U. S. Securities and Exchange
Commission

Washington, D.C. 20549





Form 10-K

ANNUAL REPORT UNDER SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended
December 31, 2010

Commission File Number 000-49848





MIDCAROLINA FINANCIAL CORPORATION

(Name of Issuer in Its Charter)

|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|North Carolina                                                 |  | 55-6144577                          
|(State or Other Jurisdiction of
Incorporation or Organization) |  | (I.R.S. Employer Identification No.)
|                                                               | 
|3101 South Church Street Burlington, North Carolina            |  | 27215                               
|(Address of Principal Executive Offices)                       |  | (Zip Code)                          

(336)
538-1600

(Issuers Telephone Number, Including Area Code)

Securities Registered Under Section 12(b) of the Act: None

Securities Registered Under Section 12(g) of the Act: common stock, no par value

Title of Class





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

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

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

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

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



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

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

The aggregate market value of the Registrants voting and non-voting common equity, held by non affiliates, computed by reference to
the average bid and asked price of such common equity, as of the last business day of the Registrants most recently completed second fiscal quarter was $15.3 million.

State the number of shares outstanding of each of the issuers classes of common equity, as of the latest practicable date. 4,927,828 shares of common stock, no par value, as of
March 10, 2011.









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DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the 2011 Annual Meeting of Shareholders of MidCarolina Financial Corporation are incorporated by reference into Part III.

Disclaimer Regarding Forward Looking Statements

Statements in this report and its exhibits relating to plans, strategies, economic performance and trends, projections of results of specific activities or investments, expectations or beliefs about
future events or results, and other statements that are not descriptions of historical facts, may be forward-looking statements as defined in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
Forward-looking information is inherently subject to risks and uncertainties, and actual results could differ materially from those currently anticipated due to a number of factors which include, but are not limited to, factors discussed in
MidCarolinas Annual Report on Form 10-K and in other documents it files with the Securities and Exchange Commission from time to time. Copies of those reports are available directly through the SECs Internet website atwww.sec.govor through MidCarolina Banks Internet website atwww.midcarolinabank.com. Forward-looking statements may be identified by terms such as
may, will, should, could, expects, plans, intends, anticipates, feels, believes, estimates, predicts,
forecasts, potential or continue, or similar terms or the negative of these terms, or other statements concerning opinions or judgments of MidCarolinas management about future events. Factors that could
influence the accuracy of forward-looking statements in this report include, but are not limited to (a) pressures on MidCarolinas earnings, capital and liquidity resulting from current and future conditions in the credit and capital
markets, (b) continued or unexpected increases in credit losses in MidCarolina Banks loan portfolio, (c) continued adverse conditions in the economy and in the real estate market in MidCarolina Banks banking markets
(particularly those conditions that affect its loan portfolio, the abilities of its borrowers to repay their loans, and the values of collateral that secures its loans),(d) the financial success or changing strategies of customers, (e) actions
of government regulators, or change in laws, regulations or accounting standards, that adversely affect MidCarolinas business, (f) changes in the interest rate environment and the level of market interest rates that reduce MidCarolina
Banks net interest margins and/or the values of loans it makes and securities it holds, (g) changes in competitive pressures among depository and other financial institutions or in MidCarolina Banks ability to compete effectively
against other financial institutions in its banking markets, and (h) other developments or changes in our business that MidCarolina does not expect. Although MidCarolina believes that the expectations reflected in the forward-looking statements
included in this report are reasonable, they represent its managements judgments only as of the date they are made, and it cannot guarantee future results, levels of activity, performance or achievements. As a result, readers are cautioned not
to place undue reliance on these forward-looking statements. All forward-looking statements attributable to MidCarolina are expressly qualified in their entirety by the cautionary statements in this paragraph. MidCarolina has no obligation, and does
not intend, to update these forward-looking statements.



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PART I



|ITEM 1. | BUSINESS
|------- | --------

General

MidCarolina Financial Corporation (MidCarolina) is a North Carolina business corporation that was formed in 2002 to serve as a
bank holding company for MidCarolina Bank. Its office is located at 3101 South Church Street, Burlington, North Carolina 27215, and its principal source of revenue is dividends it receives from MidCarolina Bank on MidCarolina Banks common
stock held by MidCarolina.

MidCarolina Bank began operations on August 14, 1997 as a North Carolina chartered commercial
bank. It is engaged in general commercial banking primarily in Alamance and Guilford Counties, North Carolina. Its main office is located in Burlington, North Carolina, and it has one full-service branch in Burlington, NC, one full-service branch in
Graham, NC, two full-service branches in Greensboro, NC, and one full-service branch in Mebane, NC, and limited service offices in the Alamance Regional Medical Center and the Village of Brookwood Retirement Center, both of which are located in
Burlington. Its loans and deposits are generated primarily from the areas where its offices are located.

MidCarolina
Banks primary sources of revenue are interest and fee income from its lending activities. These lending activities consist principally of originating commercial operating and working capital loans, loans secured by commercial real estate,
residential mortgage loans, home equity lines of credit, and other consumer loans. Its current lending strategy is to establish market share throughout Alamance and Guilford Counties, with an emphasis in Burlington, Graham, Greensboro and Mebane.
Interest and dividend income from investment activities generally provide its second largest source of income.

Deposits are
the primary source of MidCarolina Banks funds for lending and other investment purposes. It attracts both short-term and long-term deposits from the general public by offering a variety of accounts and rates, including statement savings
accounts, negotiable order of withdrawal accounts, money market demand accounts, non-interest-bearing accounts and fixed interest rate certificates with varying maturities. MidCarolina Banks deposits are obtained primarily from its primary
market area, and it uses traditional marketing methods to attract new customers and deposits, including print media advertising and direct mailings. However, it also utilizes alternative sources of funds, such as brokered certificates of deposit and
borrowings from the Federal Home Loan Bank of Atlanta. Deposit flows are greatly influenced by economic conditions, the general level of interest rates, competition and other factors

Recent Developments

On December 16, 2010, MidCarolina announced that
it had entered into a definitive agreement providing for it to merger with American National Bankshares, Inc. (American) headquartered in Danville, Virginia, in an all stock transaction. Under the terms of the agreement, holders of
MidCarolina common stock would receive 0.33 shares of Americans common stock for each of their shares of MidCarolina common stock, and holders of MidCarolinas Series A noncumulative perpetual preferred stock would receive on shares of
Americans newly created preferred stock having terms, preferences and rights that are substantially identical to those of their MidCarolina stock.

Completion of the merger is subject to approval by MidCarolinas shareholders and to the approval by Americans shareholders of its issuance of shares of its common stock in the merger to
MidCarolinas shareholders, as well as to receipt of required approvals of bank regulators.

Memorandums of Understanding

During June 2010, MidCarolina Banks board of directors entered into an agreement called a Memorandum of
Understanding (the Memorandum) with the FDIC and the North Carolina Commissioner of Banks which provides that MidCarolina Bank will move in good faith to take various actions designed to improve its lending procedures and other
conditions related to its operations. The Memorandum provides generally for MidCarolina Banks board of directors to (i) review and formulate objectives relative to liquidity and growth, including a reduction in reliance on volatile
liabilities, (ii) formulate plans for the reduction and improvement in adversely classified assets, (iii) review compliance with and, as necessary, modify written policies regarding asset/liability, investment and funds



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management, (iv) oversee and enforce loan underwriting procedures and implement policies regarding other real estate and an effective loan documentation system, (v) not pay any dividend
without the approval of the regulators, (vi) review officer performance and consider additional staffing needs, and (vii) provide progress reports and submit various other information to the regulators.

During October 2010, MidCarolinas board of directors entered into a separate Memorandum of Understanding with the Federal Reserve
Bank of Richmond under which MidCarolina agreed that, among other things, and without its regulators prior written approval, it will not (i) receive dividends from MidCarolina Bank, (ii) pay dividends on MidCarolinas common or
preferred stock or payments on trust preferred securities, (iii) incur additional debt, or (iv) redeem any outstanding stock.

Subsidiaries

MidCarolina Bank is MidCarolinas only bank subsidiary. MidCarolina also holds all of the common trust securities of two statutory
business trusts, MidCarolina I and MidCarolina Trust II, which were formed by MidCarolina to facilitate the issuance of preferred trust securities to provide it with additional capital. MidCarolina Banks only subsidiary, MidCarolina
Investments, Inc., was dormant during 2010. It previously made general securities brokerage, insurance and other financial services available through a contract arrangement with a third-party broker-dealer and insurance agency. MidCarolina Bank
currently makes those services available through a similar contract arrangement with a third-party provider.

Employees

At December 31, 2010, MidCarolina Bank had 77 full-time equivalent employees. MidCarolina itself has no separate employees.

Market Area and Competition

MidCarolina Banks primary market area is Alamance County and Guilford County, North Carolina, and it faces strong competition in that market, both in attracting deposits and making loans. Its most
direct competition for deposits comes from commercial banks, savings institutions and credit unions located in the market area, including large financial institutions that have greater financial and marketing resources available to them. Competition
has increased as a result of the elimination of restrictions on the interstate operations of financial institutions.

Based on
data published by the FDIC as of June 30, 2010, there were 16 depository institutions (excluding credit unions) with 50 banking offices in Alamance County alone, and MidCarolina Bank held 17.9% of the total deposits held by the offices of those
institutions in that county. It held 4.5% of the total deposits held by offices of all depository institutions (other than credit unions) located in Alamance and Guilford Counties on a combined basis. MidCarolina Bank also faces significant
competition for depositors funds from sellers of short-term money market securities and other corporate and government securities. MidCarolina Banks ability to attract and retain interest-bearing deposits depends generally on its ability
to provide a rate of return, liquidity and risk comparable to that offered by competing investment opportunities.

Competition
for loans comes from savings institutions, credit unions, commercial banks, and mortgage banking companies. MidCarolina Bank competes for loans primarily through the interest rates and loan fees it charges and the efficiency and quality of services
it provides to borrowers.

Supervision and Regulation

MidCarolinas and MidCarolina Banks business and operations are subject to extensive federal and state governmental regulation and supervision. The following is a summary of some of those
basic statutes and regulations. However, it is not a complete discussion of all the laws that affect their business, and it is qualified in its entirety by reference to the particular statutory or regulatory provision being described.

General.MidCarolina is a bank holding company registered with the Federal Reserve
Board (the Federal Reserve) under the Bank Holding Company Act of 1956, as amended (the BHCA). It is subject to supervision and examination by, and the regulations and reporting requirements of, the Federal Reserve. Under the
BHCA, a bank holding companys activities are limited to banking, managing or controlling banks, or engaging in other activities the Federal Reserve determines are closely related and a proper incident to banking or managing or controlling
banks.



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The BHCA prohibits a bank holding company from acquiring direct or indirect control of more
than 5.0% of the outstanding voting stock, or substantially all of the assets, of any financial institution, or merging or consolidating with another bank holding company or savings bank holding company, without the Federal Reserves prior
approval. Additionally, the BHCA generally prohibits bank holding companies from engaging in a nonbanking activity, or acquiring ownership or control of more than 5.0% of the outstanding voting stock of any company that engages in a nonbanking
activity, unless that activity is determined by the Federal Reserve to be closely related and a proper incident to banking. In approving an application to engage in a nonbanking activity, the Federal Reserve must consider whether that activity can
reasonably be expected to produce benefits to the public, such as greater convenience, increased competition, or gains in efficiency, that outweigh possible adverse effects, such as undue concentration of resources, decreased or unfair competition,
conflicts of interest or unsound banking practices.

The law imposes a number of obligations and restrictions on bank holding
companies and their insured bank subsidiaries designed to minimize potential losses to depositors and the FDICs Deposit Insurance Fund (the DIF). For example, if a bank holding companys insured bank subsidiary becomes
undercapitalized, the bank holding company is required to guarantee the banks compliance (subject to certain limits) with the terms of any capital restoration plan filed with its federal banking agency. A bank holding company is
required to serve as a source of financial strength to its bank subsidiaries and to commit resources to support those banks in circumstances in which, absent that policy, it might not do so. Under the BHCA, the Federal Reserve may require a bank
holding company to terminate any activity or relinquish control of a nonbank subsidiary if the Federal Reserve determines that the activity or control constitutes a serious risk to the financial soundness and stability of a bank subsidiary of the
bank holding company.

MidCarolina Bank is an insured, North Carolina-chartered bank. Its deposits are insured under the
FDICs DIF, and it is subject to supervision and examination by, and the regulations and reporting requirements of, the FDIC and the North Carolina Commissioner of Banks (the NC Commissioner). MidCarolina Banks business also
is influenced by prevailing economic conditions and governmental policies, both foreign and domestic, and by the monetary and fiscal policies of the Federal Reserve. MidCarolina Bank is not a member of the Federal Reserve System. However, under the
Federal Reserves regulations, all FDIC-insured banks must maintain average daily reserves against their transaction accounts. Currently, no reserves are required on the first $10.7 million of transaction accounts, but a bank must maintain
reserves equal to 3.0% on aggregate balances between $10.7 million and $58.8 million, and reserves equal to 10.0% on aggregate balances in excess of $58.8 million. The Federal Reserve may adjust these percentages from time to time. Because
MidCarolina Banks reserves must be maintained in the form of vault cash or in an account at a Federal Reserve Bank or with a qualified correspondent bank, one effect of the reserve requirement is to reduce the amount of MidCarolina Banks
assets that are available for lending and other investment activities. The Federal Reserves actions and policy directives determine to a significant degree the cost and availability of funds MidCarolina Bank obtains from money market sources
for lending and investing, and they also influence, directly and indirectly, the rates of interest MidCarolina Bank pays on its time and savings deposits and the rates it charges on commercial bank loans.

As an insured bank, MidCarolina Bank is prohibited from engaging as a principal in an activity that is not permitted for national banks
unless (i) the FDIC determines that the activity would pose no significant risk to the DIF and (ii) MidCarolina Bank is in compliance with applicable capital standards. Insured banks also are prohibited generally from directly acquiring or
retaining any equity investment of a type or in an amount not permitted for national banks.

The NC Commissioner and the FDIC
regulate all areas of MidCarolina Banks business, including its payment of dividends and other aspects of its operations. They conduct regular examinations of MidCarolina Bank, and it must furnish periodic reports to the NC Commissioner and
the FDIC containing detailed financial and other information about its affairs. The NC Commissioner and the FDIC have broad powers to enforce laws and regulations that apply to MidCarolina Bank and to require corrective action of conditions that
affect its safety and soundness. These powers include, among others, issuing cease and desist orders, imposing civil penalties, removing officers and directors, and otherwise intervening in MidCarolina Banks operation and management if their
examinations and the reports filed with them indicate the need to do so.

Under North Carolina banking laws, if a banks
capital stock becomes impaired by losses or other causes, and the banks surplus and undivided profits are insufficient to make good the impairment, the NC Commissioner may require the bank to make the impairment good by an assessment upon the
banks stockholders (or on its sole shareholder in the case of a bank owned by a bank holding company). If any stockholder does not pay the assessment, the banks board of directors must sell a sufficient amount of the banks stock
held by that stockholder at public auction to make good the assessment on that stockholder.



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Gramm-Leach-Bliley Act. Various federal laws governing the banking
industry, as well as the securities and insurance industries, were changed during 1999 with the enactment of the Gramm-Leach-Bliley Act. It Act permitted bank holding companies to become financial holding companies and, in general
(1) expanded opportunities to affiliate with securities firms and insurance companies; (2) overrode certain state laws that prohibited certain banking and insurance affiliations; (3) expanded the activities in which banks and bank
holding companies could participate; (4) required that banks and bank holding companies engage in some activities only through affiliates owned or managed in accordance with specified requirements; and (5) reorganized responsibility among
various federal regulators for oversight of certain securities activities conducted by banks and bank holding companies.

Dodd-Frank Act. During 2010, the bank regulatory landscape was again dramatically changed by the Dodd-Frank Wall Street
Reform and Consumer Protection Act (the Dodd-Frank Act) which was signed into law on July 21, 2010 and which implements far-reaching regulatory reform. Among its more significant provisions, the Dodd-Frank Act:



| |  |  | established the Financial Stability Oversight Counsel made up of the heads of the various bank regulatory and other agencies to identify and respond to
risks to U.S. financial stability arising from ongoing activities of large financial companies;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | established centralized responsibility for consumer financial protection by creating a new Consumer Financial Protection Bureau which will be
responsible for implementing, examining and enforcing compliance with federal consumer financial laws with respect to financial institutions with over $10 billion in assets;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | required that banking agencies establish for most bank holding companies the same leverage and risk-based capital requirements as apply to insured
depository institutions; that bank holding companies and banks be well-capitalized and well managed in order to acquire banks located outside their home states; and, prohibits bank holding companies from including new trust preferred securities in
their Tier 1 capital and, beginning with a three-year phase-in period on January 1, 2013, requires bank holding companies with assets over $15 billion to deduct existing trust preferred securities from their Tier 1 capital;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | required the FDIC to set a minimum DIF reserve ratio of 1.35% and that the DIF reserve ratio be increased to that level by September 30, 2020;
that FDIC off-set the effect of the higher minimum ratio on insured depository institutions with assets of less than $10 billion; and, that FDIC change the assessment base used for calculating insurance assessments from the amount of insured
deposits to average consolidated total assets minus average tangible equity;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | established a permanent $250,000 limit for federal deposit insurance; provided separate, unlimited federal deposit insurance until December 31,
2012 for noninterest-bearing demand transaction accounts; and, repealed the federal prohibition on the payment of interest on demand deposits, thereby permitting depository institutions to pay interest on business transaction and other accounts;
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| |  |  | amended the Electronic Fund Transfer Act to, among other things, give the Federal Reserve the authority to establish rules regarding interchange fees
charged for electronic debit transactions by payment card issuers having assets over $10 billion and to enforce a new statutory requirement that those fees be reasonable and proportional to the actual cost of a transaction to the issuer; and
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| |  |  | required implementation of various corporate governance processes affecting areas such as executive compensation and proxy access by shareholders;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------

Many aspects of the Dodd-Frank Act are subject to rulemaking and will take effect over time, making it
difficult to anticipate the overall financial impact on financial institutions and consumers. Provisions in the legislation that affect the payment of interest on demand deposits and interchange fees are likely to increase the costs associated with
deposits as well as reduce banks revenues.

Restrictions on Payment of Dividends. Under
North Carolina law, MidCarolina is authorized to pay dividends as declared by its board of directors, provided that no such distribution results in MidCarolinas insolvency on a going concern or balance sheet basis. However, although
MidCarolina is a legal entity separate and distinct from MidCarolina Bank, its principal source of funds with which it can pay dividends to its shareholders and its separate expenses is dividends it receives from MidCarolina Bank. For that reason,
MidCarolinas ability to pay dividends effectively is subject to the same limitations that apply to MidCarolina Bank.

In
general, MidCarolina Bank may pay dividends only from its undivided profits. However, if its surplus is less than 50% of its paid-in capital stock, its directors may not declare any cash dividend until it has transferred to surplus 25% of its
undivided profits or any lesser percentage necessary to raise its surplus to an amount equal to 50% of its paid-in capital stock.



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As described above under the caption - Memorandums of Understanding,
MidCarolinas and MidCarolina Banks boards of directors have entered into agreements with, respectively, the Federal Reserve Bank of Richmond and with the FDIC and NC Commissioner. MidCarolinas agreement provides that it will not
receive dividends from MidCarolina Bank, pay dividends on MidCarolinas common or preferred stock or payments on trust preferred securities, incur additional debt, or redeem any outstanding stock, without its regulators prior written
approval. MidCarolina Banks agreement provides that it will not pay any dividend to MidCarolina without its regulators approval.

Federal law prohibits MidCarolina Bank from making any capital distributions, including paying a cash dividend, if it is, or after making the distribution it would become, undercapitalized as
that term is defined in the Federal Deposit Insurance Act (the FDIA). Also, if in the FDICs opinion an insured bank under its jurisdiction is engaged in or is about to engage in an unsafe or unsound practice, the FDIC may require,
after notice and hearing, that the bank cease and desist from that practice. The FDIC has indicated that paying dividends that deplete a banks capital base to an inadequate level would be an unsafe and unsound banking practice. (See
Prompt Corrective Action below.) The FDIC has issued policy statements which provide that insured banks generally should pay dividends only out of their current operating earnings. Also, under the FDIA no dividend may be paid by an
FDIC-insured bank while it is in default on any assessment due the FDIC. MidCarolina Banks payment of dividends also may be affected or limited by other factors, such as events or circumstances that lead the FDIC to require it to maintain its
capital above regulatory guidelines.

