bank has been actively pursuing the corrective actions required by theMOU in an effort to ensure that the requirements of the MOU are met in a timelymanner.  For example:

 

·                  As of March 31, 2010, we are deemed to be “significantlyundercapitalized.”  We have developed acapital plan for returning to a “well-capitalized” designation, and wesubmitted this plan to the FDIC and the South Carolina Board of FinancialInstitutions in July 2009.  Ourcapital plan outlines how we intend to return our Bank’s risk-based capitalratio level over 10% by (i) reducing our overall amount of assets and, inparticular, our amount of risk-based assets and (ii) raising additionalcapital.  To reduce our amount of assets,we have sold assets such as our bank-owned life insurance and some of ouravailable for sale securities.  Inaddition, we are actively seeking buyers for part of our loan portfolio.  As a result of these steps, we decreased our amountof risk-based assets by $21.6 million from December 31, 2009 to March 31,2010.  We are also exploring additionalfinancing alternatives to strengthen the capital levels of the Bank.

 

·                  We have developed and implemented a plan to reduce ouramount of classified loans by establishing an IMPAC committee (ImprovingProblem Asset Committee) to focus on the development of work-out plans for ourother real estate owned (OREO) and classified loans and to explore approachesto provide additional capital to support our classified loans or to reduce thelevel of such loans, such as through the sale of loans to third parties. As aresult, we have created a more risk-based loan review program, which we believehas enhanced the underwriting and monitoring of our loan portfolio.

 

·                  We have implemented a plan to decrease theconcentration of our commercial real estate loans.  Since January 2009, we have effectivelyceased making any new commercial real estate loans and we are decreasing theexisting level of these loans through the normal sale of real estate byborrowers and by encouraging borrowers who are not full relationship clients ofthe Bank to seek other financing when their loans mature.  We are also actively seeking secondary marketpermanent financing for recently completed residential constructionprojects.  As a result of these efforts,our amount of commercial real estate loans decreased from $151.6 million at December 31,2008 to $114.6 million at March 31, 2010.

 

·                  We have developed and implemented an improved loanreview program, which includes the hiring of a new internal loan review officerand the engagement of a new external loan review firm for ongoing review andthe establishment of a new system for tracking borrower financial statementsand the structure of our watch reports. The new external review firm is active and since its engagement has beenon site three times to evaluate the effectiveness of the program.  The external review firm reviews both specificloans and the overall loan portfolio.

 

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·                  On September 10, 2009, we submitted to the FDICand the South Carolina Board of Financial Institutions a revised FundsManagement Policy to reflect our plan to continue to improve liquidity levelsand reduce our reliance on brokered deposits and other non-core funding sourcesover the next 18 months.  We grew rapidlyin our initial years of operations, which we funded with a combination of localdeposits and wholesale funding, including brokered deposits.  As of March 31, 2010, we are deemed tobe “significantly undercapitalized” and, as a result, can no longer accept,renew or roll over brokered deposits without the prior consent of theFDIC.  Thus, we are actively focused oneliminating brokered deposits on our balance sheet.  We improved the Bank’s liquidity position byraising approximately $27.2 million in new deposits through the use of aninternet based deposit gathering system along with growth of local depositsfrom December 31, 2009 to March 31, 2010.

 

In addition, in mid-February 2010the Bank received a supervisory letter from the FDIC dated February 11,2010, which provided for additional restrictions and mandatory actions to betaken by the Bank.  These restrictionsand actions were all substantially addressed and superseded by the subsequent ConsentOrder discussed in the subsection below. However, in order to comply with the supervisory letter, the Bank wasrequired to prepare and submit to the FDIC a capital restoration plan no laterthan April 2, 2010, which submission date was sooner than a similarrequirement under the Consent Order.  TheBank submitted its capital restoration plan to the FDIC on April 2, 2010.

 

***ConsentOrder***

 

Following the FDIC’ssafety and soundness examination of the Bank in the fourth quarter of 2009, theBank entered into the Consent Order with the FDIC and the South Carolina Boardof Financial Institutions on February 23, 2010.  The Consent Order, which supersedes the MOU,conveys specific actions needed to address certain findings from the FDIC’sReport of Examination and to address the Bank’s current financial condition,primarily related to capital planning, liquidity/funds management, policy andplanning issues, management oversight, loan concentrations and classifications,and non-performing loans.

 

Specifically, the ConsentOrder requires the Bank to, among other things,

 

·                  establish, within 30 days from the effective date ofthe Consent Order, a plan to monitor compliance with the Consent Order, whichshall be monitored by the Bank’s board of directors.  A plan to monitor compliance with the ConsentOrder was established by the Bank’s board of directors at a meeting held on March 16,2010.  Pursuant to the plan, the boardcreated and appointed four of its members to serve on a consent ordercompliance committee to monitor the Bank’s compliance with the ConsentOrder.  The committee has met five timessince its creation on March 16, 2010;

 

·                  ensure the Bank has qualified management in place tocarry out the policies of the Bank’s board of directors and operate the Bank ina safe and sound manner.  A managementplan, which includes organizational structure and management assessment, wasapproved by the Bank’s board of directors and submitted to the supervisoryauthorities on April 12, 2010;

 

·                  achieve and maintain, within 120 days from theeffective date of the Consent Order, Total Risk Based capital at least equal to10% of risk-weighted assets and Tier 1 capital at least equal to 8% of totalassets.  At this time, we do not believethat we will be able to meet these minimum capital requirements within 120 daysfrom the effective date of the Consent Order. If this were to occur, then within 30 days of such determination theBank would be required to submit a written plan to the FDIC describing themeans and timing by which the Bank will increase such ratios up to or in excessof the established minimums;

 

·                  develop, within 45 days from the effective date of theConsent Order, a written analysis and assessment of the Bank’s management andstaffing needs.  The Bank prepared awritten analysis and assessment of its management and staffing needs andsubmitted this analysis to the supervisory authorities on April 12, 2010;

 

·                  establish, within 60 days from the effective date ofthe Consent Order, a comprehensive policy for determining the adequacy of theBank’s allowance for loan and lease losses, which must provide for a review ofthe Bank’s allowance for loan and lease losses at least once each calendarquarter.  The Bank’s board of directorsand consent order compliance committee reviewed and approved a comprehensivepolicy for determining the adequacy of the Bank’s allowance for loan and leaselosses, and this policy was submitted to the supervisory authorities prior tothe April 27, 2010 deadline;

 

·                  enhance, within 60 days from the effective date of theConsent Order, the Bank’s written plan for the reduction 

 

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of classified assets,which shall include, among other things, a reduction of the Bank’s riskposition in each asset in excess of $250,000 that is classified as “Substandard”or “Doubtful.”  A plan to reduce the Bank’sclassified assets was reviewed and approved by the Bank’s board of directorsand consent order compliance committee on April 20, 2010.  The plan was submitted to the supervisoryauthorities on the April 27, 2010 deadline;

 

·                  not extend any additional credit to any borrower whohas a loan or other extension of credit from the Bank that has been charged offor classified, in whole or in part, “loss” or “doubtful” and isuncollected.  In addition, the Bank maynot extend any additional credit to any borrower who has a loan or otherextension of credit from the Bank that has been classified, in whole or inpart, “substandard” and is uncollected, unless the Bank’s board of directorsdetermines that failure to extend further credit to a particular borrower wouldbe detrimental to the best interests of the Bank.  The Bank has not knowingly extended, directlyor indirectly, any additional credit to, or for the benefit of, any borrowerwho was a loan or other extension of credit from the Bank that has been chargedoff or classified, in whole or in part, “loss” or “doubtful” and isuncollected;

 

·                  perform, within 45 days from the effective date of theConsent Order, a risk segmentation analysis with respect to the Bank’sConcentrations of Credit and a written plan to systematically reduce anysegment of the portfolio that is an undue concentration of credit.  The Bank performed a risk segmentationanalysis with respect to its concentrations of credit, and this analysis wasreviewed and approved by the consent order compliance committee on April 6,2010 and by the Bank’s board of directors on April 8, 2010. This analysiswas submitted to the supervisory authorities by the April 12, 2010deadline;

 

·                  revise, within 60 days from the effective date of theConsent Order, the Bank’s internal loan review and grading system to providefor the periodic review of the Bank’s loan portfolio in order to identify andcategorize the Bank’s loans, and other extensions of credit which are carriedon the Bank’s books as loans, on the basis of credit quality.  The Bank revised and updated its internalloan review plan, which was reviewed and approved by the Bank’s board ofdirectors and the consent order compliance committee on April 20, 2010.The plan was submitted to the supervisory authorities prior to the April 27,2010 deadline;

 

·                  formulate and implement, within 60 days from theeffective date of the Consent Order, a profit plan and comprehensive budget forall categories of income and expense, which must address, at minimum, goals andstrategies for improving and sustaining the earnings of the Bank, the majorareas in and means by which the Bank will seek to improve the Bank’s operatingperformance, and the operating assumptions that form the basis for andadequately support major projected income and expense components of the plan.  The Bank created profit plan and budget forall categories of income and expense, which includes adjustments where the Bankeither exceeded budget or had budget shortfalls in order to provide realisticprojections going forward.  The profitplan and budget were reviewed and approved by the Bank’s board of directors on April 20,2010 and were submitted to the supervisory authorities prior to the April 27,2010 deadline;

 

·                  enhance, within 60 days from the effective date of theConsent Order, the Bank’s written funds management plan addressing liquidity,contingent funding, and asset liability management.  The Bank’s funds management plan, whichaddresses liquidity, contingent funding, and asset liability management, wasreviewed and approved by the Bank’s board of directors and the consent ordercompliance committee on April 20, 2010 and was submitted to thesupervisory authorities prior to the April 27, 2010 deadline;

 

·                  not accept, renew, or rollover any brokereddeposits.  The Bank must develop andsubmit to the FDIC, within 30 days from the effective date of the ConsentOrder, a plan for eliminating its reliance on brokered deposits.  A plan was approved by the Bank’s board ofdirectors and consent order compliance committee on March 24, 2010 and wassubmitted to the FDIC on March 25, 2010. Since entering into the Consent Order, the Bank has not accepted,renewed, or rolled-over any brokered deposits;

 

·                  not offer an effective yield in excess of 75 basispoints over interest paid on deposits (including brokered deposits, if approvalis granted for the Bank to accept them) of comparable size and maturity ineither the Bank’s normal market area or in the market area in which suchdeposits would otherwise be accepted. However, on April 1, 2010, we applied for and received adetermination from the FDIC that our market areas were all high interest rateareas.  As a result, we have permissionto pay deposit rates of up to 75 basis points over the local rates (assumingthe local rates exceed the applicable non-local rates) and on non-localdeposits gathered in our normal market area even if these rates exceednon-local rates by more than 75 basis points;

 

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·                  not declare or pay any dividends or bonuses or makeany distributions of interest, principal, or other sums on subordinateddebentures without the prior approval of the supervisory authorities.  Since entering into the Consent Order, theBank has not declared or paid any dividends or bonuses or made anydistributions of interest, principal, or other sums on subordinated debentures;and

 

·                  furnish, within 45 days from the effective date of theConsent Order and within 45 days of the end of each quarter thereafter, writtenprogress reports to the supervisory authorities detailing the form and mannerof any actions taken to secure compliance with the Consent Order.  The Bank has furnished written progressreports to the supervisory authorities as required by the Consent Order.