Capital Adequacy. MidCarolina and MidCarolina Bank are
required to comply with the Federal Reserves and FDICs capital adequacy standards for bank holding companies and insured banks. The Federal Reserve and FDIC have issued risk-based capital and leverage capital guidelines for measuring
capital adequacy, and all applicable capital standards must be satisfied for MidCarolina or MidCarolina Bank to be considered in compliance with regulatory capital requirements.

Under the risk-based capital guidelines, the minimum ratio (Total Capital Ratio) of an entitys total capital
(Total Capital) to its risk-weighted assets (including certain off-balance-sheet items, such as standby letters of credit) is 8.0%. At least half of Total Capital must be composed of Tier 1 Capital. Tier 1 Capital
includes common equity, undivided profits, minority interests in the equity accounts of consolidated subsidiaries, qualifying noncumulative perpetual preferred stock, and a limited amount of cumulative perpetual preferred stock, less goodwill and
certain other intangible assets. The remaining Total Capital may consist of Tier 2 Capital which includes certain subordinated debt, certain hybrid capital instruments and other qualifying preferred stock, and a limited amount of loan
loss reserves. A bank or bank holding company that does not satisfy minimum capital requirements may be required to adopt and implement a plan acceptable to its federal banking regulator to achieve an adequate level of capital.

Under the leverage capital measure, the minimum ratio (Leverage Capital Ratio) of Tier 1 Capital to average assets, less
goodwill and various other intangible assets, is 3.0% for entities that meet specified criteria, including having the highest regulatory rating. All other entities generally are required to maintain an additional cushion of 100 to 200 basis points
above the stated minimum. The guidelines also provide that banks experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum levels without significant reliance on
intangible assets. A banks Tangible Leverage Ratio (deducting all intangibles) and other indicators of capital strength also will be taken into consideration by banking regulators in evaluating proposals for expansion or new
activities.

The Federal Reserve and the FDIC also consider interest rate risk (when the interest rate sensitivity of an
institutions assets does not match the sensitivity of its liabilities or its off-balance-sheet position) in evaluating capital adequacy. Banks with excessive interest rate risk exposure must hold additional amounts of capital against their
exposure to losses resulting from that risk. The regulators also require banks to incorporate market risk components into their risk-based capital. Under these market risk requirements, capital is allocated to support the amount of market risk
related to a banks trading activities.

Capital categories of financial institutions are determined only for the purpose
of applying the prompt corrective action rules described below which have been adopted by the various federal banking regulators, and they do not necessarily constitute an accurate representation of overall financial condition or
prospects for other purposes. A failure to meet capital guidelines could subject MidCarolina Bank to a variety of enforcement remedies under those rules, including issuance of a capital directive, termination of FDIC deposit insurance, a prohibition
on taking brokered deposits, and other restrictions on MidCarolina Banks business. As described below, substantial additional restrictions can be imposed on banks that fail to meet applicable capital requirements.



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Prompt Corrective Action.Federal law establishes a system of prompt
corrective action to resolve the problems of undercapitalized banks. Under this system, the FDIC has established five capital categories (well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized) and it is required to take various supervisory actions, and is authorized to take other discretionary actions, with respect to banks in the three
undercapitalized categories. The severity of any actions taken will depend on the capital category in which a bank is placed. Generally, subject to a narrow exception, current federal law requires the FDIC to appoint a receiver or conservator for a
bank that is critically undercapitalized.

Under the FDICs rules implementing the prompt corrective action provisions,
an insured, state-chartered bank that (1) has a Total Capital Ratio of 10.0% or greater, a Tier 1 Capital Ratio of 6.0% or greater, and a Leverage Ratio of 5.0% or greater, and (2) is not subject to any written agreement, order,
capital directive, or prompt corrective action directive issued by the FDIC, is considered well capitalized. A bank with a Total Capital Ratio of 8.0% or greater, a Tier 1 Capital Ratio of 4.0% or greater, and a Leverage Ratio of
4.0% or greater, is considered adequately capitalized. A bank that has a Total Capital Ratio of less than 8.0%, a Tier 1 Capital Ratio of less than 4.0%, or a Leverage Ratio of less than 4.0%, is considered
undercapitalized. A bank that has a Total Capital Ratio of less than 6.0%, a Tier 1 Capital Ratio of less than 3.0%, or a Leverage Ratio of less than 3.0%, is considered significantly undercapitalized, and a bank that
has a tangible equity capital to assets ratio equal to or less than 2.0% is considered critically undercapitalized. For purposes of these rules, the term tangible equity includes core capital elements counted as Tier 1
Capital for purposes of the risk-based capital standards (see Capital Adequacy above), plus the amount of outstanding cumulative perpetual preferred stock (including related surplus), minus all intangible assets (with various
exceptions). A bank may be deemed to be in a lower capitalization category than indicated by its actual capital position if it receives an unsatisfactory examination rating.

A bank categorized as undercapitalized, significantly undercapitalized, or critically undercapitalized is required to submit an acceptable capital restoration plan to
the FDIC. An undercapitalized bank also is generally prohibited from increasing its average total assets, making acquisitions, establishing new branches, or engaging in new lines of business, other than in accordance with an accepted
capital restoration plan or with the FDICs approval. Also, the FDIC may treat an undercapitalized bank as being significantly undercapitalized if it determines that is necessary to carry out the purpose of the law.

On December 31, 2010, MidCarolina Banks capital ratios were at levels to qualify it as well
capitalized under the FDICs rules.

Federal Deposit Insurance. MidCarolina Banks
deposits are insured by the FDIC to the full extent provided in the Federal Deposit Insurance Act, and it pays assessments to the FDIC for that insurance coverage. Under the Act, the FDIC may terminate a banks deposit insurance if it finds
that the bank has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations, or has violated applicable laws, regulations, rules or orders.

The FDIC uses a risk-based assessment system to determine the amount of MidCarolina Banks deposit insurance assessment based on an
evaluation of the probability that MidCarolina Bank will cause a loss to the DIF. That evaluation takes into consideration risks attributable to different categories and concentrations of MidCarolina Banks assets and liabilities and any other
factors the FDIC considers relevant, including information obtained from the NC Commissioner. A higher assessment rate results in an increase in the deposit insurance assessments paid by MidCarolina Bank.

The FDIC is responsible for maintaining the adequacy of the DIF, and the amount MidCarolina Bank pays for deposit insurance is influenced
not only by the assessment of the risk it poses to the DIF, but also by the adequacy of the insurance fund at any time to cover the risk posed by all insured institutions. Because the DIF reserve ratio had fallen below the minimum level required by
law, during 2008 the FDIC adopted a restoration plan to return the reserve ratio to the minimum level and, during 2009, it imposed a special assessment on insured institutions, increased regular assessment rates, and required that insured
institutions prepay their regular quarterly assessments through 2012. More recently, as required by the Dodd-Frank Act, the FDIC has set the minimum DIF reserve ratio at 1.35% which must be achieved by September 30, 2020. Although the
Dodd-Frank Act requires the FDIC to off-set the effect of the higher minimum ratio on insured depository institutions with assets of less than $10 billion, FDIC insurance assessments paid by all insured depository institutions, including MidCarolina
Bank, could be increased substantially in the future if the FDIC finds an increase to be necessary in order to adequately maintain the DIF.



8



---

Restrictions on Transactions with Affiliates. MidCarolina Bank is
subject to the provisions of Sections 23A and 23B of the Federal Reserve Act which restrict certain transactions between a bank and its affiliates, including its bank holding company. Among other things, Section 23A limits the
amount of:



| |  |  | a banks loans or extensions of credit to, or investment in, its affiliates;
| | - |  | ----------------------------------------------------------------------------



| |  |  | assets a bank may purchase from affiliates, except for real and personal property exempted by the Federal Reserve;
| | - |  | ------------------------------------------------------------------------------------------------------------------



| |  |  | the amount of a banks loans or extensions of credit to third parties collateralized by securities or obligations of the banks affiliates;
and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | a banks issuance of a guarantee, acceptance or letter of credit for its affiliates.
| | - |  | ------------------------------------------------------------------------------------

The total amount of these transactions is limited in amount, as to any one affiliate, to 10% of a banks capital and surplus and, as
to all affiliates, to 20% of a banks capital and surplus. In addition to the amount limitations, each of the above transactions must meet specified collateral requirements. MidCarolina Bank also must comply with other provisions under
Section 23A designed to prevent the Banks taking of low-quality assets from an affiliate.

Section 23B, among
other things, prohibits a bank or its subsidiaries generally from engaging in transactions with its affiliates unless those transactions are on terms substantially the same, or at least as favorable to the bank or its subsidiaries, as would apply in
comparable transactions with nonaffiliated companies.

Federal law also restricts MidCarolina Banks ability to extend
credit to its and MidCarolinas executive officers, directors, principal shareholders and their related interests. These credit extensions:



| |  |  | must be made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with
unrelated third parties; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | must not involve more than the normal risk of repayment or present other unfavorable features.
| | - |  | ----------------------------------------------------------------------------------------------

Community Reinvestment. Under the Community Reinvestment Act (the CRA), an insured bank has a continuing
and affirmative obligation, consistent with its safe and sound operation, to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs
for banks, nor does it limit a banks discretion to develop, consistent with the CRA, the types of products and services it believes are best suited to its particular community. The CRA requires the federal banking regulators, in their
examinations of insured banks, to assess the banks records of meeting the credit needs of their communities, using the ratings of outstanding, satisfactory, needs to improve, or substantial
noncompliance, and to take that record into account in their evaluations of various applications by those banks. All banks are required to make public disclosure of their CRA performance ratings. MidCarolina Bank received a
satisfactory rating in its last CRA examination during 2010.

USA Patriot Act of
2001. The USA Patriot Act of 2001 was enacted in response to the terrorist attacks that occurred in the United States on September 11, 2001. The Act strengthened the ability of U.S. law enforcement and the intelligence
community to work cohesively to combat terrorism on a variety of fronts. The Acts impact on all financial institutions has been significant and wide ranging. The Act contains sweeping anti-money laundering and financial transparency
requirements and imposes various other regulatory requirements, including standards for verifying customer identification at account opening, and rules promoting cooperation among financial institutions, regulators and law enforcement agencies in
identifying parties that may be involved in terrorism or money laundering.

Sarbanes-Oxley Act of
2002. The Sarbanes-Oxley Act of 2002 became effective on July 30, 2002. In general, it mandated important corporate governance and financial reporting requirements intended to enhance the accuracy and transparency of public
companies reported financial results. It established specific responsibilities for corporate chief executive officers, chief financial officers and audit committees in the financial reporting process, and it created a regulatory body to
oversee auditors of public companies. It enhanced SEC enforcement tools, criminal penalties for federal mail, wire and securities fraud, and criminal penalties for document and record destruction in connection with federal investigations. It also
lengthened the statute of limitations for securities fraud claims and provided new corporate whistleblower protection.

The
economic and operational effects of the Sarbanes-Oxley Act on public companies, including MidCarolina, have been and will continue to be significant in terms of the time, resources and costs associated with compliance. Because the Sarbanes-Oxley
Act, for the most part, applies equally to larger and smaller public companies, MidCarolina will continue to be presented with additional challenges as a smaller, community-oriented financial institution seeking to compete with larger financial
institutions in its markets.



9



---

Available Information

MidCarolina makes its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports available free of charge on MidCarolina Banks internet
website at www.midcarolinabank.com as soon as reasonably practicable after the reports are electronically filed with the SEC. These filings also are accessible on the SECs website at www.sec.gov.



|ITEM 2. | DESCRIPTION OF PROPERTY
|------- | -----------------------

MidCarolina Bank owns the facilities that house its main office located at 3101 South Church Street in Burlington, as well as its
full-service branch offices located at 5509-A West Friendly Avenue, Suite 102 in Greensboro, and at 842 South Main Street in Graham. It leases the facilities housing its full-service offices located at 2214 North Church Street in Burlington, 703
Suite 101, Green Valley Road in Greensboro, and 1107 South Fifth Street in Mebane. It occupies space rent-free for its two limited service offices in Burlington located in the Alamance Regional Medical Center and in the Village of Brookwood
Retirement Center under arrangements with the owners of those facilities. MidCarolina Bank also rents space for its loan operations functions located at 3102 South Church Street in Burlington.

The total net book value of MidCarolina Banks furniture, fixtures, leasehold improvements, land, buildings and equipment at
December 31, 2010 was approximately $6.7 million. All properties are considered by MidCarolina Banks management to be in good condition and adequately covered by insurance.

Additional information regarding MidCarolina Banks properties is set forth in Note F in MidCarolinas Notes to Consolidated
Financial Statements contained in Item 8 of this report.



|ITEM 3. | LEGAL PROCEEDINGS
|------- | -----------------

From
time to time MidCarolina and MidCarolina Bank may become involved in legal proceedings in the ordinary course of their business. However, subject to the uncertainties inherent in any litigation, MidCarolinas management believes that, at
December 31, 2010, there were no material pending legal proceeding to which they or any of their properties were subject, other than ordinary routine litigation incidental to their business.



|ITEM 4. | [RESERVED]
|------- | ----------

PART II



|ITEM 5. | MARKET FOR COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
|------- | -----------------------------------------------------------------------------------------------

MidCarolinas common stock is traded in the over-the-counter markets, with prices for the stock being reported on the OTC Bulletin
Board under the symbol MCFI. As of March 7, 2011, there were 1,026 holders of record of the stock, which excludes persons or entities whose stock is held by banks, brokers or other nominee in street name.

The following table lists the high and low sales prices for MidCarolinas common stock as reported on the OTC Bulletin Board for
each calendar quarter during the years ended December 31, 2010 and 2009.



|               |  |      |      |  |     |   |      | 
|-------------- |  | ---- | ---- |  | --- | - | ---- | 
|               |  | High |      |  | Low |  
|2010           |  |      |      |  |     |   |      | 
|               |  |     
|First quarter  |  | $    | 5.50 |  |     | $ | 4.50 | 
|Second quarter |  |      | 5.50 |  |     |   | 4.00 | 
|Third quarter  |  |      | 4.40 |  |     |   | 2.70 | 
|Fourth quarter |  |      | 7.00 |  |     |   | 2.80 | 
|               |  |     
|2009           |  |      |      |  |     |   |      | 
|               |  |     
|First quarter  |  | $    | 7.50 |  |     | $ | 4.05 | 
|Second quarter |  |      | 7.00 |  |     |   | 4.50 | 
|Third quarter  |  |      | 7.10 |  |     |   | 5.25 | 
|Fourth quarter |  |      | 6.35 |  |     |   | 4.00 | 



10



---

Since it was organized in 2002, MidCarolina has retained its earnings as additional capital
to support growth in its earning assets, and it has not paid any cash dividends on its common stock. MidCarolina is a legal entity separate and distinct from MidCarolina Bank, but its principal source of funds with which it can pay dividends to its
shareholders and its separate expenses is dividends it receives from MidCarolina Bank. For that reason, MidCarolinas ability to pay dividends effectively is subject to the same limitations that apply to MidCarolina Bank. Information regarding
regulatory restrictions on MidCarolinas and MidCarolina Banks abilities to pay cash dividends is contained in this report under the caption ITEM 1. DESCRIPTION OF BUSINESS - Supervision and Regulation above, and in NOTE Q to
MidCarolina consolidated financial statements included in this Report under Item 8.

As described above under the caption
ITEM 1. BUSINESS - Memorandums of Understanding, MidCarolinas and MidCarolina Banks boards of directors have entered into agreements called Memorandums of Understanding with, respectively, the Federal Reserve Bank of Richmond
and with the FDIC and NC Commissioner. MidCarolinas agreement provides that it will not receive dividends from MidCarolina Bank, pay dividends on MidCarolinas common or preferred stock or payments on trust preferred securities, incur
additional debt, or redeem any outstanding stock, without its regulators prior written approval. MidCarolina Banks agreement provides that it will not pay any dividend to MidCarolina without its regulators approval.

In the future, in addition to the regulatory considerations referenced above and general business and economic conditions,
MidCarolinas ability to declare and pay cash dividends will be subject to its board of directors evaluation of MidCarolinas and MidCarolina Banks operating results, capital levels, financial condition, future growth plans,
and other relevant considerations, as well as to changes in applicable statutes, regulations or regulatory policies that could have a material effect on their business.

MidCarolina did not repurchase any of its outstanding securities during the last quarter of the fiscal year ending December 31, 2010.



11



---

|ITEM 6. | SELECTED FINANCIAL DATA
|------- | -----------------------

The following table
sets forth certain summary consolidated financial data, performance ratios and other data at, or for the periods indicated. As this information is only a summary, you should read it in conjunction with the historical financial statements (and
related notes) of the Company and Item 7. - Managements Discussion and Analysis of Financial Condition and Results of Operations.

MidCarolina Financial Corporation

Table 1

Selected Consolidated Financial Information and Other Data

($ in thousands, except per share and nonfinancial data)



|                                                    |  |                                                      |           |   |      |   |           |      |  |   |           |  |  |      |           |  |      |   |           |  |  |   |           | 
|--------------------------------------------------- |  | ---------------------------------------------------- | --------- | - | ---- | - | --------- | ---- |  | - | --------- |  |  | ---- | --------- |  | ---- | - | --------- |  |  | - | --------- | 
|                                                    |  | At or for the Year Ended December 31,                |          
|                                                    |  | 2010                                                 |           |   | 2009 |   |           | 2008 |  |   | 2007      |  |  | 2006 |           |  | 2005 |  
|                                                    |  | (Amounts in thousands, except per share information) |          
|Results of Operations:                              |  |                                                      |           |   |      |   |           |      |  |   |           |  |  |      |           |  |      |   |           |  |  |   |           | 
|Interest income                                     |  | $                                                    | 25,726    |   |      | $ | 27,583    |      |  | $ | 29,616    |  |  | $    | 31,053    |  |      | $ | 27,061    |  |  | $ | 19,208    | 
|Interest expense                                    |  |                                                      | 8,123     |   |      |   | 10,440    |      |  |   | 15,294    |  |  |      | 17,721    |  |      |   | 14,241    |  |  |   | 8,327     | 
|                                                    |  |                                                      |           |   |      |   |           |      |  |   |           |  |  |      |           |  |      |   |           |  |  |   |           | 
|Net interest income                                 |  |                                                      | 17,603    |   |      |   | 17,143    |      |  |   | 14,322    |  |  |      | 13,332    |  |      |   | 12,820    |  |  |   | 10,881    | 
|Provision for loan losses                           |  |                                                      | 6,418     |   |      |   | 4,455     |      |  |   | 1,665     |  |  |      | 425       |  |      |   | 394       |  |  |   | 1,373     | 
|                                                    |  |                                                      |           |   |      |   |           |      |  |   |           |  |  |      |           |  |      |   |           |  |  |   |           | 
|Net interest income after provision for loan losses |  |                                                      | 11,185    |   |      |   | 12,688    |      |  |   | 12,657    |  |  |      | 12,907    |  |      |   | 12,426    |  |  |   | 9,508     | 
|Noninterest income                                  |  |                                                      | 2,659     |   |      |   | 2,787     |      |  |   | 2,220     |  |  |      | 2,627     |  |      |   | 2,304     |  |  |   | 2,683     | 
|Noninterest expenses                                |  |                                                      | 12,881    |   |      |   | 12,281    |      |  |   | 9,462     |  |  |      | 8,305     |  |      |   | 9,077     |  |  |   | 8,546     | 
|                                                    |  |                                                      |           |   |      |   |           |      |  |   |           |  |  |      |           |  |      |   |           |  |  |   |           | 
|Income before income taxes                          |  |                                                      | 963       |   |      |   | 3,194     |      |  |   | 5,415     |  |  |      | 7,229     |  |      |   | 5,653     |  |  |   | 3,645     | 
|Income tax (benefit) \expense                       |  |                                                      | (14       | ) |      |   | 818       |      |  |   | 1,741     |  |  |      | 2,342     |  |      |   | 1,757     |  |  |   | 1,277     | 
|                                                    |  |                                                      |           |   |      |   |           |      |  |   |           |  |  |      |           |  |      |   |           |  |  |   |           | 
|Net income                                          |  |                                                      | 977       |   |      |   | 2,376     |      |  |   | 3,674     |  |  |      | 4,887     |  |      |   | 3,896     |  |  |   | 2,368     | 
|Dividends on preferred stock                        |  |                                                      | 364       |   |      |   | 417       |      |  |   | 417       |  |  |      | 417       |  |      |   | 417       |  |  |   | 104       | 
|                                                    |  |                                                      |           |   |      |   |           |      |  |   |           |  |  |      |           |  |      |   |           |  |  |   |           | 
|Net income available to common shareholders         |  | $                                                    | 613       |   |      | $ | 1,959     |      |  | $ | 3,257     |  |  | $    | 4,470     |  |      | $ | 3,479     |  |  | $ | 2,264     | 
|                                                    |  |                                                      |           |   |      |   |           |      |  |   |           |  |  |      |           |  |      |   |           |  |  |   |           | 
|                                                    |  |                                                      |           |   |      |  
|Financial Condition:                                |  |                                                      |           |   |      |   |           |      |  |   |           |  |  |      |           |  |      |   |           |  |  |   |           | 
|Total Assets                                        |  | $                                                    | 531,200   |   |      | $ | 541,004   |      |  | $ | 540,847   |  |  | $    | 467,186   |  |      | $ | 420,850   |  |  | $ | 370,440   | 
|Loans, net of unearned income                       |  |                                                      | 39,829    |   |      |   | 438,087   |      |  |   | 434,662   |  |  |      | 371,714   |  |      |   | 313,572   |  |  |   | 279,962   | 
|Securities                                          |  |                                                      | 90,152    |   |      |   | 70,719    |      |  |   | 71,124    |  |  |      | 70,801    |  |      |   | 73,795    |  |  |   | 58,373    | 
|Deposits                                            |  |                                                      | 465,873   |   |      |   | 465,020   |      |  |   | 467,948   |  |  |      | 373,897   |  |      |   | 339,275   |  |  |   | 300,262   | 
|Shareholders equity                                |  |                                                      | 40,424    |   |      |   | 40,185    |      |  |   | 37,196    |  |  |      | 33,150    |  |      |   | 28,259    |  |  |   | 23,093    | 
|Shareholders equity, tangible                      |  |                                                      | 40,424    |   |      |   | 40,185    |      |  |   | 37,196    |  |  |      | 33,150    |  |      |   | 28,259    |  |  |   | 23,093    | 
|                                                    |  |                                                      |           |   |      |  
|Per Share Data (4):                                 |  |                                                      |           |   |      |   |           |      |  |   |           |  |  |      |           |  |      |   |           |  |  |   |           | 
|Earnings per common share, basic                    |  | $                                                    | 0.12      |   |      | $ | 0.40      |      |  | $ | 0.66      |  |  | $    | 0.98      |  |      | $ | 0.80      |  |  | $ | 0.53      | 
|Earnings per common share, diluted                  |  |                                                      | 0.12      |   |      |   | 0.40      |      |  |   | 0.66      |  |  |      | 0.92      |  |      |   | 0.73      |  |  |   | 0.48      | 
|Cash dividends paid on common                       |  |                                                      |          |   |      |   |          |      |  |   |          |  |  |      |          |  |      |   |          |  |  |   |          | 
|Book value                                          |  |                                                      | 7.23      |   |      |   | 7.18      |      |  |   | 6.57      |  |  |      | 6.13      |  |      |   | 5.20      |  |  |   | 4.25      | 
|Book value, tangible                                |  |                                                      | 7.23      |   |      |   | 7.18      |      |  |   | 6.57      |  |  |      | 6.13      |  |      |   | 5.20      |  |  |   | 4.25      | 
|Weighted average shares outstanding, basic          |  |                                                      | 4,927,828 |   |      |   | 4,927,828 |      |  |   | 4,915,350 |  |  |      | 4,548,565 |  |      |   | 4,348,128 |  |  |   | 4,299,522 | 
|Weighted average shares outstanding, diluted        |  |                                                      | 4,927,828 |   |      |   | 4,930,310 |      |  |   | 4,916,876 |  |  |      | 4,851,738 |  |      |   | 4,775,853 |  |  |   | 4,669,601 | 



12



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MidCarolina Financial Corporation

Table 1

Selected Consolidated Financial Information and Other Data

($ in thousands, except per share and nonfinancial data)



|                                                             |  |                                                      |        |   |      |  |       |      |  |  |        |   |  |      |        |   |      |  |        |   |  |  |         |  
|------------------------------------------------------------ |  | ---------------------------------------------------- | ------ | - | ---- |  | ----- | ---- |  |  | ------ | - |  | ---- | ------ | - | ---- |  | ------ | - |  |  | ------- | -
|                                                             |  | At or for the Year Ended December 31,                |       
|                                                             |  | 2010                                                 |        |   | 2009 |  |       | 2008 |  |  | 2007   |   |  | 2006 |        |   | 2005 | 
|                                                             |  | (Amounts in thousands, except per share information) |       
|Selected Ratios:                                             |  |                                                      |        |   |      |  |       |      |  |  |        |   |  |      |        |   |      |  |        |   |  |  |         |  
|Return on average assets                                     |  |                                                      | 0.18   | % |      |  | 0.43  | %    |  |  | 0.73   | % |  |      | 1.09   | % |      |  | 0.98   | % |  |  | 0.72    | %
|Return on average common equity (1)                          |  |                                                      | 1.70   | % |      |  | 5.80  | %    |  |  | 10.50  | % |  |      | 17.82  | % |      |  | 17.63  | % |  |  | 12.64   | %
|Return on average tangible equity (1)(2)                     |  |                                                      | 1.70   | % |      |  | 5.80  | %    |  |  | 10.50  | % |  |      | 17.82  | % |      |  | 17.63  | % |  |  | 12.64   | %
|Common stock dividend payout ratio                           |  |                                                      | 0.00   | % |      |  | 0.00  | %    |  |  | 0.00   | % |  |      | 0.00   | % |      |  | 0.00   | % |  |  | 0.00    | %
|Efficiency ratio (2)                                         |  |                                                      | 63.57  | % |      |  | 61.62 | %    |  |  | 57.20  | % |  |      | 52.04  | % |      |  | 60.02  | % |  |  | 63.01   | %
|Net interest margin                                          |  |                                                      | 3.34   | % |      |  | 3.27  | %    |  |  | 2.94   | % |  |      | 3.12   | % |      |  | 3.38   | % |  |  | 3.51    | %
|                                                             |  |                                                      |        |   |      | 
|Asset Quality Ratios:                                        |  |                                                      |        |   |      |  |       |      |  |  |        |   |  |      |        |   |      |  |        |   |  |  |         |  
|Allowance for loan losses to period end loans                |  |                                                      | 2.31   | % |      |  | 1.67  | %    |  |  | 1.30   | % |  |      | 1.20   | % |      |  | 1.35   | % |  |  | 1.46    | %
|Allowance for loan losses to period end non-performing loans |  |                                                      | 123.57 | % |      |  | 99.50 | %    |  |  | 180.34 | % |  |      | 637.43 | % |      |  | 531.74 | % |  |  | 1725.74 | %
|Non-performing assets to total assets                        |  |                                                      | 2.87   | % |      |  | 1.89  | %    |  |  | 0.88   | % |  |      | 0.21   | % |      |  | 0.74   | % |  |  | 0.83    | %
|Net charge-offs to average loans                             |  |                                                      | 1.07   | % |      |  | 0.63  | %    |  |  | 0.12   | % |  |      | 0.05   | % |      |  | 0.05   | % |  |  | 0.09    | %
|                                                             |  |                                                      |        |   |      | 
|Capital Ratios:                                              |  |                                                      |        |   |      |  |       |      |  |  |        |   |  |      |        |   |      |  |        |   |  |  |         |  
|Total risk-based capital ratio                               |  |                                                      | 13.04  | % |      |  | 11.93 | %    |  |  | 11.19  | % |  |      | 11.48  | % |      |  | 11.28  | % |  |  | 11.34   | %
|Tier 1 risk-based capital ratio                              |  |                                                      | 11.78  | % |      |  | 10.67 | %    |  |  | 9.97   | % |  |      | 10.37  | % |      |  | 10.12  | % |  |  | 9.90    | %
|Tier 1 leverage ratio                                        |  |                                                      | 9.03   | % |      |  | 8.79  | %    |  |  | 8.68   | % |  |      | 8.95   | % |      |  | 8.73   | % |  |  | 8.64    | %
|Equity to assets ratio (3)                                   |  |                                                      | 6.71   | % |      |  | 6.54  | %    |  |  | 5.98   | % |  |      | 6.06   | % |      |  | 5.57   | % |  |  | 4.93    | %



|(1) | Return on average tangible common equity is calculated by dividing net income available to common shareholders less amortization of intangibles by averate common equity
less average intangibles.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | The efficiency ratio is calculated by dividing noninterest expense by the sum of net interest income plus noninterest income.
|--- | -----------------------------------------------------------------------------------------------------------------------------

|(3) | Equity to assets ratio is calculated by dividing period-end common equity less period-end intangibles by period-end assets less period-end intangibles.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | All per share data has been restated to reflect stock splits effected in the form of a 25% and 10% stock dividend in 2007 and 2006, respectively.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------



13



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

The discussion and analysis that follows is intended to assist readers in the understanding and evaluation of the financial condition and results of
operations of MidCarolina. It should be read in conjunction with the audited consolidated financial statements and accompanying notes included in this Annual Report on Form 10-K and the supplemental financial data appearing throughout this
discussion and analysis. Because the MidCarolinas primary asset is the Bank, the discussion that follows focuses on the Banks business and operations.

EXECUTIVE OVERVIEW

Significant accomplishments.In the opinion of its management, MidCarolinas most significant accomplishments during 2010, which are discussed in more detail in this Item 7, were as follows:



| |  |  | Remained profitable during a difficult economic environment for the community bank industry
| | - |  | -------------------------------------------------------------------------------------------



| |  |  | Reduced concentration of wholesale funding by $35.1 million or 19.2%
| | - |  | --------------------------------------------------------------------



| |  |  | Reduced concentration of construction loan portfolio by 35.0% or $23.7 million
| | - |  | ------------------------------------------------------------------------------



| |  |  | Improved interest margin to 3.34% from 3.27%
| | - |  | --------------------------------------------

Challenges. The Bank has achieved significant growth without acquisitions or mergers since first opening its doors in 1997. The financial industry in general is faced with many
uncertainties and challenges. As management plans its strategic goals and objectives, future expectations of economic activity, and how these uncertainties could impact MidCarolinas performance, must be taken into consideration. The challenges
that we believe are most likely to have an impact on the operations of MidCarolina in the foreseeable future are presented below:



| |  |  | Sustaining profitable growth
| | - |  | ----------------------------



| |  |  | Managing margins in an abnormally low interest rate environment
| | - |  | ---------------------------------------------------------------



| |  |  | Competition from bank and non-bank entities, including fierce price competition
| | - |  | -------------------------------------------------------------------------------



| |  |  | Uncertainty of real estate values
| | - |  | ---------------------------------



| |  |  | Maintaining liquidity during an uncertain economic environment
| | - |  | --------------------------------------------------------------



| |  |  | Managing equity in an unpredictable capital market
| | - |  | --------------------------------------------------



| |  |  | Managing asset quality during a period of economic uncertainty
| | - |  | --------------------------------------------------------------

FINANCIAL CONDITION

DECEMBER 31, 2010 AND 2009

The MidCarolinas total assets were
$531.2 million at year-end 2010, a decrease of $9.9 million, or 1.83%, when compared to year-end 2009. Loans, excluding those held for sale, decreased by $38.3 million, or 8.73%, from $438.1 million at the beginning of the year to $399.8 million at
year end. The change in loans was composed principally of decreases of $23.7 million in construction loans, $1.0 million in home equity lines of credit, $1.7 million in commercial mortgage loans, $9.0 million in residential mortgage loans and $2.9
million in commercial and industrial loans, all of which are segments of lending MidCarolina targets and intends to continue targeting in differing magnitudes in the future. Investment securities increased by $19.4 million, or 27.48%, from $70.7
million to $90.2 million. Liquid assets, consisting of cash and demand balances due from banks, interest-earning deposits in other banks and investment securities, were 19.56% of total assets, at December 31, 2010 and 14.82% at
December 31, 2009. The Bank, as a member of the FHLB of Atlanta, has an investment of $2.1 million in FHLB stock. The Banks investment in life insurance used to offset the cost of employee benefit plans, increased by $335 thousand during
2010 to $8.5 million. The increase was due to an increase in the cash surrender value of the policies. Other assets increased $4.2 million over 2009. Other real estate owned (OREO) was the component of other assets that incurred significant change.
OREO increased $4.4 million or 154.1% over 2009 year-end, reflecting the distressed economy affecting the industry.

Deposits
increased a modest $853,000 during 2010. However, the mix of deposits showed significant improvement as total transactional accounts comprised of noninterest-bearing demand accounts and interest-bearing demand accounts increased $80.4 million or
50.89%, from $186.5 million at December 31, 2009 to $266.9 million at December 31, 2010. Individually, noninterest-bearing demand accounts decreased $2.7 million, or 6.49%, interest



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bearing demand accounts increased $83.1 million, or 57.38%, savings accounts increased $5.9 million or 71.75%, and time deposits decreased $85.5 million, or 31.63%, over the amount of these
deposits at December 31, 2009. The Bank also used wholesale brokered certificates of deposit and advances from the FHLB of Atlanta, Georgia as funding sources during 2010 to serve as a secondary source of funding asset growth. Borrowings from
the FHLB decreased $10.0 million to $15.0 million at December 31, 2010. Wholesale brokered certificates of deposit decreased $1.2 million or 1.16% and comprised approximately 21.73% of total deposit balances. Typically brokered certificates of
deposit have similar terms to retail certificates of deposit issued in the Banks local markets, with rates marginally lower than local market certificate of deposit rates.

Total shareholders equity increased by $239,000, or 0.59%, during 2010. All capital ratios continue to place MidCarolina and the
Bank in excess of the minimum required to be a well-capitalized institution by regulatory measures. The MidCarolina issued $4.8 million in Non-Cumulative Perpetual Preferred Stock on August 15, 2005 and $8.5 million in Trust Preferred
Securities during prior years, so as to remain well capitalized under regulatory capital guidelines without diluting existing shareholders ownership. The Trust Preferred Securities and Preferred Stock should provide sufficient
capital to retain a well-capitalized designation as defined by regulatory capital guidelines for the foreseeable future. The Trust Preferred Securities qualify as Tier 1 regulatory capital and are reported in Federal Reserve regulatory
reports as a qualifying security in a consolidated subsidiary. The junior subordinated debentures issued to guarantee the Trust Preferred Securities do not qualify as Tier 1 regulatory capital.

Net Interest Income. Similar to most financial institutions, the primary component of earnings for the Bank
is net interest income. Net interest income is the difference between interest income, principally from the loan and investment securities portfolios, and interest expense, principally on deposits and borrowings. Changes in net interest income
result from changes in volume, spread and margin. For this purpose, volume refers to the average dollar level of interest-earning assets and interest-bearing liabilities, spread refers to the difference between the average
yield on interest-earning assets and the average cost of interest-bearing liabilities and margin refers to net interest income divided by average interest-earning assets and is influenced by the level and relative mix of interest-earning
assets and interest-bearing liabilities, as well as levels of non-interest-bearing liabilities. During the years ended December 31, 2010, 2009 and 2008, average interest-earning assets were $526.8 million, $523.7 million and $487.0 million,
respectively. During these same years, the Banks net yields on average interest-earning assets were 3.34%, 3.27% and 2.94%, respectively. The increase in net yields from 2009 to 2010 is a reflection of decreases in interest rates over the
year. An overall increase in spread which is the difference between yields earned on interest bearing assets less the interest paid on interest bearing liabilities was strongly influenced by the Banks concerted effort to increase transactional
accounts during 2010. The Banks balance sheet is well positioned for changes in interest rates. When interest rates change, the Banks earnings and net yields remain stable as the Banks ratio of interest-earning assets to
interest-bearing liabilities is well matched under all interest rate environments and time periods measured by the Bank.

Table 2 following this discussion presents an analysis of the Banks net interest income for 2010, 2009 and 2008.

Table 3 following this discussion shows the amounts of changes in net interest income due to changes in volume and rates and illustrates
that the change in the average rate of loans was offset by the decrease in average deposit rates. These two variables were the predominant factors in the higher amount of net interest income realized by the Bank in 2010, when compared to 2009.

RESULTS OF OPERATIONS

YEARS ENDED DECEMBER 31, 2010 AND 2009

Overview.MidCarolina reported net income available to common shareholders of $613,000, or $0.12 per diluted common share, for the year ended December 31, 2010, compared to net income available to shareholders of $2.0 million, or $0.40 per diluted
common share, for 2009, a decrease of $1.3 million or $0.28 per diluted share.

Net Interest Income.Net
interest income increased to $17.6 million for the year ended December 31, 2010, a $468,000 or 2.73% increase from the $17.1 million earned in 2009. Total interest income benefited from moderate growth in the level of average earning assets
offset by significantly lower rates paid on liabilities caused by abnormally low interest rates during the year. The rates earned on a significant portion of the Banks loans adjust immediately when indexes like the prime rate change.
Conversely, a large portion of interest-bearing liabilities, including certificates of deposit and bank borrowings, have rates fixed until maturity. As a result, interest rate reductions will generally result in an immediate drop in the Banks
interest income on loans, with a more delayed



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impact on interest expense because reductions in interest costs will only occur upon renewals of certificates of deposit or borrowings. Interest rate increases will generally result in an
immediate increase in the Banks interest income on loans, with a more delayed impact on interest expense because increases in interest costs will only occur upon renewals of certificates of deposit or borrowings. Average total interest-earning
assets increased $3.1 million, or 0.59%, during 2010 compared to 2009, while the average yield decreased by 39 basis points from 5.27% to 4.88%. As interest rates remained very low during 2010, the average rate on loans repriced and decreased year
over year. The average rate on investment securities decreased in 2010 compared to 2009 reflecting the lower reinvestment yields available for securities purchased or reinvested during the year. Average total interest-bearing liabilities increased
by $2.3 million, or 0.48%, a slightly lower growth rate than average interest-earning asset balances. The average cost of interest-bearing liabilities decreased by 50 basis points from 2.23% to 1.73%. With the cost on interest bearing liabilities
decreasing more significantly than the yield on earning assets, the Banks net interest margin increased by 7 basis points. For the year ended December 31, 2010, the net interest margin was 3.34%, while for the year ended December 31,
2009, the net interest margin was 3.27%. Table 3 following this discussion reflects the volume and rate variances from 2010 as compared to 2009.

Provision for Loan Losses.The Bank recorded $6.4 million in the provision for loan losses in 2010, an increase of $2.0 million from the $4.5 million provision made in 2009.
Provisions for loan losses are charged to income to bring the allowance for loan losses to a level deemed appropriate by management. In evaluating the allowance for loan losses, management considers factors that include growth, composition and
industry diversification of the portfolio, historical loan loss experience, current delinquency levels, adverse situations that may affect a borrowers ability to repay, estimated value of any underlying collateral, prevailing economic
conditions and other relevant factors. For 2010, large provisions were made each quarter in response to the weakened economy and real estate market. Specifically, builder/construction loans experienced a significant deterioration in their collateral
values and many developers experienced decreased rates of building lot inventory turn-over. Although the Bank reduced its total exposure to construction loans by $23.7 million or 35.0% from $67.6 million at December 31, 2009 to $43.9 million at
December 31, 2010, significant risk to property value depreciation continues to persist in the MidCarolinas construction loan portfolio. Real estate developers ability to service debt for extended time periods remains tentative as
cash flows have deteriorated. Total loans outstanding, net of loans held for sale, decreased $38.3 million in 2010 and increased $3.4 million in 2009. At December 31, 2010, the allowance for loan losses was $9.2 million, an increase of $1.9
million, or 26.27%, from the $7.3 million at the end of 2009. The allowance represented 2.31% and 1.67%, respectively, of loans outstanding at the end of 2010 and 2009, net of loans held for sale. The increase in the allowance is reflective of the
on going economic and real estate market deterioration experienced locally as well as nationally and internationally. At December 31, 2010, the Bank had $9.1 million in non-accrual loans. In 2009, the Bank had $7.3 million in non-accrual loans.
For a more detailed discussion of the provision of loan losses and the established reserve, see the section entitled Analysis of Allowance for Loan Losses.