 

Additionally, on March 1,2010, the Company entered into an informal agreement with the Federal ReserveBank of Richmond.  The informal agreementcontains provisions similar to those in the Bank’s MOU with the FDIC and theSouth Carolina Board of Financial Institutions, including a requirement thatthe Company obtain the prior written approval of the Federal Reserve Bank ofRichmond before (1) declaring or paying any dividends, (2) directlyor indirectly accepting dividends or any other form of payment representing areduction in capital from the Bank, (3) making any distributions ofinterest, principal or other sums on subordinated debentures or trust preferredsecurities, (4) directly or indirectly, incurring, increasing orguaranteeing any debt, and (5) directly or indirectly, purchasing orredeeming any shares of its stock. Pursuant to our plans to preserve capital and to inject more capitalinto the Bank, the Company has no plans to undertake any of the foregoingactivities.

 

***GoingConcern Considerations***

 

The going concernassumption is a fundamental principle in the preparation of financialstatements. It is the responsibility of management to assess the Company’sability to continue as a going concern. In assessing this assumption, theCompany has taken into account all available information about the future,which is at least, but is not limited to, twelve months from the balance sheetdate of March 31, 2010. The Company has a history of profitable operationsand sufficient sources of liquidity to meet its short-term and long-termfunding needs. However, the Bank’s financial condition has suffered during 2009and the first quarter of 2010 from the extraordinary effects of what mayultimately be the worst economic downturn since the Great Depression.

 

The effects of thecurrent economic environment are being felt across many industries, withfinancial services and residential real estate being particularly hard hit. Theeffects of the economic downturn have been particularly severe during the last150 days. The Bank, with a loan portfolio consisting of a concentration incommercial real estate loans including residential construction and developmentloans, has seen a decline in the value of the collateral securing its portfolioas well as rapid deterioration in its borrowers’ cash flow and ability to repaytheir outstanding loans to the Bank. As a result, the Bank’s level ofnonperforming assets has increased substantially during 2009 and the firstquarter of 2010. For the quarter ended March 31, 2010, the Bank recorded a$1,000,000 provision increase the allowance for loan losses to a level which,in management’s best judgment, adequately reflected the increased risk inherentin the loan portfolio as of March 31, 2010.

 

The Company and the Bankoperate in a highly-regulated industry and must plan for the liquidity needs ofeach entity separately. A variety of sources of liquidity are available to theBank to meet its short-term and long-term funding needs. Although a number ofthese sources have been limited following execution of the Consent Order withthe FDIC and the South Carolina Board of Financial Institutions, management hasprepared forecasts of these sources of funds and the Bank’s projected uses offunds during 2010 in an effort to ensure that the sources available aresufficient to meet the Bank’s projected liquidity needs for this period.

 

The Company relies ondividends from the Bank as its primary source of liquidity. The Company is alegal entity separate and distinct from the Bank. Various legal limitationsrestrict the Bank from lending or otherwise supplying funds to the Company tomeet its obligations, including paying dividends. In addition, the terms of theConsent Order described above will further limit the Bank’s ability to paydividends to the Company to satisfy its funding needs.

 

The Company will alsoneed to raise additional capital to increase capital levels to meet thestandards set forth by the FDIC. As a result of the recent downturn in thefinancial markets, the availability of many sources of capital (principally tofinancial services companies) has become significantly restricted or has becomeincreasingly costly as compared to the prevailing market rates prior to thevolatility. Management cannot predict when or if the capital markets willreturn to more favorable conditions. Management is actively evaluating a numberof capital sources asset reductions and other balance sheet managementstrategies to ensure that the Bank’s projected level of regulatory capital cansupport its balance sheet.

 

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There can be noassurances that the Company will be successful in its efforts to raiseadditional capital during 2010. An equity financing transaction would result insubstantial dilution to the Company’s current shareholders and could adverselyaffect the market price of the Company’s common stock. It is difficult topredict if these efforts will be successful, either on a short-term orlong-term basis. Should these efforts be unsuccessful, due to the regulatoryrestrictions which exist that restrict cash payments between the Bank and theCompany, the Company may be unable to realize its assets and discharge itsliabilities in the normal course of business.

 

As a result of management’sassessment of the Company’s ability to continue as a going concern, theaccompanying consolidated financial statements for the Company have beenprepared on a going concern basis, which contemplates the realization of assetsand the discharge of liabilities in the normal course of business for theforeseeable future, and does not include any adjustments to reflect thepossible future effects on the recoverability or classification of assets.

 

**Current Business Strategy**

 

In addition to theactions required by the MOU, we have been actively pursuing the correctiveactions required by the Consent Order in an effort to ensure that therequirements of the Consent Order are met in a timely manner.  Specifically, we are currently focusing ourefforts in the following areas:

 

·                  **Increasing and Strengthening OurCapital Position.**

As of March 31,2010, the Bank is deemed to be “significantly undercapitalized.”  Management has developed a plan to increaseand preserve our capital with the goal of returning to and maintaining a “well-capitalized”status. These initiatives include, among other things, restructuring the Bank’sbalance sheet by limiting new loan activity and aggressively attempting to sellcertain real estate-related loans and other assets, and raising additionalcapital through a stock offering. Additionally, we are actively evaluating a number of capital sources,balance sheet management strategies, and other strategic alternatives to ensurethat our projected level of regulatory capital can support our balance sheet andmeet or exceed minimum requirements.

 

·                  **Managing and Improving AssetQuality.**

The economic recessionand the deterioration of the housing and real estate markets have had anadverse impact on the credit quality of our loan portfolio. In response, our Bankintends to significantly reduce the amount of its non-performing assets.Non-performing assets hurt our profitability because they reduce the balance ofearning assets, may require additional loan loss provisions or write-downs, andrequire significant devotion of staff time and financial resources toresolve. We believe our asset quality plan aggressively addresses theseissues.  For example,

 

·                  In February of 2009, we restructured the creditadministration and loan operations departments and hired a skilled chief creditofficer to oversee the enhancement of our processes and procedures in thisarea.

 

·                  In June of 2009, we established an improvingproblem asset committee to assist Bank management in policy development,management strategy, and/or liquidation of problem assets. We are currentlyproactively seeking avenues to sell bank-owned properties and problem assets tooutside investors.

 

·                  In January of 2009, we implemented a process forthe continuous review of all classified loans, watch loans, past due loans,relationships over $500,000, and any other potential risky loans and appliedconservative risk grades.

 

·                  Throughout 2009 and 2010, we conducted disciplinedwatch loan meetings to track and monitor progress, including the execution ofworkout plans, obtainment of current financial data, and detailed progressupdates.

 

·                  Throughout 2009 and 2010, we maintained an adequatereserve for loan losses given the risk profile of our Bank.

 

·                  In May of 2009, we implemented a risk-focusedinternal and external loan review program.

 

·                  During 2010, we plan to create a special assetsdivision to focus our efforts and enhance staffing related to loan work-outsand collection processes.

 

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·                  **Decreasing Concentrations in OurLoan Portfolio.**

We are focused onreducing our concentrations in commercial real estate (CRE), specificallyacquisition development and construction loans, and residential constructionloans.  Since January 2009, we haveeffectively ceased making any new CRE loans while proactively decreasing thelevel of these existing loan types.  Wehave worked to decrease our concentration by various means, including (1) throughthe normal sale of real estate by borrowers, (2) by seeking avenues tosell a portion of the CRE portfolio to outside investors, (3) byproactively seeking secondary market permanent financing for recently completedresidential construction projects, and (4) encouraging transactional CREcustomers to seek other financing when their loans mature.  As a result of these efforts, our amount ofCRE loans decreased 24.4% from $151.6 million of our total loan portfolio at December 31,2008 to $114.6 million of our loan portfolio at March 31, 2010.  We have also reduced our residentialconstruction portfolio 96.2% from $33.8 million at December 31, 2008 to$1.3 million at March 31, 2010.  Weexpect commercial real estate loan portfolio balances to continue to decreasein 2010 through the continued successful implementation of the plans outlinedabove.

 

·                  **Reducing Operating Expenses.**

We have alwaysfocused on controlling expenses and managing efficient overhead.  During 2010, management intends to furtherreduce costs in a manner which does not impact the quality of our customerservice.  Given the prolonged economicrecession, we have embarked on an extremely aggressive expense reductioncampaign.  Management has already reducedsalary and benefits expenses by reducing staffing levels, freezing salaries at2008 levels, and reducing compensation in several positions.  Additionally, we will continue to renegotiatevendor contracts and implement several other cost-saving measures to reduce noninterestexpenses.  Reducing our level of nonperforming assets will also lowerour operating costs.

 

·                  **Enhancing Funds Management andLiquidity.**

We have grownrapidly since our inception through 2008, and have historically funded ourasset growth with a combination of local deposits and wholesale funding,specifically brokered deposits. As of March 31, 2010, we had brokereddeposits of $195.9 million, representing 49.36% of our total deposits, of which$79.7 million are scheduled to mature in the third quarter of 2010 and $94.9million are scheduled to mature in the fourth quarter of2010.  Because of the limitations on brokered deposits imposed by theConsent Order and our undercapitalized status, the Bank may no longer accept,renew, or roll over brokered deposits. Thus, we must find other sources of liquidity to replace these depositsas they mature. We have amended our funds management policy to reflect our planto continue to improve liquidity levels and reduce our use of brokered depositsand other non-core funding sources. Our funds management policy also includesour plan to reduce assets, certain loans, and other bank-owned real estate. Weplan to reduce our brokered deposit usage by executing on our comprehensivedeposit acquisition program, which creates an environment of consistent depositgrowth based on relationship-based banking, advocate-based selling and anaggressive, focused calling program. Our experienced team of bankers isactively cross-selling core deposits to our local depositors and borrowers, andis held accountable for production through twice-weekly sales meetings.Production is enhanced by our relationship-based culture training, whichincludes advanced customer service techniques and one-on-one coaching. We alsoplan to generate core deposits through a combination of competitive productsand pricing, customer service excellence, and targeted marketing campaigns

 

·                  **Enhancing Our Bank’s RelationshipCulture.**

While the bulk ofour strategic plan encompasses strategies to survive the prolonged economicrecession, management recognizes that we must also place the Bank in the bestposition to thrive as we emerge from this recession. In this regard, planninghas also centered on enhancing the Bank’s culture. We believe the enhancementof our culture will place the Bank in the best position possible to provideunmatched customer service and to take advantage of market opportunitiesthrough advocate-based selling and relationship banking strategies. Enhancementplans include, among others, the following:

 

·                  implementing consistent customer service andcommunication standards in all areas of the Bank;

 

·                  training and certifying the non-negotiables ofrelationship banking to all employees;

 

·                  ensuring all employees are engaged and motivated whileenabling management to measure the enhancement of the culture by conductingquarterly employee engagement surveys;

 

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·                  implementing consistent management standards for allsupervisors resulting in internal and external advocacy;

 

·                  refining the Bank’s customer experience measurements,including branch mystery shopping and customer survey programs; and ensuringall programs evaluate and measure the Bank’s expectations and areas of focus.