Non-Interest Income.Non-interest income decreased to $2.7 million for the year ended December 31, 2010 compared to $2.8 million for the year ended December 31, 2009, a
decrease of $128,000 or 4.59%. A significant factor in the decrease in total non-interest income was the reduction in service charges levied on deposit accounts. The banking industry is reevaluating the methodology in which overdrawn deposit account
customers are service charged. The restructuring of service charge routines in part caused by newly implemented Regulation E, effective July 1, 2010, caused the company to incur a $198,000 decrease in service charge income from $910,000 in 2009
to $712,000 for 2010, or 21.76%. Mortgage operations income decreased to $786,000 in 2010, from $800,000 in 2009, reflecting the impact of the discontinuance of government initiated first time home buyer incentives. During 2010 the portion of OTTI
expense (other than temporary impairment) that was determined to be credit-related and thus recognized in earnings as an expense was $29,000, a decrease of $119,000 or 80.41% compared to $148,000 OTTI expense for 2009. Other non-interest income
decreased $75,000 in 2010 reflecting the absence of a one-time insurance claim recognized in 2009. Table 4, following this discussion, is a comparative analysis of the components of non-interest income for 2010, 2009 and 2008.

Non-Interest Expenses.Non-interest expenses totaled $12.9 million for the year ended December 31, 2010, an
increase of $572,000 over the $12.3 million reported for 2009. Salaries and employee benefits decreased $365,000 primarily resulting from down sizing 5 staff positions during 2010. Professional and other services decreased $236,000 or 32.15%
primarily due to a reduction in expenses incurred related to legal proceedings completed during 2009. Other outside services increased $368,000 or 98.40% resulting from expenses incurred during 2010 for merger related activities. Deposit and other
insurance expense decreased $27,000 or 2.11% because of increased FDIC premiums. Occupancy and equipment expense decreased by $76,000 due to decreases in software licensure expenses that were absorbed by a third party information technology vendor
resulting from the transfer of



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related management, hardware and software information technology responsibilities. Data processing and other outside services increased $278,000, or 29.86%, due primarily to costs associated with
the reconfiguration and relocation of the Banks data processing servers as well as the implementation of a significantly enhanced business and disaster recovery plan. Advertising expense decreased $10,000. Loss on sale of OREO increased
$269,000 from $339,000 in 2009 to $618,000 in 2010, reflecting continued activity related to the disposition of foreclosed real estate. Table 5, following this discussion, presents a comparative analysis of the components of non-interest expenses
for 2010, 2009 and 2008.

Income Taxes.An income tax benefit of $14,000 was recognized in 2010 and a provision
for income tax expense in the amount of $818,000 was recognized in 2009. The effective tax rates were (1.45%) and 25.6%, respectively, on income before income taxes. The decrease in the effective tax rate for 2010 reflects an increase in the
proportion of tax-exempt income to total income for 2010 over 2009.

RESULTS OF OPERATIONS

YEARS ENDED DECEMBER 31, 2009 AND 2008

Overview.MidCarolina reported net income available to common shareholders of $2.0 million, or $0.40 per diluted common share, for the year ended December 31, 2009, compared with
net income available to shareholders of $3.3 million, or $0.66 per diluted common share, for 2008, a decrease of $1.3 million or $0.26 per diluted share.

Net Interest Income.Net interest income increased to $17.1 million for the year ended December 31, 2009, a $2.8 million or 19.70% increase from the $14.3 million earned in 2008.
Total interest income benefited from moderate growth in the level of average earning assets offset by significantly lower rates paid on liabilities caused by historically low interest rates during the year. The rates earned on a significant portion
of the Banks loans adjust immediately when indexes like the prime rate change. Conversely, a large portion of interest-bearing liabilities, including certificates of deposit and Bank borrowings, have rates fixed until maturity. As a result,
interest rate reductions will generally result in an immediate drop in the Banks interest income on loans, with a more delayed impact on interest expense because reductions in interest costs will only occur upon renewals of certificates of
deposit or borrowings. Interest rate increases will generally result in an immediate increase in the Banks interest income on loans, with a more delayed impact on interest expense because increases in interest costs will only occur upon
renewals of certificates of deposit or borrowings. Average total interest-earning assets increased $36.7 million, or 7.53%, during 2009 compared to 2008, while the average yield decreased by 81 basis points from 6.08% to 5.27%. As interest rates
remained very low during 2009, the average rate on loans repriced and decreased year over year. The average rate on investment securities decreased in 2009 compared to 2008 reflecting the lower reinvestment yields available for securities purchased
or reinvested during the year. Average total interest-bearing liabilities increased by $34.9 million, or 8.07%, a slightly higher growth rate than average interest-earning asset balances. The average cost of interest-bearing liabilities decreased by
131 basis points from 3.54% to 2.23%. With the cost on interest bearing liabilities decreasing more significantly than the yield on earning assets, the Banks net interest margin increased by 33 basis points. For the year ended
December 31, 2009, the net interest margin was 3.27%, while for the year ended December 31, 2008, the net interest margin was 2.94%. Table 3 following this discussion reflects the volume and rate variances from 2009 as compared to 2008.

Provision for Loan Losses.The Bank recorded $4.5 million in the provision for loan losses in 2009, an
increase of $2.8 million from the $1.7 million provision made in 2008. Provisions for loan losses are charged to income to bring the allowance for loan losses to a level deemed appropriate by management. In evaluating the allowance for loan losses,
management considers factors that include growth, composition and industry diversification of the portfolio, historical loan loss experience, current delinquency levels, adverse situations that may affect a borrowers ability to repay,
estimated value of any underlying collateral, prevailing economic conditions and other relevant factors. For 2009, large provisions were made each quarter in response to the weakened economy and real estate market. Specifically, builder/construction
loans experienced a significant deterioration in their collateral values and many developers experienced decreased rates of building lot inventory turn-over. Although the Bank reduced its total exposure to construction loans by $24.3 million or
26.4% from $91.9 million at December 31, 2008 to $67.6 million at December 31, 2009, significant risk to property value depreciation continues to persist in the Companys construction loan portfolio. Real estate developers
ability to service debt for extended time periods remains tentative as cash flows have deteriorated. Total loans outstanding, net of loans held for sale, increased by $3.4 million in 2009 and by $62.9 million in 2008. At December 31, 2009, the
allowance for loan losses was $7.3 million, an increase of $1.7 million, or 29.74%, from the $5.6 million at the end of 2008. The allowance represented 1.67% and 1.30%, respectively, of loans outstanding at the end of 2009 and 2008, net of loans
held for sale. The increase in the allowance is reflective of the on going economic and real estate market deterioration experienced



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locally as well as nationally and internationally. At December 31, 2009, the Bank had $7.3 million in non-accrual loans. In 2008, the Bank had $3.1 million in non-accrual loans. For a more
detailed discussion of the provision of loan losses and the established reserve, see the section entitled Analysis of Allowance for Loan Losses.

Non-Interest Income.Non-interest income increased to $2.8 million for the year ended December 31, 2009 compared to $2.2 million for the year ended December 31, 2008, an
increase of $567,000 or 25.54%. A significant factor in the increase in total non-interest income was the reduction in Other Than Temporary Impairment (OTTI) of private label collateralized mortgage obligation securities. OTTI recognized in 2009 was
$148,000, which is a decrease of $342,000, a 69.79% improvement compared to the 2008 OTTI write down of $490,000. The decrease in the determination of OTTI was influenced by the adoption of ASC Topic 320-10-65-1 (formerly referred to as FSP FAS
115-2) effective January 1, 2009. Prior to January 1, 2009, if an investment was determined to be other than temporarily impaired, then the difference between the book value and market value was recognized as an OTTI loss in earnings.
Beginning January 1, 2009, if an investment in a debt security was deemed to be other than temporarily impaired, then the difference between the book value and market value was further evaluated to identify the portion that related to credit
deterioration. Only the portion related to credit deterioration is recognized through earnings. The cumulative effect of the change in accounting principle was an opening adjustment of $211,000, net of tax, to increase retained earnings. During 2009
the portion of OTTI that was determined to be credit-related and thus recognized in earnings was $148,000. Mortgage operations income increased to $800,000 in 2009, from $571 thousand in 2008, reflecting the impact of government initiated first time
home buyer incentives and attractive refinancing rates available in the mortgage origination market. Service charges on deposit accounts in 2009 were $910,000, a decrease of $242,000, or 21.01%, compared to $1.2 million in 2008 reflecting the
competitive market for attracting and retaining demand deposit accounts. Other non-interest income increased $272,000 in 2009 reflecting a receipt of a one time insurance claim for $252,000. Table 4, following this discussion, is a comparative
analysis of the components of non-interest income for 2009, 2008 and 2007.

Non-Interest Expenses.Non-interest expenses totaled $12.3 million for the year ended December 31, 2009, an increase of $2.8 million over the $9.5 million reported for 2008. Noninterest expense of $12.3 million, excluding the effect of the $349,000 loss on sale
of other real estate, increased $1.9 million for 2009, compared to noninterest expense of $9.5 million, excluding the effect of the $536,000 gain on sale of other real estate in 2008. Salaries and employee benefits increased $239,000 primarily
resulting from increases in fair value expenses due to Stock Options issued in 2009. Professional and other services increased $184,000 or 33.45% primarily due increases in audit and legal fees and proceedings. Deposit and other insurance expense
increased $848,000 or 196.30% because of increased FDIC premiums and the special assessment imposed during 2009. Occupancy and equipment expense increased by $449,000 due to increases in maintenance costs and additional lease expense incurred with
the relocation of our Green Valley Office located in Greensboro and new software licensure expenses. Data processing and other outside services increased $144,000, or 18.30%, due primarily to costs associated with the reconfiguration and relocation
of the Banks data processing servers as well as the implementation of a significantly enhanced business and disaster recovery plan. Advertising expense decreased $49,000 reflecting new marketing strategies and programs during 2009. Table 5,
following this discussion, presents a comparative analysis of the components of non-interest expenses for 2009, 2008 and 2007.

Income Taxes.The provision for income tax was $818,000 in 2009 and $1.7 million in 2008. The effective tax rates were
25.6% and 32.2%, respectively, on income before income taxes. The decrease in the effective tax rate for 2009 reflects an increase in the proportion of tax-exempt income to total income for 2009 over 2008.

LIQUIDITY

The Banks sources of liquidity are customer deposits, cash and demand balances due from other banks, interest-earning deposits in
other banks and investment securities available for sale. These funds, together with loan and securities repayments, are used to fund loans and continuing operations. At December 31, 2010, the Bank had credit availability with the Federal
Reserve Bank of $51.1 million and the FHLB of $165.4 million, with $15.0 million outstanding.

Total deposits were $465.9
million and $465.0 million at December 31, 2010 and 2009, respectively. The Banks deposits increased 0.18% in 2010. Because the Banks organic deposit growth was sufficient in amount to meet the total funding needs of the Bank, the
Bank reduced its exposure to alternative funding sources during 2010. The Bank reduced its total wholesale funding sources in 2010 by $35.1 million or 19.21%. Total wholesale funding was $183.0 million at December 31, 2009 compared to $147.8
million at December 31, 2010. The Bank will



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continue to evaluate all funding sources for cost, accessibility, dependability and efficiency. Brokered certificates of deposits decreased $1.2 million during 2010, from $102.4 million in 2009
to $101.2 million in 2010, a decrease of 1.16%. Brokered certificates of deposits as a percent of assets decreased from 18.92% in 2009 to 18.56% in 2010.

At December 31, 2010 and 2009, time deposits represented 39.67% and 58.12%, respectively, of the Banks total deposits. Certificates of deposit of $100,000 or more represented 34.1% and 48.8%,
respectively, of the Banks total deposits at December 31, 2010 and 2009. At December 31, 2010, the Bank had $26.4 million in public deposits and $101.2 million in brokered time deposits. These sources of funds are generally
considered to be less stable than deposits from the Banks local markets. However, management believes that other non-traditional funding time deposits are relationship oriented. While the Bank appreciates the need to pay competitive rates to
retain these deposits, other subjective factors also influence deposit retention. Based upon prior experience, the Bank anticipates that a substantial portion of outstanding certificates of deposit will renew upon maturity. The Banks aggregate
wholesale funding comprised of brokered CDs, wholesale NOW accounts, FHLB advances, FRB discount window borrowings and CDARS accounts (Certificate of Deposit Account Registry Service) as a percentage of total assets decreased to 31.7% in 2010
from 33.9% in 2009. The wholesale funding aggregate decrease is due primarily to an increase in traditional deposits resulting from our customer bases recognition of MidCarolinas consistent performance during a difficult economic period.

Management anticipates that the Bank will continue to utilize non-local market funding sources such as wholesale NOW
accounts, CDARS, FHLB advances, FRB advances and brokered certificates of deposits as a less costly diversified funding source to complement the Banks local market deposits. Deposits, loan repayments, mortgage-backed securities prepayments,
bond maturities, FHLB advances, FRB discount window borrowings and current earnings will be employed to provide liquidity, generate loans, purchase securities, procure fixed assets and meet other operating needs incurred in normal banking
activities.

In the normal course of business there are various outstanding contractual obligations of the Bank that will
require future cash outflows. In addition, there are commitments and contingent liabilities, such as commitments to extend credit that may or may not require future cash outflows. Table 6 following this discussion summarizes the Banks
contractual obligations and commitments as of December 31, 2010.

CAPITAL RESOURCES

At December 31, 2010 and 2009, shareholders equity totaled $40.4 million and $40.2 million, respectively. MidCarolinas
equity to asset ratio on those dates was 7.61% and 7.42%, respectively, reflecting MidCarolinas moderate negative asset growth during 2010. MidCarolina and the Bank are subject to minimum capital requirements. See PART 1, ITEM 1 -
DESCRIPTION OF BUSINESS  SUPERVISION AND REGULATION. Because MidCarolinas only significant asset is its investment in the Bank, information concerning capital ratios is essentially the same for the MidCarolina and the Bank.

All capital ratios place the Bank in excess of minimum requirements to be classified as well capitalized by
regulatory measures. The Banks Tier-1 leverage ratio was 9.03% at December 31, 2010.

Note Q to the accompanying
consolidated financial statements presents an analysis of the Banks regulatory capital position as of December 31, 2010 and 2009. Management anticipates that the Bank will remain well-capitalized for regulatory purposes
throughout 2011.

ASSET/LIABILITY MANAGEMENT

The Banks results of operations depend substantially on its net interest income. Like most financial institutions, the Banks interest income and cost of funds are affected by general economic
conditions and by competition in the market place. The purpose of asset/liability management is to provide stable net interest income growth by protecting the Banks earnings from undue interest rate risk, which arises from volatile interest
rates and changes in the balance sheet mix, and by managing the risk/return relationships between liquidity, interest rate risk, market risk and capital adequacy. The Bank maintains, and has complied with, an asset/liability management policy
approved by the board of directors of MidCarolina and the Bank that provides guidelines for controlling exposure to interest rate risk by utilizing the following ratios and trend analysis: liquidity, equity, volatile liability dependence, portfolio
maturities, maturing assets and maturing liabilities. The Banks policy is to control the exposure of its



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earnings to changing interest rates by generally endeavoring to maintain a position within a range around an earnings neutral position, which is defined as the mix of assets and
liabilities that generate a net interest margin that is least affected by interest rate changes.

When suitable lending
opportunities are not sufficient to utilize available funds, the Bank has generally invested such funds in securities, primarily securities issued by U.S. governmental agencies, mortgage-backed securities and securities issued by local governmental
municipalities. The securities portfolio contributes to the Banks profits and plays an important part in the overall interest rate management. However, management of the securities portfolio alone cannot balance overall interest rate risk. The
securities portfolio must be used in combination with other asset/liability techniques to actively manage the balance sheet. The primary objectives in the overall management of the securities portfolio are safety, liquidity, yield, asset/liability
management (interest rate risk) and investing in securities that can be pledged for public deposits or as collateral for FHLB advances.

In reviewing the needs of the Bank with regard to proper management of its asset/liability program, the Banks management estimates its future needs, taking into consideration historical periods of
high loan demand and low deposit balances, estimated loan and deposit increases (due to increased demand through marketing) and forecasted interest rate changes. A number of measures are used to monitor and manage interest rate risk, including
income simulations and interest sensitivity (gap) analyses. An income simulation model is the primary tool used to assess the direction and magnitude of changes in net interest income resulting from changes in interest rates. Key assumptions in the
model include prepayments on loan and loan-backed assets, cash flows and maturities of other investment securities, loan and deposit volumes and pricing. These assumptions are inherently uncertain and, as a result, the model cannot precisely
estimate net interest income or precisely predict the impact of higher or lower interest rates on net interest income. Actual results will differ from simulated results due to timing, magnitude and frequency of interest rate changes and changes in
market conditions and management strategies, among other factors.

Based on the results of the income simulation model, as of
December 31, 2010, due to the extremely low interest rate environment, the Bank would expect a decrease in net interest income of $709,000 if interest rates increase from current rates by an instantaneous 100 basis points and an increase in net
interest income of $23,000 thousand if interest rates decrease from current rates by an instantaneous 100 basis points.

The
analysis of an institutions interest rate gap (the difference between the repricing of interest-earning assets and interest-bearing liabilities during a given period of time) is another standard tool for the measurement of the exposure to
interest rate risk. Management believes that because interest rate gap analysis does not address all factors that can affect earnings performance, it should be used in conjunction with other methods of evaluating interest rate risk.

Table 7 following this discussion sets forth the amounts of interest-earning assets and interest-bearing liabilities outstanding at
December 31, 2010, which are projected to reprice or mature in each of the future time periods shown. Except as stated below, the amounts of assets and liabilities shown which reprice or mature within a particular period were determined in
accordance with the contractual terms of the assets or liabilities. Loans with adjustable rates are shown as being due at the end of the next upcoming adjustment period. Money market deposit accounts are considered rate sensitive and are placed in
the shortest period. Negotiable order of withdrawal or other transaction accounts are also assumed to be rate sensitive and are placed in the shortest period. In making the gap computations, none of the assumptions sometimes made regarding
prepayment rates and deposit decay rates are used for any interest-earning assets or interest-bearing liabilities. In addition, the table does not reflect scheduled principal payments that will be received throughout the lives of the loans. The
interest rate sensitivity of the Banks assets and liabilities illustrated in the table would vary substantially if different assumptions were used or if actual experience differs from that indicated by such assumptions.

Table 7 illustrates that if assets and liabilities reprice in the time intervals indicated in the table, the Bank is liability sensitive
within three months, liability sensitive over three months to twelve months, liability sensitive within twelve months and asset sensitive thereafter. As stated above, certain shortcomings are inherent in the method of analysis presented in the
foregoing table. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets
and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market interest rates. For instance, while the table is based on the assumption that money market accounts
are immediately sensitive to movements in rates, the Bank expects that in a changing rate environment the amount of the adjustment in interest rates for such accounts would be less than the adjustment in categories of assets that are considered to
be immediately sensitive. The same is true for



20



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all other interest-bearing transaction accounts. Additionally, certain assets have features that restrict changes in the interest rates of such assets both on a short-term basis and over the
lives of such assets. Further, in the event of a change in market interest rates, prepayment and early withdrawal levels could deviate significantly from those assumed in calculating the tables. Finally, the ability of many borrowers to service
their adjustable-rate debt may decrease in the event of an increase in market interest rates. Due to these shortcomings, the Bank places primary emphasis on its income simulation model when managing its exposure to changes in interest rates. The
Bank does not normally make interest rate predictions, or take undue risk on potential changes in interest rate direction.

LENDING ACTIVITIES

General.The Bank provides to its customers a full range of short- to medium-term commercial, mortgage, construction and personal loans, both secured and unsecured. The Bank also
makes real estate mortgage and construction loans.

The Banks loan policies and procedures establish the basic
guidelines governing its lending operations. Generally, the guidelines address the types of loans that the Bank seeks, target markets, underwriting and collateral requirements, terms, interest rate and yield considerations and compliance with laws
and regulations. All loans or credit lines are subject to approval procedures and amount limitations. These limitations apply to the borrowers total outstanding indebtedness to the Bank, including the indebtedness of any guarantor. The
policies are reviewed and approved at least annually by the board of directors of the Bank. The Bank supplements its own supervision of the loan underwriting and approval process with periodic loan audits by internal loan examiners and outside
professionals experienced in loan review work. The Bank has focused its portfolio lending activities on typically higher yielding commercial, construction and consumer loans. The Bank also originates one-to-four family mortgages that are typically
sold into the secondary market, servicing released.

Table 8 following this discussion provides an analysis of the Banks
loan portfolio composition by type of loan as of the end of each of the last five years.

Table 9 following this discussion
presents, at December 31, 2010, (i) the aggregate maturities or re-pricings of commercial, industrial and commercial mortgage loans and of real estate constructions loans and (ii) the aggregate amounts of such loans by variable and
fixed rates.

Commercial and Industrial Loans.At December 31, 2010, the Banks commercial and
industrial loan portfolio equaled $61.2 million, or 15.3% of total loans, as compared with $64.2 million, or 14.6% of total loans, at December 31, 2009. Commercial and industrial loans include both secured and unsecured loans for working
capital, expansion and other business purposes. Short-term working capital loans generally are secured by accounts receivable, inventory and/or equipment. The Bank also makes term commercial loans secured by equipment and real estate. Lending
decisions are based on an evaluation of the financial strength, management and credit history of the borrower, and the quality of the collateral securing the loan. With few exceptions, the Bank requires personal guarantees and secondary sources of
repayment.

Commercial and industrial loans generally provide greater yields and reprice more frequently than other types of
loans, such as real estate loans, as most commercial loan yields are tied to the prime rate index. Therefore, yields on most commercial loans adjust with changes in the prime rate.

Real Estate Loans.Real estate loans are originated for the purpose of purchasing, constructing or refinancing one-to-four
family, five-or-more family and commercial properties. The Bank offers fixed and adjustable rate options. The Bank provides customers access to long-term conventional real estate loans through its mortgage loan department which makes Federal
National Mortgage Association (FNMA), Federal Home Loan Mortgage Company (FHLMC) and Government National Mortgage Association (GNMA) conforming loans that are originated with a commitment from a correspondent Bank
to purchase the loan within 30 to 45 days of closing.

Residential one-to-four family loans are classified into two
categories: conforming loans, that are originated under the underwriting guidelines established by FNMA, FHLMC or GNMA and held for sale and nonconforming loans that are originated and retained in the Banks loan portfolio. The terms
conforming and nonconforming do not refer to credit quality, but rather to whether the loan is underwritten so that it can be sold in the secondary market. At December 31, 2010, the Bank had $3.0 million in loans held
for sale, while nonconforming loans held in the Banks permanent portfolio amounted to $425,000. The Banks permanent residential mortgage loans are generally secured by properties located within the Banks market area. Most of the
one-to-four family residential mortgage loans that the Bank makes are conforming loans and are sold within 30 days of closing to a correspondent



21



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Bank. The Bank originated 233 loans in the amount of $35.8 million for sale in the secondary market during 2010. The Bank receives a fee for each loan originated, with fees aggregating $786,000
for the year ended December 31, 2010 and $800,000 for the year ended December 31, 2009. The Bank anticipates that it will continue to be an active originator of residential loans. Nonconforming residential mortgage loans that are retained
in the Banks loan portfolio generally have rate terms of five years or less, with amortizations up to 20 years.

The
Bank has made, and may continue to make, under qualifying circumstances, commercial real estate loans. Commercial real estate loan outstandings amounted to $173.3 million at December 31, 2010. These loans are secured principally by commercial
buildings for office, storage and warehouse space, commercial and residential real estate developments and agricultural properties. Generally in underwriting commercial real estate loans, the Bank requires the personal guarantee of borrowers and a
demonstrated cash flow capability sufficient to service the debt. Loans secured by commercial real estate usually involve a greater degree of risk than one-to-four family residential mortgage loans. Payments on such loans are often dependent on
successful operation or management of the properties.

The Bank originates one-to-four family residential construction loans
for the construction of custom homes (where the home buyer is the borrower) and provides financing to builders and consumers for the construction of pre-sold homes. The Bank generally receives a pre-arranged permanent financing commitment from an
outside entity prior to financing the construction of pre-sold homes. The Bank lends to builders who have demonstrated a favorable record of performance and profitable operations and who are building in markets that management believes it
understands and in which it is comfortable with the economic conditions. The Bank also makes commercial real estate construction loans, generally for owner-occupied properties. The Bank further endeavors to limit its construction lending risk
through adherence to established underwriting procedures. The Bank generally requires documentation for all draw requests and utilizes loan officers to inspect the project prior to honoring draw requests from the builder. With few exceptions, the
Bank requires personal guarantees and secondary sources of repayment on construction loans.

Consumer Loans and Home
Equity Lines of Credits.Loans to individuals include automobile loans, boat and recreational vehicle financing, home equity and home improvement loans and miscellaneous secured and unsecured personal loans. Consumer loans generally
can carry significantly greater risks than other loans, even if secured, if the collateral consists of rapidly depreciating assets such as automobiles and equipment. Repossessed collateral securing a defaulted consumer loan may not provide an
adequate source of repayment of the loan. Consumer loan collections are sensitive to job loss, illness and other personal factors. The Bank attempts to manage the risks inherent in consumer lending by following established credit guidelines and
underwriting practices designed to minimize risk of loss.

Loan Approvals.The Banks loan policies
and procedures establish the basic guidelines governing its lending operations. Generally, the guidelines address the type of loans that the Bank seeks, target markets, underwriting and collateral requirements, terms, interest rate and yield
considerations and compliance with laws and regulations. All loans or credit lines are subject to approval procedures and amount limitations. These limitations apply to the borrowers total outstanding indebtedness to the Bank, including the
indebtedness of any guarantor. The policies are reviewed and approved at least annually by the board of directors of the Bank. The Bank supplements its own supervision of the loan underwriting and approval process with periodic loan audits by
independent, outside professionals experienced in loan review analysis.

Responsibility for loan production rests with the
Senior Commercial Lending Officer in each market. The responsibility for loan underwriting, loan processing and approval is with the Chief Credit Officer. The board of directors of the Bank reviews the Presidents lending authority annually.
The board, in turn delegates loan authority to the Chief Credit Officer and other loan officers of the Bank. Delegated authorities may include loans, letters of credit, overdrafts, uncollected funds and such other authority as determined by the
board of directors or the President.

The President and the Chief Credit Officer each have the authority to approve loans up
to $400,000. The President in conjunction with the Chief Credit Officer have the combined authority to approve loans up to $2.0 million which is the maximum staff, in-house lending limit set by the board of directors. The boards Loan Committee
approves all loans in excess of the staffs in-house lending limit. The Committee consists of the President, the Chairman and Vice Chairman of the Banks board and six outside directors as appointed by the board

Additionally, all loans of $50,000 or greater and all loans with relationship exposure of $200,000 or above



22



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are reviewed by the Management Loan Committee comprised of the President, Chief Credit Officer, and the Senior Commercial Loan Officers for Alamance County and Guilford County. The Banks
Loan Committee reviews all loans with total exposure of $1.0 million or greater and approves all loans with total exposure of $2.0 million or greater. The Banks legal lending limit was $14.6 million at December 31, 2010. The Bank seldom
makes loans approaching its legal lending limit.

COMMITMENTS TO EXTEND CREDIT

In the ordinary course of business, the Bank enters into various types of transactions that include commitments to extend credit that are
not included in loans receivable, net, presented on MidCarolinas consolidated balance sheets. The Bank applies the same credit standards to these commitments as it uses in all its lending activities and has included these commitments in its
lending risk evaluations. The Banks exposure to credit loss under commitments to extend credit is represented by the amount of these commitments. See Note P to the accompanying consolidated financial statements and Table 6 following this
discussion.

ASSET QUALITY

The Bank considers asset quality to be of primary importance, and employs a formal internal loan review process to ensure adherence to the lending policy as approved by the Banks board of directors.
It is the responsibility of each loan officer to assign an appropriate risk grade to loans when originated. Credit Administration, through the loan review process, validates the accuracy of the initial risk grade assessment. In addition, as a given
loans credit quality changes, it is the responsibility of Credit Administration to change the borrowers risk grade accordingly. The process of determining the allowance for loan losses is fundamentally driven by the risk grade system. In
determining the allowance for loan losses and any resulting provision to be charged against earnings, particular emphasis is placed on the results of the loan review process. Consideration is also given to historical loan loss experience, the value
and adequacy of collateral, economic conditions in the Banks market area and other factors. For loans determined to be impaired, the allowance is based on discounted cash flows using the loans initial effective interest rate or the fair
value of the collateral for certain collateral dependent loans. This evaluation is inherently subjective, as it requires material estimates, including the amounts and timing of future cash flows expected to be received on impaired loans that may be
susceptible to significant change. At December 31, 2010 the Bank had 53 impaired loans totaling $20.2 million comprised of 15 builder/construction loans totaling $9.3 million, 17 commercial and industrial loans for $9.1 million and 21
residential mortgage loans for $1.8. The allowance for loan losses represents managements estimate of the appropriate level of reserve to provide for probable losses inherent in the loan portfolio.

The Banks policy regarding past due loans normally requires a prompt charge-off to the allowance for loan losses following timely
collection efforts and a thorough review. Further efforts are then pursued through various means available. Loans carried in a non-accrual status are generally collateralized and are considered in the determination of the allowance for loan losses.

NONPERFORMING ASSETS

MidCarolinas total nonperforming assets increased $4.6 million to $14.7 million at December 31, 2010, from $10.2 million at December 31, 2009, reflecting the distressed economy mentioned
previously. Non-accrual loans, a subset of nonperforming assets, comprised 56% of total nonperforming assets or $9.1 million. Other real estate owned comprised the remaining significant component of nonperforming assets in the amount of $7.2 million
or 44% of total nonperforming assets. Nonperforming restructured loans at December 31, 2010, which were included in total nonperforming assets, consisted of three construction loans in the amount of $656,000 and one home equity line of credit
in the amount of $73,000. Performing restructured loans at December 31, 2010 which were not included in nonperforming assets, consisted of eight construction loans in the amount of $3.3 million and one commercial mortgage loan in the amount of
$710,000.

Table 10 following this discussion sets forth, for the last five years, information with respect to the Banks
nonperforming assets.

MidCarolinas consolidated financial statements are prepared on the accrual basis of accounting,
including the recognition of interest income on loans, unless a loan is placed on non-accrual basis. For all classes of loans, loans are accounted for on a non-accrual basis when management has serious concerns about the collectibility of principal
or interest. Generally, the Banks policy is to place a loan on non-accrual status when the loan becomes 90 days past due. Loans are also placed on non-accrual status in cases where management is uncertain whether the



23



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borrower can satisfy the contractual terms of the loan agreement. Payments received on non-accrual loans generally are applied to principal first, and then to interest after all principal
payments have been satisfied. Restructured loans are those for which concessions, including the reduction of interest rates below a rate otherwise available to that borrower or the deferral of interest or principal, have been granted due to the
borrowers weakened financial condition. The Bank accrues interest on restructured loans at the restructured rate when management anticipates that no loss of original principal will occur. Potential problem loans are defined as loans currently
performing that are not included in non-accrual or restructured loans, but are loans as to which management has concerns as to the borrowers ability to comply with present repayment terms. These loans could potentially deteriorate to
non-accrual, past due or restructured loans status. Therefore, management quantifies the risk associated with problem loans in assessing the adequacy of the allowance for loan losses. At December 31, 2010, the Bank identified $9.1 million in
non-accrual loans. At December 31, 2009, the Bank identified $7.4 million in non-accrual loans.

Other real estate owned
consists of foreclosed, repossessed and idled properties. At December 31, 2010, there were $7.2 million assets classified as real estate owned. At December 31, 2009, there were $2.9 million in assets classified as real estate owned.

ANALYSIS OF ALLOWANCE FOR LOAN LOSSES

The allowance for loan losses is established through a provision for loan losses charged to expense. Loans are charged-off against the allowance when management believes that the collectability of
principal is unlikely. Recoveries of amounts previously charged-off are credited to the allowance.

The allowance for loan
losses relating to loans that are determined to be impaired is based on discounted cash flows using the loans initial effective interest rate or the estimated fair value of the collateral, less costs to sell, for certain collateral dependent
loans. Large groups of smaller balance homogeneous loans that are collectively evaluated for impairment (such as residential mortgage and consumer installment loans) are excluded from impairment evaluation, and their allowance for loan losses is
calculated in accordance with the allowance for loan losses policy described below.

The provision for loan losses charged to
operating expense is based on factors which, in managements judgment, deserve current recognition in estimating probable loan losses. Such factors considered by management include growth and composition of the loan portfolio, the relationship
of the allowance for loan losses to outstanding loans, historical charge off activity, current and probable future local, regional and national economic conditions and an in depth assessment of the status of certain individual borrowers
ability to meet repayment obligations. While management uses the best information available to make evaluations, this evaluation is inherently subjective as it requires material estimates, including the amounts and timing of future cash flows
expected to be received on impaired loans that may be susceptible to significant change. The provision contributed to the allowance for loan losses segregated by major loan category during 2010 is:



|                                |  |                        |       |  |                      |  |       | 
|------------------------------- |  | ---------------------- | ----- |  | -------------------- |  | ----- | 
|Loan Category                   |  | Contribution (in $000) |       |  | % of Total Provision | 
|Construction loans              |  | $                      | 3,209 |  |                      |  | 50.00 | 
|Commercial mortgage loans       |  |                        | 1,284 |  |                      |  | 20.00 | 
|Home equity lines of credit     |  |                        | 385   |  |                      |  | 6.00  | 
|Residential mortgage loans      |  |                        | 642   |  |                      |  | 10.00 | 
|Commercial and Industrial loans |  |                        | 834   |  |                      |  | 13.00 | 
|Consumer loans                  |  |                        | 64    |  |                      |  | 1.00  | 

In addition, various
regulatory agencies, as an integral part of their examination process, periodically review MidCarolinas allowance for loan losses. Such agencies may require the MidCarolina to recognize adjustments to the allowance based on their judgments of
information available to them at the time of their examination.

Growth in loans outstanding has, throughout the Banks
history, been the primary reason for increases in the Banks allowance for loan losses and the resultant provisions for loan losses necessary to provide for those increases. This growth has been spread among the Banks major loan
categories, with the concentrations of major loan categories being relatively consistent. Between December 31, 2009 and December 31, 2010, the range of each major category of loans as a percentage of total loans outstanding is as follows:
residential mortgage loans  18.7% to 18.0%; commercial mortgage loans  39.9% to 43.0%; construction loans  15.4% to 10.9%; commercial and industrial loans  14.6% to 15.2%; loans to individuals  1.2% to 1.3%; and home
equity lines of credit  10.2% to 10.8%. Net loan charge-offs in the past five years ranged from 0.05% to 1.07% of average loans outstanding. In



24



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2009 and 2010, net charge offs were .63% and 1.07% of average loans, respectively, reflecting the deterioration of economic conditions. Charge offs are typically recognized when it is the opinion
of management that all or a portion of an outstanding loan becomes uncollectible. Loan repayment may be realized through a contractual agreement, or through liquidation of assets pledged as collateral. Net charge-offs totaled $2.8 million or 0.63%
of outstanding loans for 2009 and $4.5 million or 1.07% of outstanding loans for 2010. Charge-offs incurred by major loan category during 2010 are:



|                                |  |                       |       |  |                  |  |       | 
|------------------------------- |  | --------------------- | ----- |  | ---------------- |  | ----- | 
|Loan Category                   |  | Charge-offs (in $000) |       |  | % of Charge-offs | 
|Construction loans              |  | $                     | 2,388 |  |                  |  | 49.65 | 
|Commercial mortgage             |  |                       | 965   |  |                  |  | 20.07 | 
|Commercial and industrial loans |  |                       | 611   |  |                  |  | 12.71 | 
|Residential mortgage loans      |  |                       | 462   |  |                  |  | 9.61  | 
|Home equity Lines of credit     |  |                       | 319   |  |                  |  | 6.64  | 
|Consumer loans                  |  |                       | 65    |  |                  |  | 1.36  | 

The Banks
allowance for loan losses at December 31, 2009 of $7.3 million represents 1.67% of total loans outstanding, net of loans held for sale. The Banks allowance for loan losses at December 31, 2010 was $9.2 million or 2.31% of outstanding
loans, net of loans held for sale. The allowance for loan losses as a percentage of loans outstanding increased in 2010 compared to 2009 due to increases in net charge offs as well as nonperforming loans, reflecting the decline in the local,
national and international economic environment. The ending balance of the allowance for loan losses (ALLR) by major loan category and the major categorys ALLR balance as a percentage of its outstanding loan balance at December 31, 2010
are:



|                                |  |                       |       |  |                                               |  |      | 
|------------------------------- |  | --------------------- | ----- |  | --------------------------------------------- |  | ---- | 
|Loan Category                   |  | ALLR balance(in $000) |       |  | ALLR as % of categoryloan balance outstanding | 
|Construction loans              |  | $                     | 2,079 |  |                                               |  | 4.74 | 
|Commercial mortgage             |  |                       | 3,239 |  |                                               |  | 1.87 | 
|Commercial and industrial loans |  |                       | 1,397 |  |                                               |  | 2.29 | 
|Residential mortgage loans      |  |                       | 1,563 |  |                                               |  | 2.19 | 
|Home equity Lines of credit     |  |                       | 810   |  |                                               |  | 1.86 | 
|Consumer loans                  |  |                       | 138   |  |                                               |  | 2.56 | 

Nonperforming loans
increased $122,000 during 2010 to $7.5 million compared to $7.3 million at December 31, 2009 and $4.9 million of the non performing loans at December 31, 2010, or 65.2%, were concentrated in commercial real estate.

Table 11 following this discussion presents the allocation of the allowance for loan losses at the end of each of the last five years.
The allocation is based on an evaluation of defined loan problems, historical ratios of loan losses and other factors that may affect future loan losses in the categories of loans shown.

Table 12 following this discussion sets forth for each of the last five years information regarding changes in the Banks allowance
for loan losses.

INVESTMENT ACTIVITIES

The Banks portfolio of investment securities, all of which are available for sale, consists primarily of U.S. government agency securities, mortgage-backed securities, government sponsored
enterprise collateralized mortgage obligations, private label collateralized mortgage obligations and securities issued by local governments. Securities to be held for indefinite periods of time and not intended to be held to maturity are classified
as available for sale and carried at fair value, with any unrealized gains or losses reflected as an adjustment to stockholders equity. Securities held for indefinite periods of time include securities that management intends to use as part of
its asset/liability management strategy and that may be sold in response to changes in interest rates and/or significant prepayment risks. It is the Banks policy to classify its investment securities as available for sale. Table 13 following
this discussion summarizes investment securities by type at December 31, 2010, 2009 and 2008.

Table 14 following this
discussion summarizes the amortized costs, fair values and weighted average yields of the Banks investment securities at December 31, 2010, by contractual maturity groups.

The Bank does not engage in, nor does it presently intend to engage in, securities trading activities and therefore does not maintain a
trading account. At December 31, 2010, there were no securities of any issuer (other



25



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than governmental agencies) held in the Banks portfolio that exceeded 10% of MidCarolinas shareholders equity.

SOURCES OF FUNDS

Deposit Activities.The Bank provides a range of deposit services, including non-interest-bearing checking accounts, interest-bearing checking and savings accounts, money market
accounts and certificates of deposit. These accounts generally earn interest at rates established by management based on competitive market factors and managements desire to increase or decrease certain types or maturities of deposits. As
described under the caption Liquidity above, the Bank uses wholesale deposits as a funding source. However, the Bank strives to establish customer relations to attract core deposits in non-interest-bearing transactional accounts and thus
to reduce the Banks costs of funds.

Table 15 following this discussion sets forth for the for the years ended
December 31, 2010, 2009 and 2008 the average balances outstanding and average interest rates for each major category of deposits.

Table 16 following this discussion presents maturities of certificates of deposit with balances of $100,000 or more at December 31, 2010.