 

The Bank will continue toserve customers in all areas, including processing banking transactions, payingcompetitive rates on deposits, and providing access to lines of credit.  All customer deposits are fully insured tothe highest limits set by the FDIC, which are $250,000 for individually titledaccounts and $250,000 for individually titled IRA accounts. In addition, theBank participates in the FDIC Transaction Account Guarantee Program (the “TAGP”).Under this program, all non-interest bearing transaction accounts are fullyguaranteed by the FDIC for the entire amount of the account. The guarantee alsoapplies to interest bearing transaction accounts with interest rates of 0.50%or less. On April 13, 2010, the FDIC approved an interim rule thatextends the TAGP to December 31, 2010. We have elected to continue ourvoluntary participation in the program. This program is in addition to and separate from the coverage availableunder the FDIC general deposit insurance rules. We believe participation in the program is enhancing our ability toretain customer deposits.

 

However, should the Bankfail to comply with the capital and liquidity funding requirements in theConsent Order, or suffer a continued deterioration in our financial condition,the Bank may be subject to being placed into a federal conservatorship orreceivership by the FDIC, with the FDIC appointed as conservator or receiver.

 

**RecentLegislative and Regulatory Initiatives to Address Financial and Economic Crises**

 

Marketsin the United States and elsewhere have experienced extreme volatility anddisruption for more than 12 months. These circumstances have exerted significant downward pressure on pricesof equity securities and virtually all other asset classes, and have resultedin substantially increased market volatility, severely constrained credit andcapital markets, particularly for financial institutions, and an overall lossof investor confidence.  Loan portfolioperformances have deteriorated at many institutions resulting from, among otherfactors, a weak economy and a decline in the value of the collateral supportingtheir loans.  Dramatic slowdowns in thehousing industry, due in part to falling home prices and increasingforeclosures and unemployment, have created strains on financial institutions.  Many borrowers are now unable to repay theirloans, and the collateral securing these loans has, in some cases, declinedbelow the loan balance.   In response tothe challenges facing the financial services sector, several regulatory andgovernmental actions have recently been announced including:

 

·                  The Emergency Economic Stabilization Act, approved byCongress and signed by President Bush on October 3, 2008, which, amongother provisions, allowed the U.S. Treasury to purchase troubled assets frombanks, authorized the Securities and Exchange Commission to suspend theapplication of marked-to-market accounting, and raised the basic limit of FDICdeposit insurance from $100,000 to $250,000 through  December 31, 2013;

 

·                  On October 7, 2008, the FDIC approved a plan toincrease the rates banks pay for deposit insurance;

 

·                  On October 14, 2008, the U.S. Treasury announcedthe creation of a new program, the Capital Purchase Program, that encouragesand allows financial institutions to build capital through the sale of seniorpreferred shares to the U.S. Treasury on terms that are non-negotiable;

 

·                  On October 14, 2008, the FDIC announced thecreation of the Temporary Liquidity Guarantee Program (“TLGP”), which seeks tostrengthen confidence and encourage liquidity in the banking system.  The TLGP has two primary components that areavailable on a voluntary basis to financial institutions:

 

·                  Guarantee of newly-issued senior unsecured debt; theguarantee would apply to new debt issued on or before October 31, 2009 andwould provide protection until December 31, 2012; issuers electing toparticipate would pay a 75 basis point fee for the guarantee; and

 

·                  Unlimited deposit insurance for non-interest bearingdeposit transaction accounts; financial institutions electing to participatewill pay a 10 basis point premium in addition to the insurance premiums paidfor standard deposit insurance.

 

·                  On February 10, 2009, the U.S. Treasury announcedthe Financial Stability Plan, which earmarked $350 billion of the TARP fundsauthorized under EESA. Among other things, the Financial Stability Planincludes:

 

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·                  A capital assistance program that will invest inmandatory convertible preferred stock of certain qualifying institutionsdetermined on a basis and through a process similar to the Capital PurchaseProgram;

 

·                  A consumer and business lending initiative to fund newconsumer loans, small business loans and commercial mortgage asset-backedsecurities issuances;

 

·                  A new public-private investment fund that willleverage public and private capital with public financing to purchase up to$500 billion to $1 trillion of legacy “toxic assets” from financialinstitutions; and

 

·                  Assistance for homeowners by providing up to $75 billionto reduce mortgage payments and interest rates and establishing loanmodification guidelines for government and private programs.

 

·                  On February 17, 2009, the American Recovery andReinvestment Act (the “Recovery Act”) was signed into law in an effort to,among other things, create jobs and stimulate growth in the United Stateseconomy.  The Recovery Act specifiesappropriations of approximately $787 billion for a wide range of Federalprograms and will increase or extend certain benefits payable under theMedicaid, unemployment compensation, and nutrition assistance programs.  The Recovery Act also reduces individual andcorporate income tax collections and makes a variety of other changes to taxlaws.  The Recovery Act also imposescertain limitations on compensation paid by participants in the U.S. Treasury’sTroubled Asset Relief Program (“TARP”).

 

·                  On March 23,2009, the U.S. Treasury, in conjunction with the FDIC and the Federal Reserve,announced the Public-Private Partnership Investment Program for Legacy Assetswhich consists of two separate plans, addressing two distinct asset groups:

 

·                  The firstplan is the Legacy Loan Program, which has a primary purpose to facilitate thesale of troubled mortgage loans by eligible institutions, including FDIC-insuredfederal or state banks and savings associations. Eligible assets are notstrictly limited to loans; however, what constitutes an eligible asset will bedetermined by participating banks, their primary regulators, the FDIC and theTreasury. Under the Legacy Loan Program, the FDIC has sold certain troubledassets out of an FDIC receivership in two separate transactions relating to thefailed Illinois bank, Corus Bank, NA, and the failed Texas bank, Franklin Bank,S.S.B. These transactions were completed in September 2009 and October 2009,respectively.

 

·                  The secondplan is the Securities Program, which is administered by the Treasury andinvolves the creation of public-private investment funds to target investmentsin eligible residential mortgage-backed securities and commercialmortgage-backed securities issued before 2009 that originally were rated AAA orthe equivalent by two or more nationally recognized statistical ratingorganizations, without regard to rating enhancements (collectively, “LegacySecurities”). Legacy Securities must be directly secured by actual mortgageloans, leases or other assets, and may be purchased only from financialinstitutions that meet TARP eligibility requirements. Treasury received over100 unique applications to participate in the Legacy Securities PPIP and in July 2009selected nine public-private investment fund managers.  As of December 31, 2009, public-privateinvestment funds have completed initial and subsequent closings onapproximately $6.2 billion of private sector equity capital, which was matched100% by Treasury, representing $12.4 billion of total equity capital. Treasuryhas also provided $12.4 billion of debt capital, representing $24.8 billion oftotal purchasing power. As of December 31, 2009, public-private investmentfunds have drawn-down approximately $4.3 billion of total capital which hasbeen invested in certain non-agency residential mortgage backed securities andcommercial mortgage backed securities and cash equivalents pending investment.

 

·                  On May 22, 2009, the FDIC levied a one-timespecial assessment on all banks due on September 30, 2009; and

 

·                  On November 12, 2009, the FDIC issued a final rule torequire banks to prepay their estimated quarterly risk-based assessments forthe fourth quarter of 2009 and for all of 2010, 2011 and 2012 and to increaseassessment rates effective on January 1, 2011.

 

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It is likely that furtherregulatory actions may arise as the Federal government continues to attempt toaddress the economic situation.

 

We are participating inthe TAGP component of the TLGP.  As aresult of the enhancements to deposit insurance protection and the expectationthat there will be demands on the FDIC’s deposit insurance fund, our depositinsurance costs have increased and will continue to increase significantlythroughout the remainder of 2010.  Wehave elected not to participate in the CPP. Regardless of our lack of participation, governmental intervention andnew regulations under these programs could materially and adversely affect ourbusiness, financial condition and results of operations.  The following discussion and analysisdescribes our performance in this challenging economic environment.

 

**Results of Operations**

 

*Three Months ended March 31, 2010 and 2009*

 

*Overview*

 

Our net loss was $2.1 million for the three months ended March 31,2010 as compared to net loss of $36,000 for the three months ended March 31,2009.  For the three months ended March 31,2010, we realized $4,217,000 in interest income, of which $674,000 was frominvestment activities and $3,543,000 was from loan activities.  For the three months ended March 31,2009, we realized $4,933,000 in interest income, of which $563,000 was frominvestment activities and $4,370,000 was from loan activities.  The primary source of funding for our loanportfolio is deposits that are acquired both locally and via the nationalbrokered certificate market.  We incurredinterest expense of $2,337,000 and $2,080,000 for the three months ended March 31,2010 and March 31, 2009, respectively. We have experienced a decrease in our net interest margin to 1.83% from3.05% for the quarters ended March 31, 2010 and 2009, respectively.  This decrease is due to an increased volumeof non-performing assets as well as increased liquidity in anticipation ofrepayment of brokered deposits maturing in 2010.

 

*Rate/Volume Analysis*

 

Net interest income can be analyzed in terms of the impact of changinginterest rates and changing volumes.  Thefollowing tables set forth the effect which the varying levels ofinterest-earning assets and interest-bearing liabilities and the applicablerates have had on changes in the net interest income for the periods presented.

 
| ** **                 | ** ** | **Three Months Ended  March 31,  2010 vs. 2009** | ** ** |
|----------------------------|------------|------------------------------------------------------------|------------|
| ** **                 | ** ** | **Increase (decrease) Due to**                             | ** ** |
| ** **                 | ** ** | ** **                                                 | ** ** | ** ** | ** ** | **Rate /** | ** ** | ** ** | ** ** |
| **(Dollars in thousands)** | ** ** | **Volume**                                                 | ** ** | **Rate** | ** ** | **Volume** | ** ** | **Total** | ** ** |
| Interest Income            |       |                                                       |       |   |   |   |   |   |   |
| Loans                      |       | $                                                          | (697       | ) | $ | (153 | ) | $ | 24 |   | $ | (826 | ) |
| Investment securities  (1) |       | 479                                                        |       | (209 | ) | (179 | ) | 91 |   |
| Federal funds              |       | 35                                                         |       | (3 | ) | (13 | ) | 19 |   |
| Total Interest Income      | ** ** | **$**                                                      | **(183**   | **)** | **$** | **(365** | **)** | **$** | **(168** | **)** | **$** | **(716** | **)** |
|                       |       |                                                       |       |   |   |   |   |   |   |
| Interest Expense           |       |                                                       |       |   |   |   |   |   |   |
| Deposits                   |       | $                                                          | 443        |   | $ | (117 | ) | $ | (32 | ) | $ | 294 |   |
| Other borrowings           |       | (180                                                       | )          | 241 |   | (98 | ) | (37 | ) |
| Total Interest Expense     | ** ** | **$**                                                      | **263**    | ** ** | **$** | **124** | ** ** | **$** | **(130** | **)** | **$** | **257** | ** ** |
|                       |       |                                                       |       |   |   |   |   |   |   |
| Net Interest Income        | ** ** | **$**                                                      | **(446**   | **)** | **$** | **(489** | **)** | **$** | **(38** | **)** | **$** | **(973** | **)** |

 

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(1)      For the purpose of thistable, the investment securities include marketable and non-marketablesecurities.

 

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*AverageBalances, Income and Expenses and Rate*

 

The following table sets forth, for the nine monthsended March 31, 2010 and 2009, information related to the Company’saverage balance sheet and its average yields on earning assets and averagecosts of interest-bearing liabilities.  Such yields are derived by dividing income orexpense by the average balance of the corresponding earning assets orinterest-bearing liabilities.  Averagebalances have been derived from the daily balances throughout the periodsindicated.

 
| ** **                                          | ** ** | **Three  Months Ended********March 31, 2010** | ** **  | **Three  Months Ended********March 31, 2009** | ** ** |
|-----------------------------------------------------|------------|----------------------------------------------------|-------------|----------------------------------------------------|------------|
| ** **                                          | ** ** | **Average**                                        | ** **  | **Income  /**                                      | ** ** | **Yield/** | ** ** | **Average** | ** ** | **Income  /** | ** ** | **Yield  /** | ** ** |
| **(Dollars  in thousands)**                         | ** ** | **Balance**                                        | ** **  | **Expense**                                        | ** ** | **Rate** | ** ** | **Balance** | ** ** | **Expense** | ** ** | **Rate** | ** ** |
| **Assets**                                          |       |                                               |        |                                               |       |   |   |   |   |   |   |   |   |
| Earning assets:                                     |       |                                               |        |                                               |       |   |   |   |   |   |   |   |   |
| Loans (1)                                           |       | $                                                  | 268,880     |                                               | $          | 3,543 |   | 5.34 | % | $ | 319,943 |   | $ | 4,369 |   | 6.76 | % |
| Investment securities (2)                           |       | 93,156                                             |        | 648                                                |       | 2.82 | % | 50,062 |   | 557 |   | 4.99 | % |
| Federal funds sold and other                        |       | 54,004                                             |        | 26                                                 |       | 0.20 | % | 8,994 |   | 7 |   | 3.57 | % |
| Total earning assets                                |       | 416,040                                            |        | 4,217                                              |       | 4.11 | % | 378,999 |   | 4,933 |   | 6.43 | % |
| Cash and due from banks                             |       | 8,093                                              |        |                                               |       |   |   | 6,957 |   |   |   |   |   |
| Premises and equipment                              |       | 3,796                                              |        |                                               |       |   |   | 4,619 |   |   |   |   |   |
| Other assets                                        |       | 11,794                                             |        |                                               |       |   |   | 12,295 |   |   |   |   |   |
| Allowance for loan losses                           |       | (13,013                                            | )           |                                               |       |   |   | (8,097 | ) |   |   |   |   |
| Total assets                                        | ** ** | **$**                                              | **426.710** |                                               |       |   |   | ** ** | **$** | **394,773** |   |   |   |   |   |
| ** **                                          |       |                                               |        |                                               |       |   |   |   |   |   |   |   |   |
| **Liabilities**                                     |       |                                               |        |                                               |       |   |   |   |   |   |   |   |   |
| Interest-bearing liabilities:                       |       |                                               |        |                                               |       |   |   |   |   |   |   |   |   |
| Repurchase agreements                               |       | $                                                  | 30,000      |                                               | 283        |   | 3.83 | % | $ | 30,000 |   | 240 |   | 3.24 | % |
| Federal funds purchased                             |       | —                                             |        | —                                             |       | — | % | 631 |   | 1 |   | 0.64 | % |
| Federal Home Loan Bankadvances                      |       | —                                             |        | —                                             |       | — | % | 21,833 |   | 72 |   | 1.34 | % |
| Note Payable                                        |       | —                                             |        | —                                             |       | — | % | 1,006 |   | 7 |   | 2.82 | % |
| Subordinated Debt                                   |       | 4,325                                              |        | 123                                                |       | 11.50 | % | 4,325 |   | 123 |   | 11.50 | % |
| Interest-bearing transaction accounts               |       | 18,368                                             |        | 27                                                 |       | 0.60 | % | 17,579 |   | 53 |   | 1.22 | % |
| Savings deposits                                    |       | 71,505                                             |        | 450                                                |       | 2.55 | % | 14,642 |   | 60 |   | 1.66 | % |
| Time deposits                                       |       | 269,471                                            |        | 1,454                                              |       | 2.19 | % | 250,624 |   | 1,524 |   | 2.47 | % |
| Total interest-bearing liabilities                  |       | 393,669                                            |        | 2,337                                              |       | 2.41 | % | 340,640 |   | 2,080 |   | 2.35 | % |
| Demand deposits                                     |       | 22,094                                             |        |                                               |       |   |   | 22,493 |   |   |   |   |   |
| Accrued interest and other liabilities              |       | 2,207                                              |        |                                               |       |   |   | 1,280 |   |   |   |   |   |
| Total liabilities                                   |       | 417,970                                            |        |                                               |       |   |   | 364,413 |   |   |   |   |   |
| Shareholders’ equity                           |       | 8,740                                              |        |                                               |       |   |   | 30,360 |   |   |   |   |   |
| Total liabilities and****shareholders’  equity |       | **$**                                              | **426,710** |                                               |       |   |   |   | **$** | **394,773** |   |   |   |   |   |
| ** **                                          |       |                                               |        |                                               |       |   |   |   |   |   |   |   |   |
| Net interest income                                 |       |                                               | ** **  | **$**                                              | **1,880**  |   |   |   |   | ** ** | **$** | **2,853** |   |   |   |
| Net interest spread                                 |       |                                               |        |                                               | ** ** | **1.70** | **%** |   |   |   | ** ** | **2.80** | **%** |
| Net interest margin                                 |       |                                               |        |                                               | ** ** | **1.83** | **%** |   |   |   | ** ** | **3.05** | **%** |

 

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(1)               There were $32.7 million and $16.7 million of loans innon-accrual status as of March 31, 2010 and 2009, respectively, that wereincluded in the loan balance.  The effectof fees collected on loans for the three months ended March 31, 2010 and2009 totaled $9,000 and $40,000, respectively, and increased the annualizedyield on loans by 1 basis point from 5.33% for March 31, 2010 and by 5basis points from 5.49% for March 31, 2009.  The effect of such fees on the annualizedyield on earning assets was an increase of 1 basis point from 4.10% for March 31,2010 and an increase of 4 basis points from 5.24% for March 31, 2009.  The effects of such fees on net interestspread were an increase of 1 basis point from 1.69% for March 31, 2010 andan increase of 4 basis points from 2.76% for March 31, 2009.  The effects of such fees on net interestmargin were an increase of 1 basis point from 1.82% for March 31, 2010 andan increase of 4 basis points from 3.01% for March 31, 2009.

 

(2)               For the purpose of thistable, the investment securities include marketable and non-marketablesecurities.

 

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*Provision for Loan Losses*

 

Our provision for loanlosses for the three months ended March 31, 2010 was $1,000,000 comparedto $1,305,000 for the comparable prior year period. This was a result of thecontinued deterioration of our loan portfolio. ** **As noted earlier, we haveapproximately $36.2 million of acquisition and development (A&D) loansoutstanding at March 31, 2010.  Weare experiencing higher levels of loan delinquencies, defaults andforeclosures.  Further, the downturn inthe real estate market has adversely impacted the value of the underlyingcollateral (real estate) for the A&D loans. The greater degree of strain on these types of loans and thesignificance to our overall loan portfolio has caused us to apply a greaterdegree of scrutiny in analyzing the ultimate collectability of amounts due.

 

*Non-interest Income*

 

We had non-interest income of $422,000 and $814,000 for the threemonths ended March 31, 2010 and 2009, respectively.  The decrease was mainly due to a $520,000gain on sale of securities for the three months ended March 31, 2009compared to a gain of $54,000 for the three months ended March 31,2010.  Mortgage origination revenue forthe three months ended March 31, 2010 was $163,000.  We had $62,000 in mortgage originationrevenue in the first quarter of 2009. This increase is due to an increased sales staff.

 

*Non-interest Expense*

 

We incurred non-interest expense of $3,407,000 during the three monthsended March 31, 2010, which was an increase of $991,000 over the threemonths ended March 31, 2009. Included in the expense was $1,395,000 of salaries and employee benefits,$216,000 of data processing expense, $354,000 of professional fees expense,$36,000 of advertising expense, $23,000 of expense related to office supplies,$35,000 of telephone expense and $402,000 of assessments related to the FDIC.  The non-interest expense incurred in thethree months ended March 31, 2009 was $2,416,000.  Included in the expense was $1,239,000 ofsalaries and employee benefits, $222,000 of data processing expense, $91,000 ofprofessional fee expense, $36,000 of advertising expense, $23,000 of expenserelated to office supplies, $35,000 of telephone expense and $96,000 ofassessments related to the FDIC.

 

For the three months ended March 31, 2010, we incurred otherproperty and equipment expenses of $176,000 in depreciation and $77,000 inequipment maintenance and rental.  Forthe three months ended March 31, 2009, we incurred other property andequipment expenses of $180,000 in depreciation and $42,000 in equipmentmaintenance and rental.  We incurred$182,000 and $171,000 in occupancy expense related to all of our officelocations for the three months ended March 31, 2010 and 2009,respectively.

 

The increase in non-interest expense is the result of the increasedadministrative expenses including an increase in professional fees of $263,000,increased assessments related to the FDIC of $306,000, and an increase in loanexpenses of $175,000 resulting from the increased cost of problem loans andforeclosures.