Borrowings.As additional sources of funding, the Bank uses advances from the FHLB under a line of credit equal to 30% of
the Banks total assets, subject to qualifying collateral. The available aggregate line of credit was $165.4 million at December 31, 2010. Outstanding advances at December 31, 2010 totaled $15.0 million, of which $5.0 million matures
in 2011 at 2.37% and $10 million matures in 2018 at 2.98%. The Bank had no daily rate credit advances outstanding at December 31, 2010. Pursuant to collateral agreements with the FHLB, at December 31, 2010, advances are secured by loans
with a carrying amount of $50.2 million, which approximates market value. Advances outstanding at December 31, 2009 totaled $25.0 million.

The Bank also has a line of credit with the FRB through their discount window in the amount of $51.1 million. No borrowings were outstanding at December 31, 2010. The line of credit is secured by
loans with a carrying amount of $62.8 million, which approximates market value.

In addition to FHLB advances, MidCarolina has
issued $8.8 million of junior subordinated debentures to its wholly owned capital trusts, MidCarolina I and MidCarolina Trust II, to fully and unconditionally guarantee the preferred securities issued by the Trusts. These long term obligations,
which currently qualify as Tier I capital for MidCarolina, constitute a full and unconditional guarantee by MidCarolina of the Trusts obligations under the capital trust securities.

CRITICAL ACCOUNTING POLICIES

We have established various accounting policies that govern the application of accounting principles generally accepted in the United States of America in the preparation of our financial statements.
Significant accounting policies are described in Note B to the audited consolidated financial statements. A critical accounting policy is one that is both very important to the portrayal of the MidCarolinas financial condition and results, and
requires managements most difficult, subjective or complex judgments. What makes these judgments difficult, subjective and/or complex is the need to make estimates about the effects of matters that are inherently uncertain. These policies may
involve significant judgments and estimates that have a material impact on the carrying value of certain assets and liabilities. Different assumptions made in the application of these policies could result in material changes in our financial
position and results of operations.

Allowance for Loan Losses.MidCarolinas most significant
critical accounting policy is the determination of the Banks allowance for loan losses. If the mix and amount of future write-offs differ significantly from those assumptions used in making a determination, the allowance for loan losses and
provision for loan losses on the income statement could be materially affected. For further discussion of the allowance for loan losses and a detailed description of the methodology used in determining the adequacy of the allowance, see the sections
of this discussion titled Asset Quality, Analysis of Allowance for Loan Losses and Note B to the consolidated financial statements contained in this Annual Report.

Other Than Temporary Impairment. We evaluate securities for other-than-temporary impairment at least on a monthly
basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term
prospects of the issuer, (3) the anticipated outlook for changes in the general level of interest



26



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rates, (4) whether, for debt securities, it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis, and (5) whether, for
equity securities, our intent and ability to retain our investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.



27



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MidCarolina Financial Corporation

Table 2

Average Balances and Net Interest Income (1)

($ in thousands)



|                                                                                 |  |                              |         |   |                              |   |        |                              |  |  |                |   |  |          |         |   |             |   |        |                |  |  |          |   |  |             |         |   |  |   |        |  |  |  |      |  
|-------------------------------------------------------------------------------- |  | ---------------------------- | ------- | - | ---------------------------- | - | ------ | ---------------------------- |  |  | -------------- | - |  | -------- | ------- | - | ----------- | - | ------ | -------------- |  |  | -------- | - |  | ----------- | ------- | - |  | - | ------ |  |  |  | ---- | -
|                                                                                 |  | Year Ended December 31, 2010 |         |   | Year Ended December 31, 2009 |   |        | Year Ended December 31, 2008 | 
|                                                                                 |  | AverageBalance               |         |   | Interest                     |   |        | AverageRate                  |  |  | AverageBalance |   |  | Interest |         |   | AverageRate |   |        | AverageBalance |  |  | Interest |   |  | AverageRate |        
|Interest-earning assets:                                                         |  |                              |         |   |                              |   |        |                              |  |  |                |   |  |          |         |   |             |   |        |                |  |  |          |   |  |             |         |   |  |   |        |  |  |  |      |  
|Loans, net (1)                                                                   |  | $                            | 421,947 |   |                              | $ | 22,943 |                              |  |  | 5.44           | % |  | $        | 441,704 |   |             | $ | 24,160 |                |  |  | 5.47     | % |  | $           | 405,119 |   |  | $ | 25,763 |  |  |  | 6.36 | %
|Investment securities (2)                                                        |  |                              | 76,114  |   |                              |   | 2,706  |                              |  |  | 3.56           | % |  |          | 70,289  |   |             |   | 3,378  |                |  |  | 4.81     | % |  |             | 69,728  |   |  |   | 3,561  |  |  |  | 5.11 | %
|Interest-earning cash deposits                                                   |  |                              | 26,468  |   |                              |   | 48     |                              |  |  | 0.18           | % |  |          | 9,387   |   |             |   | 21     |                |  |  | 0.22     | % |  |             | 9,678   |   |  |   | 131    |  |  |  | 1.35 | %
|Other                                                                            |  |                              | 2,250   |   |                              |   | 29     |                              |  |  | 1.29           | % |  |          | 2,312   |   |             |   | 24     |                |  |  | 1.04     | % |  |             | 2,454   |   |  |   | 161    |  |  |  | 6.56 | %
|                                                                                 |  |                              |         |   |                              |   |        |                              |  |  |                |   |  |          |         |   |             |   |        |                |  |  |          |   |  |             |         |   |  |   |        |  |  |  |      |  
|                                                                                 |  |                              |         |   |                              |   |        |                              | 
|Total interest-earning assets                                                    |  |                              | 526,779 |   |                              |   | 25,726 |                              |  |  | 4.88           | % |  |          | 523,692 |   |             |   | 27,583 |                |  |  | 5.27     | % |  |             | 486,979 |   |  |   | 29,616 |  |  |  | 6.08 | %
|                                                                                 |  |                              |         |   |                              |   |        |                              |  |  |                |   |  |          |         |   |             |   |        |                |  |  |          |   |  |             |         |   |  |   |        |  |  |  |      |  
|                                                                                 |  |                              |         |   |                              |   |        |                              | 
|Other assets                                                                     |  |                              | 25,439  |   |                              |   |        |                              |  |  |                |   |  |          | 26,915  |   |             |   |        |                |  |  |          |   |  |             | 19,602  |   |  |   |        |  |  |  |      |  
|                                                                                 |  |                              |         |   |                              |   |        |                              |  |  |                |   |  |          |         |   |             |   |        |                |  |  |          |   |  |             |         |   |  |   |        |  |  |  |      |  
|                                                                                 |  |                              |         |   |                              |   |        |                              | 
|Total assets                                                                     |  | $                            | 552,218 |   |                              |   |        |                              |  |  |                |   |  | $        | 550,607 |   |             |   |        |                |  |  |          |   |  | $           | 506,581 |   |  |   |        |  |  |  |      |  
|                                                                                 |  |                              |         |   |                              |   |        |                              |  |  |                |   |  |          |         |   |             |   |        |                |  |  |          |   |  |             |         |   |  |   |        |  |  |  |      |  
|                                                                                 |  |                              |         |   |                              |   |        |                              | 
|Interest-bearing liabilities:                                                    |  |                              |         |   |                              |   |        |                              |  |  |                |   |  |          |         |   |             |   |        |                |  |  |          |   |  |             |         |   |  |   |        |  |  |  |      |  
|Deposits:                                                                        |  |                              |         |   |                              |   |        |                              |  |  |                |   |  |          |         |   |             |   |        |                |  |  |          |   |  |             |         |   |  |   |        |  |  |  |      |  
|Demand deposits                                                                  |  |                              | 208,977 |   |                              |   | 2,733  |                              |  |  | 1.31           | % |  |          | 112,438 |   |             |   | 1,510  |                |  |  | 1.34     | % |  |             | 74,531  |   |  |   | 1,275  |  |  |  | 1.71 | %
|Savings deposits                                                                 |  |                              | 11,691  |   |                              |   | 78     |                              |  |  | 0.67           | % |  |          | 6,663   |   |             |   | 20     |                |  |  | 0.30     | % |  |             | 5,772   |   |  |   | 29     |  |  |  | 0.50 | %
|Fixed maturity deposits                                                          |  |                              | 219,836 |   |                              |   | 4,344  |                              |  |  | 1.98           | % |  |          | 312,282 |   |             |   | 7,648  |                |  |  | 2.45     | % |  |             | 308,562 |   |  |   | 12,192 |  |  |  | 3.95 | %
|Short term borrowed funds                                                        |  |                              |        |   |                              |   |       |                              |  |  |               |   |  |          | 2,225   |   |             |   | 15     |                |  |  | 0.67     | % |  |             | 9,807   |   |  |   | 288    |  |  |  | 2.94 | %
|Long term borrowed funds                                                         |  |                              | 29,106  |   |                              |   | 968    |                              |  |  | 3.33           | % |  |          | 33,764  |   |             |   | 1,247  |                |  |  | 3.69     | % |  |             | 33,764  |   |  |   | 1,510  |  |  |  | 4.47 | %
|                                                                                 |  |                              |         |   |                              |   |        |                              |  |  |                |   |  |          |         |   |             |   |        |                |  |  |          |   |  |             |         |   |  |   |        |  |  |  |      |  
|                                                                                 |  |                              |         |   |                              |   |        |                              | 
|Total interest-bearing liabilities                                               |  |                              | 469,610 |   |                              |   | 8,123  |                              |  |  | 1.73           | % |  |          | 467,372 |   |             |   | 10,440 |                |  |  | 2.23     | % |  |             | 432,436 |   |  |   | 15,294 |  |  |  | 3.54 | %
|                                                                                 |  |                              |         |   |                              |   |        |                              |  |  |                |   |  |          |         |   |             |   |        |                |  |  |          |   |  |             |         |   |  |   |        |  |  |  |      |  
|                                                                                 |  |                              |         |   |                              |   |        |                              | 
|Noninterest-bearing deposits                                                     |  |                              | 40,545  |   |                              |   |        |                              |  |  |                |   |  |          | 43,629  |   |             |   |        |                |  |  |          |   |  |             | 36,925  |   |  |   |        |  |  |  |      |  
|Other liabilities                                                                |  |                              | 1,137   |   |                              |   |        |                              |  |  |                |   |  |          | 992     |   |             |   |        |                |  |  |          |   |  |             | 1,390   |   |  |   |        |  |  |  |      |  
|Stockholders equity                                                             |  |                              | 40,926  |   |                              |   |        |                              |  |  |                |   |  |          | 38,614  |   |             |   |        |                |  |  |          |   |  |             | 35,830  |   |  |   |        |  |  |  |      |  
|                                                                                 |  |                              |         |   |                              |   |        |                              |  |  |                |   |  |          |         |   |             |   |        |                |  |  |          |   |  |             |         |   |  |   |        |  |  |  |      |  
|                                                                                 |  |                              |         |   |                              |   |        |                              | 
|Total liabilities and stockholders equity                                       |  | $                            | 552,218 |   |                              |   |        |                              |  |  |                |   |  | $        | 550,607 |   |             |   |        |                |  |  |          |   |  | $           | 506,581 |   |  |   |        |  |  |  |      |  
|                                                                                 |  |                              |         |   |                              |   |        |                              |  |  |                |   |  |          |         |   |             |   |        |                |  |  |          |   |  |             |         |   |  |   |        |  |  |  |      |  
|                                                                                 |  |                              |         |   |                              |   |        |                              | 
|Net interest income and interest rate spread (3)                                 |  |                              |         |   |                              | $ | 17,603 |                              |  |  | 3.15           | % |  |          |         |   |             | $ | 17,143 |                |  |  | 3.03     | % |  |             |         |   |  | $ | 14,322 |  |  |  | 2.54 | %
|                                                                                 |  |                              |         |   |                              |   |        |                              |  |  |                |   |  |          |         |   |             |   |        |                |  |  |          |   |  |             |         |   |  |   |        |  |  |  |      |  
|                                                                                 |  |                              |         |   |                              |   |        |                              | 
|Net interest margin (4)                                                          |  |                              |         |   |                              |   |        |                              |  |  | 3.34           | % |  |          |         |   |             |   |        |                |  |  | 3.27     | % |  |             |         |   |  |   |        |  |  |  | 2.94 | %
|                                                                                 |  |                              |         |   |                              |   |        |                              |  |  |                |   |  |          |         |   |             |   |        |                |  |  |          |   |  |             |         |   |  |   |        |  |  |  |      |  
|                                                                                 |  |                              |         |   |                              |   |        |                              | 
|Ratio of average interest-earning assets to average interest-bearing liabilities |  |                              | 112.17  | % |                              |   |        |                              |  |  |                |   |  |          | 112.05  | % |             |   |        |                |  |  |          |   |  |             | 112.61  | % |  |   |        |  |  |  |      |  
|                                                                                 |  |                              |         |   |                              |   |        |                              |  |  |                |   |  |          |         |   |             |   |        |                |  |  |          |   |  |             |         |   |  |   |        |  |  |  |      |  



|(1) | Average loans include non-accruing loans and loans held for sale.
|--- | -----------------------------------------------------------------

|(2) | Tax exempt income is not computed on a tax equivalent basis.
|--- | ------------------------------------------------------------

|(3) | Interest rate spread equals the earning asset yield minus the interest-bearing liability rate.
|--- | ----------------------------------------------------------------------------------------------

|(4) | Net interest margin is computed by dividing net interest income by total earning assets.
|--- | ----------------------------------------------------------------------------------------



28



---

MidCarolina Financial Corporation

Table 3

Volume and Rate Variance Analysis

(In Thousands)



|                                        |  |                                       |        |   |                                       |   |        |       |  |   |        |   |  |      |       |   |       |   |        |   |  |   |        |  
|--------------------------------------- |  | ------------------------------------- | ------ | - | ------------------------------------- | - | ------ | ----- |  | - | ------ | - |  | ---- | ----- | - | ----- | - | ------ | - |  | - | ------ | -
|                                        |  | Year Ended December 31, 2010 vs. 2009 |        |   | Year Ended December 31, 2009 vs. 2008 |  
|                                        |  | Increase (Decrease) Due to            |        |   | Increase (Decrease) Due to            |  
|                                        |  | Volume                                |        |   | Rate                                  |   |        | Total |  |   | Volume |   |  | Rate |       |   | Total |  
|                                        |  |                                       |        |   |                                       |  
|Interest income:                        |  |                                       |        |   |                                       |   |        |       |  |   |        |   |  |      |       |   |       |   |        |   |  |   |        |  
|Loans, net (1)                          |  | $                                     | (1,077 | ) |                                       | $ | (140   | )     |  | $ | (1,217 | ) |  | $    | 2,164 |   |       | $ | (3,767 | ) |  | $ | (1,603 | )
|Investment securities (2)               |  |                                       | 244    |   |                                       |   | (916   | )     |  |   | (672   | ) |  |      | 28    |   |       |   | (211   | ) |  |   | (183   | )
|Interest-earning cash deposits          |  |                                       | 35     |   |                                       |   | (8     | )     |  |   | 27     |   |  |      | (2    | ) |       |   | (108   | ) |  |   | (110   | )
|Other                                   |  |                                       | (1     | ) |                                       |   | 6      |       |  |   | 5      |   |  |      | (5    | ) |       |   | (132   | ) |  |   | (137   | )
|                                        |  |                                       |        |   |                                       |   |        |       |  |   |        |   |  |      |       |   |       |   |        |   |  |   |        |  
|                                        |  |                                       |        |   |                                       |  
|Total interest income                   |  |                                       | (799   | ) |                                       |   | (1,058 | )     |  |   | (1,857 | ) |  |      | 2,185 |   |       |   | (4,218 | ) |  |   | (2,033 | )
|                                        |  |                                       |        |   |                                       |   |        |       |  |   |        |   |  |      |       |   |       |   |        |   |  |   |        |  
|                                        |  |                                       |        |   |                                       |  
|Interest expense:                       |  |                                       |        |   |                                       |   |        |       |  |   |        |   |  |      |       |   |       |   |        |   |  |   |        |  
|Deposits                                |  |                                       |        |   |                                       |   |        |       |  |   |        |   |  |      |       |   |       |   |        |   |  |   |        |  
|Demand deposits                         |  |                                       | 1,280  |   |                                       |   | (57    | )     |  |   | 1,223  |   |  |      | 579   |   |       |   | (344   | ) |  |   | 235    |  
|Savings deposits                        |  |                                       | 24     |   |                                       |   | 34     |       |  |   | 58     |   |  |      | 4     |   |       |   | (13    | ) |  |   | (9     | )
|Fixed maturity deposits                 |  |                                       | (2,045 | ) |                                       |   | (1,259 | )     |  |   | (3,304 | ) |  |      | 119   |   |       |   | (4,663 | ) |  |   | (4,544 | )
|Short term borrowed funds               |  |                                       | (15    | ) |                                       |   | 0      |       |  |   | (15    | ) |  |      | (137  | ) |       |   | (136   | ) |  |   | (273   | )
|Long term borrowed funds                |  |                                       | (163   | ) |                                       |   | (116   | )     |  |   | (279   | ) |  |      |      |   |       |   | (263   | ) |  |   | (263   | )
|                                        |  |                                       |        |   |                                       |   |        |       |  |   |        |   |  |      |       |   |       |   |        |   |  |   |        |  
|                                        |  |                                       |        |   |                                       |  
|Total interest expense                  |  |                                       | (919   | ) |                                       |   | (1,398 | )     |  |   | (2,317 | ) |  |      | 565   |   |       |   | (5,419 | ) |  |   | (4,854 | )
|                                        |  |                                       |        |   |                                       |   |        |       |  |   |        |   |  |      |       |   |       |   |        |   |  |   |        |  
|                                        |  |                                       |        |   |                                       |  
|Net interest income increase (decrease) |  | $                                     | 120    |   |                                       | $ | 340    |       |  | $ | 460    |   |  | $    | 1,620 |   |       | $ | 1,201  |   |  | $ | 2,821  |  
|                                        |  |                                       |        |   |                                       |   |        |       |  |   |        |   |  |      |       |   |       |   |        |   |  |   |        |  



29



---

MidCarolina Financial Corporation

Table 4

Noninterest Income

(In thousands)



|                                                   |  |                         |       |   |      |   |       |      |  |   |       |  
|-------------------------------------------------- |  | ----------------------- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | -
|                                                   |  | Year Ended December 31, |      
|                                                   |  | 2010                    |       |   | 2009 |   |       | 2008 | 
|                                                   |  |                         |      
|Service charges on deposit accounts                |  | $                       | 712   |   |      | $ | 910   |      |  | $ | 1,152 |  
|Mortgage operations                                |  |                         | 786   |   |      |   | 800   |      |  |   | 571   |  
|Investment brokerage fees                          |  |                         | 248   |   |      |   | 245   |      |  |   | 300   |  
|Increase in cash surrender value of life insurance |  |                         | 335   |   |      |   | 286   |      |  |   | 299   |  
|                                                   |  |                         |       |   |      |   |       |      |  |   |       |  
|                                                   |  |                         |      
|Core noninterest income                            |  |                         | 2,081 |   |      |   | 2,241 |      |  |   | 2,322 |  
|                                                   |  |                         |      
|Securities gains, net                              |  |                         | 51    |   |      |   | 63    |      |  |   | 29    |  
|Impairment on investment securities                |  |                         | (29   | ) |      |   | (148  | )    |  |   | (490  | )
|Other noninterest income                           |  |                         | 556   |   |      |   | 631   |      |  |   | 359   |  
|                                                   |  |                         |       |   |      |   |       |      |  |   |       |  
|                                                   |  |                         |      
|Total noninterest income                           |  | $                       | 2,659 |   |      | $ | 2,787 |      |  | $ | 2,220 |  
|                                                   |  |                         |       |   |      |   |       |      |  |   |       |  