 

**Assets and Liabilities**

 

*General*

 

At March 31, 2010, total assets increased 4.6% to$440.9 million as compared to $421.5 million at December 31, 2009,primarily a result of an increase in investments of $54.8 million, or 52.9%,offset by a decrease in federal funds sold of $20.7 million, or 66.8%, and adecrease of $15.4 million in gross loans, or 5.6%, during the first threemonths of 2010.  As described below,federal funds sold decreased to $10.3 million at March 31, 2010 comparedto $31.0 million at December 31, 2009. Cash and cash equivalents decreased $19.9 million, or 52.4%, since December 31,2009.  As described below, depositsincreased $20.38 million, or 5.4%, during the first three months of 2010.  At March 31, 2010, shareholders’ equitywas $8.0 million.

 

*Investment Securities*

 

Investments available for sale increased by $54.8 million, or 52.9%,since December 31, 2009 due to the purchase of short-term US treasurysecurities of $80 million coupled with the sale of $26.1 million of mortgagebacked securities.  This general increasein securities is due to our efforts to increase liquidity in anticipation ofrepayment of brokered deposits scheduled to mature in 2010.

 

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*Other Investments*

 

Other investments, consisting of FHLB stock, were $1.6 million for bothMarch 31, 2010 and December 31, 2009. All of the FHLB stock is used to collateralize advances with the FHLB.

 

*Loans*

 

Since loans typically provide higher interest yields than other typesof interest earning assets, we allocate the majority of our earning assets toour loan portfolio.  Gross loansdecreased by $15.4 million, or 5.6%, during the first three months of2010.  Loan demand has slowed during thefirst quarter of 2010 due to general economic conditions and the real estatemarket, along with management’s decision to shrink the size of the Bank’s loanportfolio, to help improve the Bank’s risk profile.****Weexpect this trend to continue during the next quarter.

 

Balances within major loan categories are as follows:

 
| **(dollar amounts in thousands)** | ** ** | **March 31, 2010** | ** **  | **December 31, 2009** | ** ** |
|-----------------------------------|------------|-------------------------|-------------|----------------------------|------------|
| Real estate -  construction       |       | $                       | 74,749      |                       | $          | 81,128 |   |
| Real estate - mortgage            |       | 161,480                 |        | 167,296                    |       |
| Commercial and  industrial        |       | 22,063                  |        | 25,028                     |       |
| Consumer and other                |       | 1,447                   |        | 1,652                      |       |
| Total loans, gross                |       | 259,739                 |        | 275,104                    |       |
| Less allowance for loan  losses   |       | (12,941                 | )           | (12,963                    | )          |
| Total loans, net                  | ** ** | **$**                   | **246,798** | ** **                 | **$**      | **262,141** | ** ** |

 

Generally, we place a delinquent loan in non-accrual status when the loan becomes 90 days or more past due.  Additionally, we discontinue accrual of interest on a loan when we conclude it is doubtful that we will be able to collect the full amount of principal and interest from the borrower.  We reach this conclusion by taking into account factors such as the borrower’s financial condition, economic and business conditions, value of the collateral underlying the loan, and the results of our previous collection efforts.    When we place a loan in non-accrual status, we reverse all interest which has been accrued on the loan but remains unpaid and we deduct this interest from earnings as a reduction of reported interest income.  We do not accrue any additional interest on the loan balance until we conclude the collection of both principal and interest is reasonably certain.  At March 31, 2010, there were $32.7 million in loans that were non-accruing and $6.5 million in loans that were 30 days past due, excluding non-accrual loans.  At December 31, 2009, there were $29.4 million in loans that were non-accruing and $4.8 million in loans that were 30 days past due, excluding non-accrual loans.

 

The increase of $3.3 million in non-accrual loans from December 31,2009 to March 31, 2010 is related primarily to continued deterioration inthe Bank’s overall Commercial Real Estate loan portfolio. The number of loanson non-accrual has decreased from 79 to 71 since December 31, 2009. Theaverage non-accrual loan balance is $372,000 and $460,000 as of December 31,2009 and March 31, 2010, respectively. At March 31, 2010, 96.7% of the non-accrual loans were secured byreal estate. At this time, management is unable to determine the length of theeconomic downturn and therefore unable to determine the ultimate impact on theBank’s Commercial Real Estate portfolio.

 

We have approximately $36.2million of A&D loans as of March 31, 2010, most of which are onproperties located in the Upstate of South Carolina and Western NorthCarolina.  A&D loans are typicallycomprised of loans to borrowers for real estate to be developed (into propertiessuch as sub-divisions or spec houses). Normally, these loans are repaid with the proceeds from the sale of thedeveloped property.  The greater degreeof strain on these types of loans and the significance to our overall loanportfolio has caused us to apply a greater degree of scrutiny in analyzing theultimate collectability of amounts due. The majority of these borrowers are having financial difficulties.  Our analysis has resulted in a significantprovision expense in order to meet the estimated allowance for loan lossreserve requirement.

 

Included in our loanssecured by real estate, we have approximately $37.2 million of acreage andfinished or buildable lot loans as of March 31, 2010.  These loans are comprised of loans toborrowers for raw land and lots in subdivisions that have utilities and areready to be built on individually but not as part of an entire developmentproject.  These loans are generallyrepaid with the proceeds from the sale of the property.  Many of these borrowers are also experiencingfinancial difficulties.

 

The current economicenvironment in our market area has resulted in a downturn in the real estatemarket, which has placed greater pressure on our borrowers’ repaymentcapabilities.  We are experiencing higherlevels of loan delinquencies, defaults and foreclosures.  Further, the downturn in the real estatemarket has adversely impacted the value of the underlying real estate securingthe loans.  The greater degree of strainon these types of loans and the significance to our overall loan 

 

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portfolio has caused usto apply a greater degree of scrutiny in analyzing the ultimate collectabilityof amounts due.  Our analysis hasresulted in a significant provision expense recorded in 2009, and an additional$1,000,000 recorded in the first quarter of 2010, in order to meet theestimated allowance for loan loss reserve requirement.  Nevertheless, given the current economicenvironment, there is a risk of further impairment to the value of ourcollateral on these loans, which would require even further increases to ourallowance for loan losses and in the corresponding expense charged to ourprovision for loan losses.

 

Changes in the allowance for loan losses for were asfollows (dollars in thousands):

 
| ** **                       | ** ** | **Three-months ended  March 31, 2010** | ** ** | **Three-months ended  March 31, 2009** | ** ** |
|----------------------------------|------------|---------------------------------------------|------------|---------------------------------------------|------------|
| Balance, beginning of  period    |       | $                                           | 12,963     |                                        | $          | 8,088 |   |
| Provision charged to  operations |       | 1,000                                       |       | 1,305                                       |       |
| Net collections  (charge-offs)   |       | (1,022                                      | )          | 20                                          |       |
| Balance, end of period           | ** ** | **$**                                       | **12,941** | ** **                                  | **$**      | **9,413** | ** ** |

 

*Impaired Loans*

 

The Company identifies impaired loans through its normal internal loan review process.  Loans are considered to be impaired when, in management’s judgment and based on current information, the full collection of principal and interest becomes doubtful according to the contractual terms of the loan agreement.  A loan is also considered impaired if its terms are modified in a troubled debt restructuring.  These loans are evaluated in determining whether all outstanding principal and interest are expected to be collected.  Loans are not considered impaired if a minimal payment delay occurs and all amounts due, including accrued interest at the contractual interest rate for the period of delay, are expected to be collected.  Management has determined that the Company had $43.9 million and $34.2 million in impaired loans at March 31, 2010 and December 31, 2009, respectively.  $2.7 and $2.0 million of the allowance for loan loss has been specifically allocated to these relationships at March 31, 2010 and December 31, 2009, respectively.

 

*Potential ProblemLoans*

 

Potential problem loans are loans that are not included in impaired loans, but about which management has become aware of information about possible credit problems of the borrowers that causes doubt about their ability to comply with current repayment terms.  Loans on the Company’s potentially problem loan list are considered potentially impaired loans.  At March 31, 2010 and December 31, 2009, the Company had identified $16.3 million and $15.9 million, respectively, of potential problem loans through its internal review procedures.  The results of this internal review process are considered in determining management’s assessment of the adequacy of the allowance for loan losses.

 

*Provision andAllowance for Loan Losses*

 

The Company has developed policies and procedures for evaluating theoverall quality of its credit portfolio and the timely identification ofpotential problem loans.  On a quarterlybasis, the Company’s Board of Directors reviews and approves the appropriatelevel for the Company’s allowance for loan losses based upon management’srecommendations, the results of the internal monitoring and reporting system,and an analysis of economic conditions in its market.  In 2009, the Company developed and began toimplement an improved loan review program, which included the hiring of a newinternal loan review officer and the engagement of a new external loan reviewfirm and the establishment of a new system for tracking borrower financialstatements and the structure of our watch reports.

 

In addition to the Company’s portfolio review process, variousregulatory agencies periodically review the Company’s allowance for loanlosses.  These agencies may require theCompany to recognize additions to the allowance for loan losses based on theirjudgments and information available to them at the time of their examinations.While the Company uses available information to recognize inherent losses onloans, future adjustments to the allowance for loan losses may be necessarybased on changes in economic conditions and other factors and the impact ofsuch changes and other factors on the Bank’s borrowers.

 

Portions of the allowance for loan losses may be allocated for specificloans or portfolio segments.  However,the entire allowance for loan losses is available for any loan that, inmanagement’s judgment, should be charged-off. While management utilizes the best judgment and information available toit, the ultimate adequacy of the allowance for loan losses depends on a varietyof factors beyond the Company’s control, including the performance of theCompany’s loan portfolio, the economy, changes in interest rates, and the viewof the regulatory authorities toward loan classifications.

 

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Additions to the allowance for loan losses, which are expensed throughthe provision for loan losses on the Company’s income statement, are madeperiodically to maintain the allowance at an appropriate level based onmanagement’s analysis of the estimated losses inherent in the loanportfolio.  Loan losses and recoveriesare charged or credited directly to the allowance.  The amount of the provision is a function ofthe level of loans outstanding, the level of non-performing loans, historicalloan loss experience, the amount of loan losses actually charged against thereserve during a given period, and current and anticipated economic conditions.

 

The Company’s allowance for loan losses is based upon judgments andassumptions about risk elements in the portfolio, future economic conditions,and other factors affecting borrowers. The process includes identification and analysis of loss potential invarious portfolio segments utilizing a credit risk grading process and specificreviews and evaluations of significant problem credits.  However, there is no precise method ofestimating credit losses, since any estimate of loan losses is necessarilysubjective and the accuracy depends on the outcome of future events.  In addition, due to our rapid growth over thepast several years and our limited operating history, a large portion of theloans in our loan portfolio was originated recently.  In general, loans do not begin to show signsof credit deterioration or default until they have been outstanding for someperiod of time, a process referred to as seasoning.  As a result, a portfolio of more mature loanswill usually behave more predictably than a newer portfolio.  Because our loan portfolio is relatively new,the current level of delinquencies and defaults may not be representative ofthe level that will prevail when the portfolio becomes more seasoned, which maybe higher than current levels.  Ifcharge-offs in future periods increase, we may be required to increase our provisionfor loan losses, which would decrease our net income and possibly our capital.