30



---

MidCarolina Financial Corporation

Table 5

Noninterest Expenses

(In thousands)



|                                           |  |                         |        |  |      |   |        |      |  |   |       |  
|------------------------------------------ |  | ----------------------- | ------ |  | ---- | - | ------ | ---- |  | - | ----- | -
|                                           |  | Year Ended December 31, |       
|                                           |  | 2010                    |        |  | 2009 |   |        | 2008 | 
|                                           |  |                         |       
|Salaries                                   |  | $                       | 4,313  |  |      | $ | 4,564  |      |  | $ | 4,338 |  
|Employee benefits                          |  |                         | 948    |  |      |   | 1,062  |      |  |   | 1,049 |  
|                                           |  |                         |        |  |      |   |        |      |  |   |       |  
|                                           |  |                         |       
|Total salaries and benefits                |  |                         | 5,261  |  |      |   | 5,626  |      |  |   | 5,387 |  
|                                           |  |                         |       
|Occupancy expense                          |  |                         | 1,003  |  |      |   | 979    |      |  |   | 699   |  
|Equipment expense                          |  |                         | 503    |  |      |   | 603    |      |  |   | 434   |  
|Other outside services                     |  |                         | 742    |  |      |   | 374    |      |  |   | 307   |  
|Data processing                            |  |                         | 1,209  |  |      |   | 931    |      |  |   | 787   |  
|Office supplies and postage                |  |                         | 346    |  |      |   | 341    |      |  |   | 350   |  
|Deposit and other insurance                |  |                         | 1,253  |  |      |   | 1,280  |      |  |   | 432   |  
|Professional and other services            |  |                         | 498    |  |      |   | 734    |      |  |   | 550   |  
|Advertising                                |  |                         | 328    |  |      |   | 338    |      |  |   | 387   |  
|Other real estate owned related costs, net |  |                         | 734    |  |      |   | 349    |      |  |   | (536  | )
|Other                                      |  |                         | 1,004  |  |      |   | 726    |      |  |   | 665   |  
|                                           |  |                         |        |  |      |   |        |      |  |   |       |  
|                                           |  |                         |       
|Total noninterest expenses                 |  | $                       | 12,881 |  |      | $ | 12,281 |      |  | $ | 9,462 |  
|                                           |  |                         |        |  |      |   |        |      |  |   |       |  



31



---

MidCarolina Financial Corporation

Table 6

Contractual Obligations and Commitments

($ in thousands)



|                                                      |  |                                            |         |  |                          |   |         |            |  |   |            |  |  |              |        |  |  |   |        | 
|----------------------------------------------------- |  | ------------------------------------------ | ------- |  | ------------------------ | - | ------- | ---------- |  | - | ---------- |  |  | ------------ | ------ |  |  | - | ------ | 
|                                                      |  | Payments Due by Period                     |        
|Contractual Obligations                               |  | Total                                      |         |  | On Demandor Within1 Year |   |         | 2 -3 Years |  |   | 4 -5 Years |  |  | After5 Years |       
|                                                      |  |                                            |         |  |                         
|Short-term borrowings                                 |  | $                                          |        |  |                          | $ |        |            |  | $ |           |  |  | $            |       |  |  | $ |       | 
|Long-term debt                                        |  |                                            | 23,764  |  |                          |   | 5,000   |            |  |   |           |  |  |              | 10,000 |  |  |   | 8,764  | 
|Operating leases                                      |  |                                            | 3,269   |  |                          |   | 417     |            |  |   | 808        |  |  |              | 728    |  |  |   | 1,316  | 
|                                                      |  |                                            |         |  |                          |   |         |            |  |   |            |  |  |              |        |  |  |   |        | 
|Total contractual cash obligations excluding deposits |  |                                            | 27,033  |  |                          |   | 5,417   |            |  |   | 808        |  |  |              | 10,728 |  |  |   | 10,080 | 
|                                                      |  |                                            |         |  |                         
|Time deposits                                         |  |                                            | 184,781 |  |                          |   | 133,644 |            |  |   | 51,137     |  |  |              |       |  |  |   |       | 
|                                                      |  |                                            |         |  |                          |   |         |            |  |   |            |  |  |              |        |  |  |   |        | 
|                                                      |  |                                            |         |  |                         
|Total contractual cash obligations                    |  | $                                          | 211,814 |  |                          | $ | 139,061 |            |  | $ | 51,945     |  |  | $            | 10,728 |  |  | $ | 10,080 | 
|                                                      |  |                                            |         |  |                          |   |         |            |  |   |            |  |  |              |        |  |  |   |        | 
|                                                      | 
|                                                      |  | Amount of Commitment Expiration Per Period |        
|Commercial Commitments                                |  | TotalAmountsCommitted                      |         |  | Within1 Year             |   |         | 2 -3 Years |  |   | 4 -5 Years |  |  | After5 Years |       
|                                                      |  |                                            |         |  |                          | $ |        |            |  |   |            |  |  |              |        |  |  |   |        | 
|Lines of credit and loan commitments (1)              |  | $                                          | 59,474  |  |                          | $ | 25,000  |            |  | $ | 2,739      |  |  | $            | 31,735 |  |  |   |       | 
|                                                      |  |                                            |         |  |                          |   |         |            |  |   |            |  |  |              |        |  |  |   |        | 



|(1) | includes financial standby letters of credit, net
|--- | -------------------------------------------------



32



---

MidCarolina Financial Corporation

Table 7

Interest Rate Sensitivity Analysis

($ in thousands)



|                                                                                  |  |                      |         |   |                           |   |         |                       |  |   |               |   |  |       |         |   |  |   |         |  
|--------------------------------------------------------------------------------- |  | -------------------- | ------- | - | ------------------------- | - | ------- | --------------------- |  | - | ------------- | - |  | ----- | ------- | - |  | - | ------- | -
|                                                                                  |  | At December 31, 2010 |        
|                                                                                  |  | 3 Monthsor Less      |         |   | Over 3 Monthsto 12 Months |   |         | Total Within12 Months |  |   | Over 12Months |   |  | Total |        
|                                                                                  |  |                      |         |   |                          
|Interest-earning assets:                                                          |  |                      |         |   |                           |   |         |                       |  |   |               |   |  |       |         |   |  |   |         |  
|Loans and loans held for sale                                                     |  | $                    | 226,321 |   |                           | $ | 53,285  |                       |  | $ | 279,606       |   |  | $     | 120,223 |   |  | $ | 399,829 |  
|Securities available for sale                                                     |  |                      | 1,536   |   |                           |   | 9,926   |                       |  |   | 11,462        |   |  |       | 78,690  |   |  |   | 90,152  |  
|Other earning assets                                                              |  |                      | 15,154  |   |                           |   |        |                       |  |   | 15,154        |   |  |       |        |   |  |   | 15,154  |  
|                                                                                  |  |                      |         |   |                           |   |         |                       |  |   |               |   |  |       |         |   |  |   |         |  
|Total interest-earning assets                                                     |  | $                    | 243,011 |   |                           | $ | 63,211  |                       |  | $ | 306,222       |   |  | $     | 198,913 |   |  | $ | 505,135 |  
|                                                                                  |  |                      |         |   |                           |   |         |                       |  |   |               |   |  |       |         |   |  |   |         |  
|                                                                                  |  |                      |         |   |                          
|Interest-bearing liabilities                                                      |  |                      |         |   |                           |   |         |                       |  |   |               |   |  |       |         |   |  |   |         |  
|Fixed maturity deposits                                                           |  | $                    | 42,971  |   |                           |   | 90,694  |                       |  |   | 133,665       |   |  | $     | 51,116  |   |  | $ | 184,781 |  
|All other deposits                                                                |  |                      | 242,141 |   |                           |   |        |                       |  |   | 242,141       |   |  |       |        |   |  |   | 242,141 |  
|Borrowings                                                                        |  |                      | 13,500  |   |                           |   |        |                       |  |   | 13,500        |   |  |       | 10,264  |   |  |   | 23,764  |  
|                                                                                  |  |                      |         |   |                           |   |         |                       |  |   |               |   |  |       |         |   |  |   |         |  
|                                                                                  |  | $                    | 298,612 |   |                           | $ | 90,694  |                       |  | $ | 389,306       |   |  | $     | 61,380  |   |  | $ | 450,686 |  
|                                                                                  |  |                      |         |   |                           |   |         |                       |  |   |               |   |  |       |         |   |  |   |         |  
|                                                                                  |  |                      |         |   |                          
|Interest sensitivity gap                                                          |  | $                    | (55,601 | ) |                           | $ | (27,483 | )                     |  | $ | (83,084       | ) |  | $     | 137,533 |   |  | $ | 54,449  |  
|Cumulative interest sensitivity gap                                               |  |                      | (55,601 | ) |                           |   | (83,084 | )                     |  |   | (83,084       | ) |  |       | 54,449  |   |  |   | 54,449  |  
|Cumulative interest sensitivity gap as a percent of total interest-earning assets |  |                      | -11.01  | % |                           |   | -16.45  | %                     |  |   | -16.45        | % |  |       | 10.78   | % |  |   | 10.78   | %
|Cumulative ratio of interest-sensitive assets to interest-sensitive liabilities   |  |                      | 81.38   | % |                           |   | 78.66   | %                     |  |   | 78.66         | % |  |       | 112.08  | % |  |   | 112.08  | %



33



---

MidCarolina Financial Corporation

Table 8

Loan Portfolio Composition

($ in thousands)



|                                                                           |  |                 |         |  |                |  |        |        |  |   |                |   |  |        |        |   |                |   |         |        |  |  |                |   |  |        |         |   |                |  |        |   |  |   |         |   |  |  |        |  
|-------------------------------------------------------------------------- |  | --------------- | ------- |  | -------------- |  | ------ | ------ |  | - | -------------- | - |  | ------ | ------ | - | -------------- | - | ------- | ------ |  |  | -------------- | - |  | ------ | ------- | - | -------------- |  | ------ | - |  | - | ------- | - |  |  | ------ | -
|                                                                           |  | At December 31, |        
|                                                                           |  | 2010            |         |  | 2009           |  |        | 2008   |  |   | 2007           |   |  | 2006   |       
|                                                                           |  | Amount          |         |  | % ofTotalLoans |  |        | Amount |  |   | % ofTotalLoans |   |  | Amount |        |   | % ofTotalLoans |   |         | Amount |  |  | % ofTotalLoans |   |  | Amount |         |   | % ofTotalLoans | 
|                                                                           |  |                 |         |  |                |  |        |        |  |  
|Real Estate:                                                               |  |                 |         |  |                |  |        |        |  |   |                |   |  |        |        |   |                |   |         |        |  |  |                |   |  |        |         |   |                |  |        |   |  |   |         |   |  |  |        |  
|Construction loans                                                         |  | $               | 43,934  |  |                |  | 10.99  | %      |  | $ | 67,635         |   |  |        | 15.44  | % |                | $ | 91,933  |        |  |  | 21.15          | % |  | $      | 80,051  |   |                |  | 21.53  | % |  | $ | 71,348  |   |  |  | 22.75  | %
|Commercial mortgage loans                                                  |  |                 | 173,275 |  |                |  | 43.35  | %      |  |   | 174,926        |   |  |        | 39.94  | % |                |   | 156,333 |        |  |  | 35.97          | % |  |        | 140,198 |   |                |  | 37.71  | % |  |   | 124,385 |   |  |  | 39.67  | %
|Home equity lines of credit                                                |  |                 | 43,611  |  |                |  | 10.91  | %      |  |   | 44,627         |   |  |        | 10.19  | % |                |   | 43,290  |        |  |  | 9.96           | % |  |        | 41,479  |   |                |  | 11.16  | % |  |   | 33,090  |   |  |  | 10.55  | %
|Residential mortgage loans                                                 |  |                 | 72,370  |  |                |  | 18.10  | %      |  |   | 81,377         |   |  |        | 18.57  | % |                |   | 73,595  |        |  |  | 16.93          | % |  |        | 57,342  |   |                |  | 15.42  | % |  |   | 37,163  |   |  |  | 11.85  | %
|                                                                           |  |                 |         |  |                |  |        |        |  |   |                |   |  |        |        |   |                |   |         |        |  |  |                |   |  |        |         |   |                |  |        |   |  |   |         |   |  |  |        |  
|Total real estate loans                                                    |  |                 | 333,190 |  |                |  | 83.35  | %      |  |   | 368,565        |   |  |        | 84.13  | % |                |   | 365,151 |        |  |  | 84.01          | % |  |        | 319,070 |   |                |  | 85.83  | % |  |   | 265,986 |   |  |  | 84.82  | %
|Commercial and industrial loans                                            |  |                 | 61,230  |  |                |  | 15.31  | %      |  |   | 64,173         |   |  |        | 14.65  | % |                |   | 63,239  |        |  |  | 14.55          | % |  |        | 46,893  |   |                |  | 12.61  | % |  |   | 38,965  |   |  |  | 12.43  | %
|Loans to individuals for household, family and other personal expenditures |  |                 | 5,398   |  |                |  | 1.34   | %      |  |   | 5,383          |   |  |        | 1.22   | % |                |   | 6,306   |        |  |  | 1.44           | % |  |        | 5,796   |   |                |  | 1.55   | % |  |   | 8,625   |   |  |  | 2.75   | %
|                                                                           |  |                 |         |  |                |  |        |        |  |   |                |   |  |        |        |   |                |   |         |        |  |  |                |   |  |        |         |   |                |  |        |   |  |   |         |   |  |  |        |  
|Loans, gross                                                               |  |                 | 399,818 |  |                |  | 100.00 | %      |  |   | 438,121        |   |  |        | 100.00 | % |                |   | 434,696 |        |  |  | 100.00         | % |  |        | 371,759 |   |                |  | 100.00 | % |  |   | 313,576 |   |  |  | 100.00 | %
|                                                                           |  |                 |         |  |                |  |        |        |  |   |                |   |  |        |        |   |                |   |         |        |  |  |                |   |  |        |         |   |                |  |        |   |  |   |         |   |  |  |        |  
|                                                                           |  |                 |         |  |                |  |        |        |  |  
|Less net deferred loan origination (fees) costs                            |  |                 | 11      |  |                |  |        |        |  |   | (34            | ) |  |        |        |   |                |   | (34     | )      |  |  |                |   |  |        | (45     | ) |                |  |        |   |  |   | (4      | ) |  |  |        |  
|                                                                           |  |                 |         |  |                |  |        |        |  |   |                |   |  |        |        |   |                |   |         |        |  |  |                |   |  |        |         |   |                |  |        |   |  |   |         |   |  |  |        |  
|                                                                           |  |                 |         |  |                |  |        |        |  |  
|Residential mortgage loans held for sale                                   |  |                 | 2,958   |  |                |  | 0.74   | %      |  |   | 228            |   |  |        | 0.05   | % |                |   |        |        |  |  | 0.00           | % |  |        | 823     |   |                |  | 0.22   | % |  |   | 2,016   |   |  |  | 0.63   | %
|                                                                           |  |                 |         |  |                |  |        |        |  |   |                |   |  |        |        |   |                |   |         |        |  |  |                |   |  |        |         |   |                |  |        |   |  |   |         |   |  |  |        |  
|                                                                           |  |                 |         |  |                |  |        |        |  |  
|Total loans                                                                |  | $               | 402,787 |  |                |  |        |        |  | $ | 438,315        |   |  |        |        |   |                | $ | 434,662 |        |  |  |                |   |  | $      | 372,537 |   |                |  |        |   |  | $ | 315,588 |   |  |  |        |  
|                                                                           |  |                 |         |  |                |  |        |        |  |   |                |   |  |        |        |   |                |   |         |        |  |  |                |   |  |        |         |   |                |  |        |   |  |   |         |   |  |  |        |  



34



---

MidCarolina Financial Corporation

Table 9

Loan Maturities

(In thousands)



|                                                  |  |                      |         |  |                                   |  |      |                     |  |   |         |  |  |        |      |   |       |   |       |        |  |  |       |   |  |   |         |  |  |  |      |  
|------------------------------------------------- |  | -------------------- | ------- |  | --------------------------------- |  | ---- | ------------------- |  | - | ------- |  |  | ------ | ---- | - | ----- | - | ----- | ------ |  |  | ----- | - |  | - | ------- |  |  |  | ---- | -
|                                                  |  | At December 31, 2010 |        
|                                                  |  | Due withinone year   |         |  | Due after oneyear but within five |  |      | Due afterfive years |  |   | Total   | 
|                                                  |  | Amount               |         |  | Yield                             |  |      | Amount              |  |   | Yield   |  |  | Amount |      |   | Yield |   |       | Amount |  |  | Yield |  
|By loan type:                                     |  |                      |         |  |                                   |  |      |                     |  |   |         |  |  |        |      |   |       |   |       |        |  |  |       |   |  |   |         |  |  |  |      |  
|Construction                                      |  | $                    | 39,899  |  |                                   |  | 4.87 | %                   |  | $ | 3,229   |  |  |        | 5.94 | % |       | $ | 806   |        |  |  | 4.64  | % |  | $ | 43,934  |  |  |  | 4.94 | %
|                                                  |  |                      |         |  |                                   |  |      |                    
|Commercial and industrial and commercial mortgage |  |                      | 82,910  |  |                                   |  | 4.61 | %                   |  |   | 146,523 |  |  |        | 5.51 | % |       |   | 5,071 |        |  |  | 6.59  | % |  |   | 234,505 |  |  |  | 4.92 | %
|                                                  |  |                      |         |  |                                   |  |      |                     |  |   |         |  |  |        |      |   |       |   |       |        |  |  |       |   |  |   |         |  |  |  |      |  
|                                                  |  |                      |         |  |                                   |  |      |                    
|Total                                             |  | $                    | 122,809 |  |                                   |  | 4.69 | %                   |  | $ | 149,753 |  |  |        | 5.52 | % |       | $ | 5,877 |        |  |  | 6.32  | % |  | $ | 278,439 |  |  |  | 4.92 | %
|                                                  |  |                      |         |  |                                   |  |      |                     |  |   |         |  |  |        |      |   |       |   |       |        |  |  |       |   |  |   |         |  |  |  |      |  
|                                                  |  |                      |         |  |                                   |  |      |                    
|By interest rate type:                            |  |                      |         |  |                                   |  |      |                     |  |   |         |  |  |        |      |   |       |   |       |        |  |  |       |   |  |   |         |  |  |  |      |  
|Fixed rate loans                                  |  | $                    | 86,222  |  |                                   |  |      |                     |  | $ | 149,000 |  |  |        |      |   |       | $ | 5,877 |        |  |  |       |   |  | $ | 241,098 |  |  |  |      |  
|Variable rate loans                               |  |                      | 36,588  |  |                                   |  |      |                     |  |   | 753     |  |  |        |      |   |       |   |      |        |  |  |       |   |  |   | 37,341  |  |  |  |      |  
|                                                  |  |                      |         |  |                                   |  |      |                     |  |   |         |  |  |        |      |   |       |   |       |        |  |  |       |   |  |   |         |  |  |  |      |  
|                                                  |  | $                    | 122,809 |  |                                   |  |      |                     |  | $ | 149,753 |  |  |        |      |   |       | $ | 5,877 |        |  |  |       |   |  | $ | 278,439 |  |  |  |      |  
|                                                  |  |                      |         |  |                                   |  |      |                     |  |   |         |  |  |        |      |   |       |   |       |        |  |  |       |   |  |   |         |  |  |  |      |  

The above table is based on contractual scheduled maturities. Early repayment of loans or renewals at maturity are
not considered in this table.