 

The current downturn in the real estate market has resulted in anincrease in loan delinquencies, defaults and foreclosures, and we believe thesetrends are likely to continue.  In somecases, this downturn has resulted in a significant impairment to the value ofour collateral and our ability to sell the collateral upon foreclosure, andthere is a risk that this trend will continue. The real estate collateral ineach case provides an alternate source of repayment in the event of default bythe borrower and may deteriorate in value during the time the credit isextended.  If real estate values continueto decline, it is also more likely that we would be required to increase ourallowance for loan losses.  We determinethe value of real estate collateral by using a current appraisal. Contrary toany other relevant information an appraisal is considered current if it is lessthan 12 months old except when economic or market changes havecaused values to rise or fall significantly. If a current appraisal isnot maintained the Bank will generally order a new appraisal prior to accepting the property as a resultof a deed in lieu of foreclosure or completion of a foreclosure action. Commercialappraisals generally take less than four weeks to complete.  A specificimpairment is made as soon as possibleupon receipt of the appraisal.  Based onpresent information and an ongoing evaluation, management considers theallowance for loan losses to be adequate to meet presently known and inherentlosses in the loan portfolio.  Management’sjudgment about the adequacy of the allowance is based upon a number ofassumptions about future events which it believes to be reasonable but whichmay or may not be accurate.  Thus, there canbe no assurance that charge-offs in future periods will not exceed theallowance for loan losses or that additional increases in the allowance forloan losses will not be required, especially considering the overall weaknessin the commercial real estate market in our market areas.

 

*Deposits*

 

Our primary source of funds for loans and investments is ourdeposits.  As of March 31, 2010,total deposits had increased by $20.3 million, or 5.4%, from December 31,2009.  The largest percentage increasewas in time deposits less than $100,000, which increased $42.7 million, or142.1%, from December 31, 2009 to March 31, 2010.

 

We have chosen to obtain a portion of our certificates of deposit fromareas outside of our market, which are brokered deposits. The deposits obtainedoutside of our market area generally have been below those being offered forcomparable certificates of deposit in our local market. Because of this, eventhough brokered deposits are interest sensitive, they have been considered adesirable source of funds. As of March 31, 2010, we had brokered depositsof $195.9 million, representing 49.36% of our total deposits, of which $79.7million are scheduled to mature in the third quarter of 2010 and $94.9 millionare scheduled to mature in the fourth quarter of 2010.  Because of the limitations on brokereddeposits imposed by the MOU, the Consent Order, and our “significantlyundercapitalized” status, we must find other sources of liquidity to replacethese deposits as they mature.  Secondarysources of liquidity may include proceeds from FHLB advances and federal fundslines of credit from correspondent banks. However, FHLB has informed us that due to our financial condition we arenot currently permitted to receive any more advances.  As a result, we must limit our growth, raiseadditional capital, or sell assets, which could materially and adversely affectour financial condition and results of operations.

 

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In addition, the Bank would normally be restricted from offering aneffective yield on deposits (including brokered deposits, if approval isgranted for the Bank to accept them) of more than 75 basis points over thenational rates published by the FDIC weekly on their website.  However, on April 1, 2010, we appliedfor and received a determination from the FDIC that our market areas were allhigh interest rate areas.  As a result,we have permission to pay deposit rates of up to 75 basis points over the localrates (assuming the local rates exceed the applicable non-local rates) and onnon-local deposits gathered in our normal market area even if these ratesexceed non-local rates by more than 75 basis points.

 

Balances within the major deposit categories are asfollows:

 
| **(dollar amounts in thousands)**  | ** ** | **March 31,  2010** | ** **  | **December 31,  2009** | ** ** |
|------------------------------------|------------|--------------------------|-------------|-----------------------------|------------|
| Non-interest  bearing demand       |       | $                        | 24,551      |                        | $          | 21,829 |   |
| Interest bearing  demand           |       | 18,512                   |        | 18,588                      |       |
| Savings                            |       | 66,958                   |        | 82,295                      |       |
| Time deposits  less than $100,000  |       | 72,751                   |        | 30,054                      |       |
| Time deposits of  $100,000 or over |       | 18,169                   |        | 21,014                      |       |
| Brokered  deposits                 |       | 195,884                  |        | 202,783                     |       |
| Total deposits                     | ** ** | **$**                    | **396,825** | ** **                  | **$**      | **376,563** | ** ** |

 

Maturities of Certificatesof Deposit of $100,000 or More (Including Brokered Deposits)

 
| ** **                                         | ** ** | ** ** | ** ** | **After**   | ** ** | **After**   | ** ** | ** ** | ** ** | ** ** | ** ** |
|----------------------------------------------------|------------|------------|------------|-------------|------------|-------------|------------|------------|------------|------------|------------|
| ** **                                         | ** ** | ** ** | ** ** | **Three**   | ** ** | **Six**     | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                         | ** ** | **Within** | ** ** | **Through** | ** ** | **Through** | ** ** | **After**  | ** ** | ** ** | ** ** |
| ** **                                         | ** ** | **Three**  | ** ** | **Six**     | ** ** | **Twelve**  | ** ** | **Twelve** | ** ** | ** ** | ** ** |
| **(Dollars in thousands)**                         | ** ** | **Months** | ** ** | **Months**  | ** ** | **Months**  | ** ** | **Months** | ** ** | **Total**  | ** ** |
| **March 31,  2010**                           |       |       | ** ** | ** **  | ** ** | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Brokered  deposits                                 |       | $          | 21,269     |        | $          | 79,739      |       | $          | 94,876     |       | $          | — |   | $ | 195,884 |   |
| Other  certificates of deposit of $100,000 or more |       | 7,690      |       | 4,864       |       | 3,797       |       | 1,818      |       | 18,169     |       |
| Total                                              |       | $          | 28,959     |        | $          | 84,603      |       | $          | 98,673     |       | $          | 1,818 |   | $ | 214,053 |   |
|                                               |       |       |       |        |       |        |       |       |       |       |       |
| **December 31,  2009**                        |       |       | ** ** | ** **  | ** ** | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Brokered  deposits                                 |       | $          | 6,800      |        | $          | 21,269      |       | $          | 174,714    |       | $          | — |   | $ | 202,783 |   |
| Other  certificates of deposit of $100,000 or more |       | 4,692      |       | 7,868       |       | 6,624       |       | 1,830      |       | 21,014     |       |
| Total                                              |       | $          | 11,492     |        | $          | 29,137      |       | $          | 181,338    |       | $          | 1,830 |   | $ | 223,797 |   |

 

Of the Company’s time deposits of $100,000 or over as of March 31,2010 and December 31, 2009, 13.53% and 5.14% are scheduled maturitieswithin three months, respectively. As of March 31, 2010 and December 31,2009, 99.15% and 99.18%, respectively, of the Company’s time deposits of$100,000 or over had maturities within twelve months.

 

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*Subordinated Debt*

 

During the third quarter of 2008, we commenced asubordinated debt offering to enhance and strengthen the levels of capital andliquidity at the holding company such that we could improve the levels ofregulatory capital at the Bank. We raised $4.325 million in additional capitalbefore we closed the offering on October 15, 2008.  The subordinated notes were sold to a limitednumber of purchasers in a private offering, bear an interest rate of 11.5%, arecallable after September 30, 2011, at a premium, and mature in 2018. Thesubordinated debt has been structured to fully count as Tier 2 regulatorycapital on a consolidated basis.  At March 31,2010, the Company had subordinated debt totaling $4.3 million.

 

Due to diminishing cash available at the holdingcompany level, if we are unable to raise additional capital, we may have todiscontinue paying interest on the subordinated debentures after the March 2010payments due to lack of funds.

 

*Federal Home Loan Bank Advances, Fed Funds Lines of Credit, Federal Reserve Discount Window, and Securities Sold Under Agreements to Repurchase*

 

Our other borrowings have traditionally includedproceeds from FHLB advances, federal funds lines of credit from correspondentbanks, and securities sold under agreements to repurchase.  As of March 31, 2010 the FHLB hasinformed us that due to our financial condition we are not currently permittedto receive any more advances. At March 31, 2010, we had federal fundslines of credit with unrelated banks totaling $5 million.  These lines are available for generalcorporate purposes.  These lines may beterminated at any time based on our financial condition. We also have creditavailability through the Federal Reserve Discount Window.  As of March 31, 2010, $6.2 million wasavailable, based on qualifying collateral. The Federal Reserve Discount Window borrowing capacity has beencurtailed to only overnight terms, contingent upon credit approval for eachtransaction.  Availability of the FederalReserve Discount Window may be terminated at any time by the Federal Reserve,and we can make no assurances that this funding source will continue to beavailable to us.  At March 31, 2010,the Bank had $30.0 million of securities under agreements to repurchase withbrokers with a weighted average rate of 4.16% and an average maturity of 75months.  The maximum amount outstandingat any month-end was $30.0 million. These agreements were secured with approximately $35.9 million ofinvestment securities.  In addition, theBank is now in default under a $15.0 million repurchase agreement due to theBank’s “significantly undercapitalized” designation.  However the broker has elected to amend theagreement and waive their right to terminate based on this issue, through December 31,2010, in exchange for the Bank providing an additional 7% of collateral basedon the outstanding balance.

 

**Liquidity**

 

Liquidity  is the  ability to  meet  current and  future  obligations through liquidation or maturity of existing  assets or the acquisition of  liabilities.  We manage both assets and liabilities toachieve appropriate levels of liquidity. Cash, federal funds and investments available for sale are our primarysources of asset liquidity.  These fundsprovide a cushion against short-term fluctuations in cash flow from bothdeposits and loans.  Historically,individual and commercial deposits have been our primary source of funds forcredit activities.  These includebrokered deposits, which comprise 49.4% of our deposit base as of March 31,2010.  These have proven to be a reliablesource of funds.  However, pursuant tothe Consent Order and our current financial condition, our ability to accessbrokered deposits through the wholesale funding market is restricted.  Specifically, the Consent Order restricts theBank’s ability to accept, renew, or rollover brokered deposits.  Management believes that this will not haveany liquidity impact through the third quarter of 2010 due to the extendedmaturities of the brokered deposits and the amount of short-term investments andfederal funds sold at March 31, 2010, but management believes this couldcause funding issues in the fourth quarter of 2010.  With access to the brokered deposit marketunavailable, the Bank must replace those funds with core deposits.  Deposit balances, net of brokered deposits,have increased $27.2 million from December 31, 2009 to March 31,2010.  This was due to intentionalrestructuring to replace brokered deposits with local and internet obtaineddeposits.  We anticipate that our fundingcost and funding mix will now remain stable until the maturity of the brokereddeposits through the third quarter of 2010.

 

In addition to our on balance sheet sources of funds, we also rely on off-balance sheet lines of credit.  At March 31, 2010, we had lines of credit with a correspondent bank totaling $5 million.  This line is available for general corporate purposes.  This line may be terminated at any time based on our financial condition. We also have credit availability through the Federal Reserve Discount Window.  As of March 31, 2010, $6.2 million was available, based on qualifying collateral.  The Federal Reserve Discount Window borrowing capacity has been curtailed to only overnight terms, contingent upon credit approval for each transaction.  Availability of the Federal Reserve Discount Window may be terminated at any time by the Federal Reserve, and we can make no assurances that this funding source will continue to be available to us.  In addition, the FHLB has informed us that due to our financial condition we are not currently permitted to receive any more advances.

 

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Following the execution of the Consent Order with the FDIC and theSouth Carolina Board of Financial Institutions, we  revised our comprehensive liquidity riskmanagement program.  This programassesses our current and projected funding needs to ensure that sufficientfunds or access to funds exist to meet those needs.  The program includes effective methods toachieve and maintain sufficient liquidity and to measure and monitor liquidityrisk including the preparation and submission of liquidity reports on a regularbasis to the FDIC.  The program containsa contingency funding plan that forecasts funding needs and funding sourcesunder different stress scenarios.  Ourplan details how the Bank is complying with the restrictions in the ConsentOrder, including the restriction against brokered deposits, as well asproviding reports detailing all funding sources and obligations under best caseand worse case scenarios.

 

The level of liquidity is measured by the cash, cash equivalents and unpledged securities available for sale to total assets ratio, which was at 30.6% at March 31, 2010, compared to 23.8% at December 31, 2009. We anticipate that this will continue to increase with the combination of deposit growth and shrinkage of assets until the brokered deposits are paid off or mature during the remainder of 2010.

 

We believe our liquiditysources are adequate to meet our needs through the third quarter of 2010.  However, based on current sources ofliquidity, our sources may be insufficient in the fourth quarter of 2010. Seesection “Maturities of Certificates of Deposit of $100,000 or More (IncludingBrokered Deposits)” above.  If we areunable to meet our liquidity needs during the fourth quarter of 2010, then theBank may be placed into a federal conservatorship or receivership by the FDIC,with the FDIC appointed as conservator or receiver.

 

**Impactof Off-Balance Sheet Instruments**

 

Through the operations of our Bank, we have made contractualcommitments to extend credit in the ordinary course of our businessactivities.  These commitments arelegally binding agreements to lend money to our customers at predeterminedinterest rates for a specified period of time. At March 31, 2010, we had issued commitments, including standbyletters of credit, to extend credit of $13.3 million through various types oflending arrangements.  We evaluate eachcustomer’s credit worthiness on a case-by-case basis.  The amount of collateral obtained, if deemednecessary by us upon extension of credit, is based on our credit evaluation ofthe borrower.  Collateral varies but mayinclude accounts receivable, inventory, property, plant and equipment,commercial and residential real estate. We manage the credit risk on these commitments by subjecting them tonormal underwriting and risk management processes.  The following table summarizes ouroff-balance-sheet financial instruments whose contract amounts represent creditrisk:

 
| **(dollar amounts in thousands)** | ** ** | **March 31, 2010** | ** ** | **December 31, 2009** | ** ** |
|-----------------------------------|------------|-------------------------|------------|----------------------------|------------|
|                              |       |                    |       |                       |       |
| Commitments to extend  credit     |       | $                       | 11,855     |                       | $          | 14,451 |   |
|                              |       |                    |       |                       |       |
| Standby letters of  credit        |       | $                       | 1,468      |                       | $          | 1,525 |   |

 

**Capital Resources**

 

Total shareholders’ equity decreased from $8.7 million at December 31,2009 to $7.5 million at March 31, 2010. The decrease is principally due to the net loss for the period of $2.1million offset partially by an increase in market value of available for salesecurities.

 

The FRB and bank regulatory agencies require bank holding companies andfinancial institutions to maintain capital at adequate levels based on apercentage of assets and off-balance sheet exposures, adjusted for risk weightsranging from 0% to 100%.

 

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The FRB guidelines contain an exemption from the capital requirementsfor “small bank holding companies” to cover most bank holding companies withless than $500 million in total assets that do not have a material amount ofdebt or equity securities outstanding registered with the SEC.  Although our class of common stock isregistered under Section 12 of the Securities Exchange Act, we believethat because our stock is not listed on any exchange or otherwise activelytraded, the FRB will interpret its new guidelines to mean that we qualify as asmall bank holding company. Nevertheless, our Bank remains subject to these capitalrequirements.  Failure to meet minimumcapital requirements can initiate certain mandatory and possibly additionaldiscretionary actions by regulators that, if undertaken, could have a directmaterial effect on the Bank’s financial statements.  Under capital adequacy guidelines and theregulatory framework for prompt corrective action, the Bank must meet specificcapital guidelines that involve quantitative measures of the Bank’s assets,liabilities, and certain off-balance sheet items as calculated under regulatoryaccounting practices.  The Bank’s capitalamounts and classifications are also subject to qualitative judgments by theregulators about components, risk weightings, and other factors.

 

Under the capital adequacy guidelines, regulatory capital is classifiedinto two tiers.  These guidelines requirean institution to maintain a certain level of Tier 1 and Tier 2 capital torisk-weighted assets.  Tier 1 capitalconsists of common shareholders’ equity, excluding the unrealized gain or losson securities available for sale, minus certain intangible assets.  In determining the amount of risk-weightedassets, all assets, including certain off-balance sheet assets, are multipliedby a risk-weight factor of 0% to 100% based on the risks believed to beinherent in the type of asset.  Tier 2capital consists of Tier 1 capital plus the general reserve for loan losses,subject to certain limitations.  We arealso required to maintain capital at a minimum level based on total averageassets, which is known as the Tier 1 leverage ratio.

 

At the Bank level, we are subject to various regulatory capitalrequirements administered by the federal banking agencies.  Under the regulations adopted by the federalregulatory authorities, a bank will be categorized as:

 

·                  Well capitalized if the institution has a total risk-based capitalratio of 10.0% or greater, a Tier 1 risk-based capital ratio of 6.0% orgreater, a leverage ratio of 5.0% or greater, and is not subject to any orderor written directive by any such regulatory authority to meet and maintain aspecific capital level for any capital measure.

·                  Adequately capitalized if the institution has a total risk-basedcapital ratio of 8.0% or greater, a Tier 1 risk-based capital ratio of4.0% or greater, a leverage ratio of 4.0% or greater, and is not categorized aswell capitalized.

·                  Undercapitalized if the institution has a total risk-based capitalratio that is less than 8.0%, a Tier 1 risk-based capital ratio of less than4.0%, or a leverage ratio of less than 4.0%.

·                  Significantly undercapitalized if the institution has a totalrisk-based capital ratio of less than 6.0%, a Tier 1 risk-based capitalratio of less than 3.0%, or a leverage ratio of less than 3.0%.

·                  Critically undercapitalized if the institution’s tangible equity isequal to or less than 2.0% of average quarterly tangible assets.

 

In addition, aninstitution may be downgraded to, or deemed to be in, a capital category thatis lower than indicated by its capital ratios if it is determined to be in anunsafe or unsound condition or if it receives an unsatisfactory examinationrating with respect to certain matters. A bank’s capital category is determined solely for the purpose ofapplying prompt corrective action regulations, and the capital category may notconstitute an accurate representation of a bank’s overall financial conditionor prospects for other purposes.

 

If a bank is not wellcapitalized, it cannot accept brokered deposits without prior FDICapproval.  In addition, a bank that isnot well capitalized cannot offer an effective yield in excess of 75 basispoints over interest paid on deposits of comparable size and maturity in suchinstitution’s normal market area for deposits accepted from within its normalmarket area, or national rate paid on deposits of comparable size and maturityfor deposits accepted outside the Bank’s normal market area.  Moreover, the FDIC generally prohibits adepository institution from making any capital distributions (including paymentof a dividend) or paying any management fee to its parent holding company ifthe depository institution would thereafter be categorized as undercapitalized.Undercapitalized institutions are subject to growth limitations (anundercapitalized institution may not acquire another institution, establishadditional branch offices or engage in any new line of business unlessdetermined by the appropriate federal banking agency to be consistent with anaccepted capital restoration plan, or unless the FDIC determines that theproposed action will further the purpose of prompt corrective action) and arerequired to submit a capital restoration plan. The agencies may not accept acapital restoration plan without determining, among other things, that the planis based on realistic assumptions and is likely to succeed in restoring thedepository institution’s capital. In addition, for a capital restoration planto be acceptable, the depository institution’s parent holding company mustguarantee that the institution will comply with the capital restoration plan.The aggregate liability of the parent holding company is limited to the lesserof an amount equal to 5.0% of the depository institution’s total assets at thetime it became categorized as undercapitalized or the amount that is necessary(or would have been necessary) to bring the institution into compliance withall capital standards applicable with respect to such institution as of thetime it fails to comply with the plan. If a depository institution fails tosubmit an acceptable plan, it is categorized as significantly undercapitalized.

 

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Significantly undercapitalizedcategorized depository institutions may be subject to a number of requirementsand restrictions, including orders to sell sufficient voting stock to becomecategorized as adequately capitalized, requirements to reduce total assets, andcessation of receipt of deposits from correspondent banks.  The appropriate federal banking agency maytake any action authorized for a significantly undercapitalized institution ifan undercapitalized institution fails to submit an acceptable capitalrestoration plan or fails in any material respect to implement a plan acceptedby the agency.  A criticallyundercapitalized institution is subject to having a receiver or conservatorappointed to manage its affairs and for loss of its charter to conduct bankingactivities.

 

An insured depositoryinstitution may not pay a management fee to a bank holding company controllingthat institution or any other person having control of the institution if,after making the payment, the institution would be undercapitalized.  In addition, an institution cannot make acapital distribution, such as a dividend or other distribution, that is insubstance a distribution of capital to the owners of the institution iffollowing such a distribution the institution would be undercapitalized.  Thus, if payment of such a management fee orthe making of such would cause a bank to become undercapitalized, it could notpay a management fee or dividend to the bank holding company.

 

At March 31, 2010, the Bank was categorized as “significantly undercapitalized”under the regulatory framework.  As of December 31,2009, the Bank was categorized “undercapitalized” under the regulatoryframework.

 

The Bank’s regulatorycapital ratios are set forth in the following table (dollars in thousands).

 
| ** **                                | ** ** | **March 31,  2010** | ** ** | **December 31,  2009** | ** ** |
|-------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                | ** ** | **Amount**               | ** ** | **Ratio**                   | ** ** | **Amount** | ** ** | **Ratio** | ** ** |
|                                      |       |                     |       |                        |       |   |   |   |   |
| Tier 1 capital  (to risk-weighted assets) |       | $                        | 11,685     |                        | 4.62       | % | $ | 13,643 |   | 4.96 | % |
| Total capital  (to risk-weighted assets)  |       | 14,969                   |       | 5.91                        |       | 17,201 |   | 6.25 |   |
| Tier 1 capital  (to average assets)       |       | 11,685                   |       | 2.74                        |       | 13,643 |   | 3.12 |   |
|                                           |            |                          |            |                             |            |  |  |  |  |  |  |

 

Our losses for 2009 andthe first quarter of 2010 have adversely impacted our capital. As a result, wehave been pursuing a plan to increase our capital ratios in order to strengthenour balance sheet and satisfy the commitments required under the Consent Orderthat we entered into with the FDIC and the South Carolina Board of FinancialInstitutions on February 23, 2010. In addition, the Consent Order requiresus to achieve and maintain, by June 23, 2010, Total Risk Based capital atleast equal to 10% of risk-weighted assets and Tier 1 capital at least equal to8% of total assets.  Our auditors havenoted that the uncertainty of our ability to obtain sufficient capital oraddress our upcoming liquidity needs raises substantial doubt about our abilityto continue as a going concern.

 

**Critical Accounting Policies**

 

We have adopted various accounting policies thatgovern the application of accounting principles generally accepted in theUnited States of America and with general practices within the banking industryin the preparation of our financial statements. Our significant accounting policies are described in Note 2 to thefinancial statements.

 

Certain accounting policies involve significant judgments andassumptions by us that have a material impact on the carrying value of certainassets and liabilities.  We considerthese accounting policies to be critical accounting policies.  The judgments and assumptions we use arebased on historical experience and other factors, which we believe to bereasonable under the circumstances. Because of the nature of the judgments and assumptions we make, actualresults could differ from these judgments and estimates that could have amaterial impact on the carrying values of our assets and liabilities and ourresults of operations.

 

We believe the allowance for loan losses is the critical accounting policy that requires the most significant judgments and estimates used in preparation of our consolidated financial statements.  Some of the more critical judgments supporting the amount of our allowance for loan losses include judgments about the credit worthiness of borrowers, the estimated value of the underlying collateral, the assumptions about cash flows, the determination of loss factors for estimating credit losses, the impact of current events, and conditions, and other factors impacting the level of probable inherent losses.  Under different conditions or using different assumptions, the actual amount of credit losses incurred by us may be different from management’s estimates provided in our consolidated financial statements.  Refer to the portion of this discussion that addresses our allowance for loan losses for a more complete discussion of our processes and methodology for determining our allowance for loan losses.

 

*Allowancefor Loan Losses*

 

The allowance for loanlosses represents an amount that we believe will be adequate to absorb probablelosses on existing loans that may become uncollectible. Assessing theadequacy of the allowance for loan losses is a process that requires 

 

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considerablejudgment. Our judgment in determining the adequacy of the allowance isbased on evaluations of the collectability of loans, including consideration offactors such as the balance of impaired loans; the quality, mix and size of ouroverall loan portfolio; economic conditions that may affect the borrower’sability to repay; the amount and quality of collateral securing the loans; ourhistorical loan loss experience; and a review of specific problemloans. We adjust the amount of the allowance periodically based onchanging circumstances as a component of the provision for loan losses. Wecharge recognized losses against the allowance and add subsequent recoveriesback to the allowance.

 

We calculate theallowance for loan losses for specific types of loans and evaluate the adequacyon an overall portfolio basis utilizing our credit grading system which weapply to each loan.  We combine our estimates of the reserves needed foreach component of the portfolio, including loans analyzed on a pool basis andloans analyzed individually.  The allowance is divided into twoportions: (1) an amount for specific allocations on significantindividual credits that are considered impaired and (2) a general reserveamount.

 

*SpecificReserve*

 

We analyze individualloans within the portfolio and make allocations to the allowance based on eachindividual loan’s specific factors and other circumstances that affect the collectabilityof the credit. Significant individual credits classified as impaired within ourcredit grading system require both individual analysis and specific allocation.

 

In these situations where a loan is determined to beimpaired (primarily because it is probable that all principal and interest dueaccording to the terms of the loan agreement will not be collected asscheduled), the loan is excluded from the general reserve calculationsdescribed below and is assigned a specific reserve.  We calculatespecific reserves on those impaired loans exceeding $250,000.  Thesereserves are based on a thorough analysis of the most probable source ofrepayment which is usually the liquidation of the underlying collateral, butmay also include discounted future cash flows or, in rare cases, the marketvalue of the loan itself.

 

Generally, for largercollateral dependent loans, current market appraisals are ordered to estimatethe current fair value of the collateral.  However, in situationswhere a current market appraisal is not available, management uses the bestavailable information (including recent appraisals for similar properties,communications with qualified real estate professionals, information containedin reputable trade publications and other observable market data) to estimatethe current fair value.  The estimated costs to sell the subjectproperty are then deducted from the estimated fair value to arrive at the “netrealizable value” of the loan and to determine the specific reserve on eachimpaired loan reviewed.  The credit risk management groupperiodically reviews the fair value assigned to each impaired loan and adjuststhe specific reserve accordingly.

 

*GeneralReserve*

 

We calculate our generalreserve based on a percentage allocation for each of the categories of thefollowing unclassified loan types such as:  real estate, commercial,consumer, A&D/construction and mortgage.  We apply historicaltrend loss factors to each category and adjust these percentages for qualitativeor environmental factors, as discussed below.  The general estimateis then added to the specific allocations made to determine the amount of thetotal allowance for loan losses.

 

We also maintain ourgeneral reserve in accordance with December 2006 regulatory interagency guidancein our assessment of the loan loss allowance.  This general reserveconsiders qualitative or environmental factors that are likely to causeestimated credit losses including, but not limited to:  changes indelinquent loan trends, trends in risk grades and net chargeoffs,concentrations of credit, trends in the nature and volume of the loanportfolio, general and local economic trends, collateral valuations, theexperience and depth of lending management and staff, lending policies andprocedures, the quality of loan review systems, and other external factors.

 

The current economicenvironment has adversely affected our general reserve requirement.  Historical data, environmental factors andloan trends have all deteriorated over the past year.  This has resulted in a larger calculatedgeneral reserve requirement than compared to a year ago.

 

*Other Real Estate Owned*

 

We obtain currentappraisals upon possession of all properties to be held as other real estateowned and adjust property values as appropriate.  Updated appraisals are obtained periodicallyand further adjustments are also made as appropriate based on general marketconditions and other related factors.

 

41

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**Item 3. Quantitative and Qualitative DisclosuresAbout Market Risk.**

 

Not applicable.

 

**Item 4. Controls and Procedures****.**

 

As of the end of theperiod covered by this report, we carried out an evaluation, under thesupervision and with the participation of our management, including our ChiefExecutive Officer and Chief Financial Officer, of the effectiveness of ourdisclosure controls and procedures as defined in Exchange Act Rule 13a-15(e).  Based upon that evaluation, our ChiefExecutive Officer and Chief Financial Officer have concluded that our currentdisclosure controls and procedures are effective as of March 31,2010.  There have been no significantchanges in our internal controls over financial reporting during the fiscalquarter ended March 31, 2010 that have materially affected, or arereasonably likely to materially affect, our internal controls over financialreporting.

 

The design of any systemof controls and procedures is based in part upon certain assumptions about thelikelihood of future events.  There canbe no assurance that any design will succeed in achieving its stated goalsunder all potential future conditions, regardless of how remote.

 

**Part II - Other Information**

 

**Item 1. LegalProceedings.**

 

Not Applicable.

 

**Item 1A. Risk Factors.**

 

Not Applicable due to oursmaller reporting company status.

 

**Item 2. UnregisteredSales of Equity Securities and Use of Proceeds.**

 

Not applicable.

 

**Item 3. Defaults UponSenior Securities.**

 

Not applicable.

 

**Item 4. (Removed andReserved).**

 

**Item 5. OtherInformation.**

 

Not applicable.

 

**Item 6. Exhibits.**

 
| 10.14  | Consent Order with the FDIC and the South Carolina  Board of Financial Institutions dated February 23, 2010 (incorporated by  reference as Exhibit 10.14 to the Company’s Form 10-K filed  March 1, 2010). |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                |
| 31.1   | Rule 13a-14(a) Certification of the  Principal Executive Officer.                                                                                                                                                         |
|   |                                                                                                                                                                                                                                |
| 31.2   | Rule 13a-14(a) Certification of the  Principal Financial Officer.                                                                                                                                                         |
|   |                                                                                                                                                                                                                                |
| 32     | Section 1350 Certifications.                                                                                                                                                                                                   |

 

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# **SIGNATURES**

# ** **

In accordance with the requirements of the Securities Exchange Act of1934, the Registrant caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 

 
| Date: May 24, 2010 | By:                                          | /s/ C. Allan Ducker, III |
|-------------------------|----------------------------------------------|-------------------------------|
|                    | C. Allan Ducker, III                    |
|                    | Chief Executive Officer                      |
|                    | (Principal Executive Officer)                |
|                    |                                         |                          |
| Date: May 24, 2010 | By:                                          | /s/ John W. Hobbs             |
|                    | John W. Hobbs                                |
|                    | Chief Financial Officer                      |
|                    | (Principal Financial and Accounting Officer) |

 

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**EXHIBIT INDEX**

 
| **Exhibit** | ** ** | ** **                                                                                                                                                                                                                          |
|-------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Number**  | ** ** | **Description**                                                                                                                                                                                                                     |
|        |       |                                                                                                                                                                                                                                |
| 10.14       |       | Consent Order with the FDIC and the South Carolina  Board of Financial Institutions dated February 23, 2010 (incorporated by  reference as Exhibit 10.14 to the Company’s Form 10-K filed  March 1, 2010). |
|        |       |                                                                                                                                                                                                                                |
| 31.1        |       | Rule 13a-14(a) Certification of the  Principal Executive Officer.                                                                                                                                                         |
|        |       |                                                                                                                                                                                                                                |
| 31.2        |       | Rule 13a-14(a) Certification of the  Principal Financial Officer.                                                                                                                                                         |
|        |       |                                                                                                                                                                                                                                |
| 32          |       | Section 1350  Certifications.                                                                                                                                                                                                  |

 

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