35



---

MidCarolina Financial Corporation

Table 10

Nonperforming Assets

($ in thousands)



|                                                       |  |                 |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|------------------------------------------------------ |  | --------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | - |  | ---- | ------ | - |  | - | ------ | -
|                                                       |  | At December 31, |       
|                                                       |  | 2010            |        |   | 2009 |   |        | 2008 |  |   | 2007   |   |  | 2006 |       
|Nonperforming loans                                    |  |                 |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Construction                                           |  | $               | 3,383  |   |      | $ | 4,301  |      |  | $ | 188    |   |  | $    | 700    |   |  | $ | 794    |  
|Commercial mortgage                                    |  |                 | 4,868  |   |      |   | 2,557  |      |  |   | 2,547  |   |  |      |       |   |  |   |       |  
|Home equity lines of credit                            |  |                 | 221    |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Residential mortgage                                   |  |                 | 455    |   |      |   | 486    |      |  |   | 362    |   |  |      |       |   |  |   |       |  
|Commercial and industrial                              |  |                 | 99     |   |      |   |       |      |  |   | 26     |   |  |      |       |   |  |   |       |  
|Individual                                             |  |                 | 53     |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|                                                       |  |                 |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Total nonperforming loans                              |  |                 | 9,079  |   |      |   | 7,344  |      |  |   | 3,123  |   |  |      | 700    |   |  |   | 794    |  
|                                                       |  |                 |        |   |     
|Repossessed Assets                                     |  |                 | 4      |   |      |   | 14     |      |  |   | 47     |   |  |      |       |   |  |   |       |  
|Other real estate owned                                |  |                 | 7,244  |   |      |   | 2,862  |      |  |   | 1,608  |   |  |      | 264    |   |  |   | 2,337  |  
|                                                       |  |                 |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|                                                       |  |                 |        |   |     
|Total nonperforming assets                             |  | $               | 16,327 |   |      | $ | 10,220 |      |  | $ | 4,778  |   |  | $    | 964    |   |  | $ | 3,131  |  
|                                                       |  |                 |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|                                                       |  |                 |        |   |     
|Accruing loans past due 90 days or more                |  | $               |       |   |      | $ |       |      |  | $ |       |   |  | $    |       |   |  | $ |       |  
|Allowance for loan losses                              |  |                 | 9,226  |   |      |   | 7,307  |      |  |   | 5,632  |   |  |      | 4,462  |   |  |   | 4,222  |  
|Nonperforming loans to year end loans                  |  |                 | 2.27   | % |      |   | 1.68   | %    |  |   | 0.72   | % |  |      | 0.19   | % |  |   | 0.25   | %
|Allowance for loan losses to year end loans            |  |                 | 2.31   | % |      |   | 1.67   | %    |  |   | 1.30   | % |  |      | 1.20   | % |  |   | 1.35   | %
|Nonperforming assets to loans and other real estate    |  |                 | 4.01   | % |      |   | 2.32   | %    |  |   | 1.11   | % |  |      | 0.27   | % |  |   | 0.99   | %
|Nonperforming assets to total assets                   |  |                 | 3.18   | % |      |   | 1.89   | %    |  |   | 0.88   | % |  |      | 0.21   | % |  |   | 0.74   | %
|Allowance for loan losses to nonperforming loans       |  |                 | 101.62 | % |      |   | 99.50  | %    |  |   | 180.34 | % |  |      | 637.43 | % |  |   | 531.74 | %
|Restructured loans not include in the categories above |  |                 | 4,014  |   |      |   | 2,619  |      |  |   |       |   |  |      |       |   |  |   |       |  



36



---

MidCarolina Financial Corporation

Table 11

Allocation of the Allowance for Loan Losses

(In thousands)



|                                |  |        |       |  |                     |  |        |        |  |   |                     |  |  |        |        |   |                     |   |       |        |  |  |                     |   |  |        |       |  |                     |  |        |   |  |   |       |  |  |  |        |  
|------------------------------- |  | ------ | ----- |  | ------------------- |  | ------ | ------ |  | - | ------------------- |  |  | ------ | ------ | - | ------------------- | - | ----- | ------ |  |  | ------------------- | - |  | ------ | ----- |  | ------------------- |  | ------ | - |  | - | ----- |  |  |  | ------ | -
|                                |  | 2010   |       |  | 2009                |  |        | 2008   |  |   | 2007                |  |  | 2006   |       
|                                |  | Amount |       |  | % of TotalLoans (1) |  |        | Amount |  |   | % of TotalLoans (1) |  |  | Amount |        |   | % of TotalLoans (1) |   |       | Amount |  |  | % of TotalLoans (1) |   |  | Amount |       |  | % of TotalLoans (1) | 
|                                |  |        |       |  |                     |  |        |        |  |  
|Real estate loans:              |  |        |       |  |                     |  |        |        |  |   |                     |  |  |        |        |   |                     |   |       |        |  |  |                     |   |  |        |       |  |                     |  |        |   |  |   |       |  |  |  |        |  
|Construction loans              |  | $      | 2,079 |  |                     |  | 10.99  | %      |  | $ | 1,127               |  |  |        | 15.44  | % |                     | $ | 1,191 |        |  |  | 21.15               | % |  | $      | 961   |  |                     |  | 21.53  | % |  | $ | 961   |  |  |  | 22.75  | %
|Commercial mortgage loans       |  |        | 3,239 |  |                     |  | 43.36  | %      |  |   | 2,918               |  |  |        | 39.94  | % |                     |   | 2,026 |        |  |  | 35.97               | % |  |        | 1,683 |  |                     |  | 37.71  | % |  |   | 1,675 |  |  |  | 39.67  | %
|Home equity lines of credit     |  |        | 810   |  |                     |  | 10.91  | %      |  |   | 744                 |  |  |        | 10.19  | % |                     |   | 561   |        |  |  | 9.96                | % |  |        | 498   |  |                     |  | 11.16  | % |  |   | 446   |  |  |  | 10.55  | %
|Residential mortgage loans      |  |        | 1,563 |  |                     |  | 18.10  | %      |  |   | 1,358               |  |  |        | 18.57  | % |                     |   | 933   |        |  |  | 16.56               | % |  |        | 678   |  |                     |  | 15.42  | % |  |   | 500   |  |  |  | 11.85  | %
|                                |  |        |       |  |                     |  |        |        |  |   |                     |  |  |        |        |   |                     |   |       |        |  |  |                     |   |  |        |       |  |                     |  |        |   |  |   |       |  |  |  |        |  
|Total real estate loans         |  |        | 7,691 |  |                     |  | 83.35  | %      |  |   | 6,147               |  |  |        | 84.13  | % |                     |   | 4,711 |        |  |  | 84.01               | % |  |        | 3,820 |  |                     |  | 85.83  | % |  |   | 3,582 |  |  |  | 84.82  | %
|Commercial and industrial loans |  |        | 1,397 |  |                     |  | 15.31  | %      |  |   | 1,071               |  |  |        | 14.65  | % |                     |   | 832   |        |  |  | 14.55               | % |  |        | 661   |  |                     |  | 12.61  | % |  |   | 623   |  |  |  | 12.43  | %
|Loans to individuals            |  |        | 138   |  |                     |  | 1.34   | %      |  |   | 89                  |  |  |        | 1.22   | % |                     |   | 81    |        |  |  | 1.44                | % |  |        | 69    |  |                     |  | 1.55   | % |  |   | 116   |  |  |  | 2.75   | %
|                                |  |        |       |  |                     |  |        |        |  |   |                     |  |  |        |        |   |                     |   |       |        |  |  |                     |   |  |        |       |  |                     |  |        |   |  |   |       |  |  |  |        |  
|                                |  | $      | 9,226 |  |                     |  | 100.00 | %      |  | $ | 7,307               |  |  |        | 100.00 | % |                     | $ | 5,632 |        |  |  | 100.00              | % |  | $      | 4,462 |  |                     |  | 100.00 | % |  | $ | 4,222 |  |  |  | 100.00 | %
|                                |  |        |       |  |                     |  |        |        |  |   |                     |  |  |        |        |   |                     |   |       |        |  |  |                     |   |  |        |       |  |                     |  |        |   |  |   |       |  |  |  |        |  



|(1) | Represents total of all outstanding loans in each category as a percent of total loans outstanding
|--- | --------------------------------------------------------------------------------------------------



37



---

MidCarolina Financial Corporation

Table 12

Loan Loss and Recovery Experience

($ in thousands)



|                                                               |  |                                       |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|-------------------------------------------------------------- |  | ------------------------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | - |  | ---- | ------- | - |  | - | ------- | -
|                                                               |  | At or for the Year Ended December 31, |        
|                                                               |  | 2010                                  |         |   | 2009 |   |         | 2008 |  |   | 2007    |   |  | 2006 |        
|                                                               |  |                                       |         |   |     
|Loans held to maturity, outstanding at the end of the year     |  | $                                     | 399,829 |   |      | $ | 438,087 |      |  | $ | 434,662 |   |  | $    | 371,714 |   |  | $ | 313,572 |  
|                                                               |  |                                       |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|                                                               |  |                                       |         |   |     
|Average loans outstanding during the year                      |  | $                                     | 421,947 |   |      | $ | 441,704 |      |  | $ | 405,119 |   |  | $    | 344,620 |   |  | $ | 301,405 |  
|                                                               |  |                                       |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|                                                               |  |                                       |         |   |     
|Allowance for loan losses at beginning of year                 |  | $                                     | 7,307   |   |      | $ | 5,632   |      |  | $ | 4,462   |   |  | $    | 4,222   |   |  | $ | 4,090   |  
|Provision for loan losses                                      |  |                                       | 6,418   |   |      |   | 4,455   |      |  |   | 1,665   |   |  |      | 425     |   |  |   | 394     |  
|                                                               |  |                                       |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|                                                               |  |                                       | 13,725  |   |      |   | 10,087  |      |  |   | 6,127   |   |  |      | 4,647   |   |  |   | 4,484   |  
|                                                               |  |                                       |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Loans charged off:                                             |  |                                       |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Real estate loans                                              |  |                                       | (4,134  | ) |      |   | (1,502  | )    |  |   | (411    | ) |  |      | (268    | ) |  |   | (214    | )
|Commercial and industrial loans                                |  |                                       | (611    | ) |      |   | (1,396  | )    |  |   | (106    | ) |  |      |        |   |  |   | (87     | )
|Loans to individuals                                           |  |                                       | (65     | ) |      |   | (127    | )    |  |   | (16     | ) |  |      | (28     | ) |  |   | (17     | )
|                                                               |  |                                       |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Total charge-offs                                              |  |                                       | (4,810  | ) |      |   | (3,025  | )    |  |   | (533    | ) |  |      | (296    | ) |  |   | (318    | )
|                                                               |  |                                       |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|                                                               |  |                                       |         |   |     
|Recoveries of loans previously charged off:                    |  |                                       |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Real estate loans                                              |  |                                       | 158     |   |      |   | 32      |      |  |   | 11      |   |  |      | 66      |   |  |   | 2       |  
|Commercial and industrial loans                                |  |                                       | 103     |   |      |   | 208     |      |  |   | 26      |   |  |      | 38      |   |  |   | 46      |  
|Loans to individuals                                           |  |                                       | 50      |   |      |   | 5       |      |  |   | 1       |   |  |      | 7       |   |  |   | 8       |  
|                                                               |  |                                       |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Total recoveries                                               |  |                                       | 311     |   |      |   | 245     |      |  |   | 38      |   |  |      | 111     |   |  |   | 56      |  
|                                                               |  |                                       |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|                                                               |  |                                       |         |   |     
|Net charge-offs                                                |  |                                       | (4,499  | ) |      |   | (2,780  | )    |  |   | (495    | ) |  |      | (185    | ) |  |   | (262    | )
|                                                               |  |                                       |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|                                                               |  |                                       |         |   |     
|Allowance for loan losses at end of year                       |  | $                                     | 9,226   |   |      | $ | 7,307   |      |  | $ | 5,632   |   |  | $    | 4,462   |   |  | $ | 4,222   |  
|                                                               |  |                                       |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|                                                               |  |                                       |         |   |     
|Ratios:                                                        |  |                                       |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Net charge-offs as a percent of average loans                  |  |                                       | 1.07    | % |      |   | 0.63    | %    |  |   | 0.12    | % |  |      | 0.05    | % |  |   | 0.09    | %
|Allowance for loan losses as a percent of loans at end of year |  |                                       | 2.31    | % |      |   | 1.67    | %    |  |   | 1.30    | % |  |      | 1.20    | % |  |   | 1.35    | %



38



---

MidCarolina Financial Corporation

Table 13

Securities Portfolio Composition

(In thousands)



|                                    |  |                |        |  |      |   |        |      |  |   |        | 
|----------------------------------- |  | -------------- | ------ |  | ---- | - | ------ | ---- |  | - | ------ | 
|                                    |  | At December 31 |       
|                                    |  | 2010           |        |  | 2009 |   |        | 2008 | 
|Securities available for sale:      |  |                |        |  |      |   |        |      |  |   |        | 
|U. S. Government agencies           |  | $              | 10,505 |  |      | $ | 12,057 |      |  | $ | 2,533  | 
|Mortgage-backed securities          |  |                | 39,214 |  |      |   | 24,917 |      |  |   | 50,431 | 
|State and municipal governments     |  |                | 30,704 |  |      |   | 28,449 |      |  |   | 17,607 | 
|GSE CMOs                           |  |                | 8,693  |  |      |   |       |      |  |   |       | 
|Private label CMOs                 |  |                | 726    |  |      |   | 4,976  |      |  |   |       | 
|Other                               |  |                | 310    |  |      |   | 320    |      |  |   | 553    | 
|                                    |  |                |        |  |      |   |        |      |  |   |        | 
|Total securities available for sale |  | $              | 90,152 |  |      | $ | 70,719 |      |  | $ | 71,124 | 
|                                    |  |                |        |  |      |   |        |      |  |   |        | 



39



---

MidCarolina Financial Corporation

Table 14

Securities Portfolio Composition

($ in thousands)



|                                                  |  |               |        |  |           |   |        |           |  |  |      |  
|------------------------------------------------- |  | ------------- | ------ |  | --------- | - | ------ | --------- |  |  | ---- | -
|                                                  |  | AmortizedCost |        |  | FairValue |   |        | BookYield | 
|Securities available for sale:                    |  |               |        |  |           |   |        |           |  |  |      |  
|U. S. Government agencies                         |  |               |        |  |           |   |        |           |  |  |      |  
|Due within one year                               |  | $             | 6,566  |  |           | $ | 6,451  |           |  |  | 1.10 | %
|Due after one but within five years               |  |               | 3,024  |  |           |   | 3,075  |           |  |  | 1.90 | %
|Due after five but within ten years               |  |               | 1,000  |  |           |   | 979    |           |  |  | 3.00 | %
|                                                  |  |               |        |  |           |   |        |           |  |  |      |  
|                                                  |  |               | 10,590 |  |           |   | 10,505 |           |  |  | 1.51 | %
|                                                  |  |               |        |  |           |   |        |           |  |  |      |  
|                                                  |  |               |       
|State and municipal securities                    |  |               |        |  |           |   |        |           |  |  |      |  
|Due within one year                               |  |               |       |  |           |   |       |           |  |  |     |  
|Due after one but within five years               |  |               | 7,398  |  |           |   | 7,178  |           |  |  | 5.59 | %
|Due after five but within ten years               |  |               | 11,638 |  |           |   | 11,474 |           |  |  | 5.38 | %
|Due after ten years                               |  |               | 12,768 |  |           |   | 12,052 |           |  |  | 5.78 | %
|                                                  |  |               |        |  |           |   |        |           |  |  |      |  
|                                                  |  |               | 31,804 |  |           |   | 30,704 |           |  |  | 5.59 | %
|                                                  |  |               |        |  |           |   |        |           |  |  |      |  
|                                                  |  |               |       
|Other                                             |  |               |        |  |           |   |        |           |  |  |      |  
|Due after five but within ten years               |  |               | 500    |  |           |   | 310    |           |  |  | 4.03 | %
|                                                  |  |               |        |  |           |   |        |           |  |  |      |  
|                                                  |  |               | 500    |  |           |   | 310    |           |  |  | 4.03 | %
|                                                  |  |               |        |  |           |   |        |           |  |  |      |  
|                                                  |  |               |       
|Total securities available for sale               |  |               |        |  |           |   |        |           |  |  |      |  
|Due within one year                               |  |               | 6,566  |  |           |   | 6,451  |           |  |  | 1.10 | %
|Due after one but within five years               |  |               | 10,422 |  |           |   | 10,253 |           |  |  | 4.48 | %
|Due after five but within ten years               |  |               | 13,138 |  |           |   | 12,763 |           |  |  | 5.16 | %
|Due after ten years                               |  |               | 12,768 |  |           |   | 12,052 |           |  |  | 5.78 | %
|GSE CMOs                                         |  |               | 8,757  |  |           |   | 8,693  |           |  |  | 2.78 | %
|Private label collateralized mortgage obligations |  |               | 810    |  |           |   | 726    |           |  |  | 7.25 | %
|Mortgage-backed securities                        |  |               | 39,278 |  |           |   | 39,214 |           |  |  | 2.49 | %
|                                                  |  |               |        |  |           |   |        |           |  |  |      |  
|                                                  |  | $             | 91,739 |  |           | $ | 90,152 |           |  |  | 3.44 | %
|                                                  |  |               |        |  |           |   |        |           |  |  |      |  

Yields on tax exempt securities are stated on a federal tax equivalent basis.



40



---

MidCarolina Financial Corporation

Table 15

Average Deposits

($ in thousands)



|                                |  |                                 |         |  |             |  |      |               |  |   |             |  |  |               |      |   |             |   |         |  |  |  |      |  
|------------------------------- |  | ------------------------------- | ------- |  | ----------- |  | ---- | ------------- |  | - | ----------- |  |  | ------------- | ---- | - | ----------- | - | ------- |  |  |  | ---- | -
|                                |  | For the Year Ended December 31, |        
|                                |  | 2010                            |         |  | 2009        |  |      | 2008          | 
|                                |  | AverageAmount                   |         |  | AverageRate |  |      | AverageAmount |  |   | AverageRate |  |  | AverageAmount |      |   | AverageRate |  
|                                |  |                                 |         |  |             | 
|Demand deposits                 |  | $                               | 208,977 |  |             |  | 1.31 | %             |  | $ | 112,438     |  |  |               | 1.34 | % |             | $ | 74,531  |  |  |  | 1.71 | %
|Savings deposits                |  |                                 | 11,691  |  |             |  | 0.67 | %             |  |   | 6,663       |  |  |               | 0.30 | % |             |   | 5,772   |  |  |  | 0.50 | %
|Fixed maturity deposits         |  |                                 | 219,836 |  |             |  | 1.98 | %             |  |   | 312,282     |  |  |               | 2.45 | % |             |   | 308,562 |  |  |  | 3.95 | %
|                                |  |                                 |         |  |             |  |      |               |  |   |             |  |  |               |      |   |             |   |         |  |  |  |      |  
|                                |  |                                 |         |  |             | 
|Total interest-bearing deposits |  |                                 | 440,504 |  |             |  | 1.62 | %             |  |   | 431,383     |  |  |               | 2.13 | % |             |   | 388,865 |  |  |  | 3.47 | %
|                                |  |                                 |         |  |             | 
|Noninterest-bearing deposits    |  |                                 | 40,545  |  |             |  |     |               |  |   | 43,629      |  |  |               |     |   |             |   | 36,925  |  |  |  |     |  
|                                |  |                                 |         |  |             |  |      |               |  |   |             |  |  |               |      |   |             |   |         |  |  |  |      |  
|                                |  |                                 |         |  |             | 
|Total deposits                  |  | $                               | 481,049 |  |             |  | 1.49 | %             |  | $ | 475,012     |  |  |               | 1.93 | % |             | $ | 425,790 |  |  |  | 3.17 | %
|                                |  |                                 |         |  |             |  |      |               |  |   |             |  |  |               |      |   |             |   |         |  |  |  |      |  



41



---

MidCarolina Financial Corporation

Table 16

Maturities of Time Deposits of $100,000 or More

(In thousands)



|                                  |  |                      |        |  |                          |   |        |                           |  |   |               |  |  |       |        |  |  |   |         | 
|--------------------------------- |  | -------------------- | ------ |  | ------------------------ | - | ------ | ------------------------- |  | - | ------------- |  |  | ----- | ------ |  |  | - | ------- | 
|                                  |  | At December 31, 2010 |       
|                                  |  | 3 Monthsor Less      |        |  | Over 3 Monthsto 6 Months |   |        | Over 6 Monthsto 12 Months |  |   | Over 12Months |  |  | Total |       
|                                  |  |                      |        |  |                         
|Time Deposits of $100,000 or more |  | $                    | 36,856 |  |                          | $ | 47,635 |                           |  | $ | 25,858        |  |  | $     | 48,478 |  |  | $ | 158,827 | 
|                                  |  |                      |        |  |                          |   |        |                           |  |   |               |  |  |       |        |  |  |   |         | 



42



---

Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Market risk reflects the risk of economic loss resulting from adverse changes in market price and interest rates. This risk of loss can be
reflected in diminished current market values and/or reduced potential net interest income in future periods. Our market risk arises primarily from interest rate risk inherent in our lending and deposit-taking activities. The structure of our loan
and deposit portfolios is such that a significant change in interest rates may adversely impact net market values and net interest income. We do not maintain a trading account nor are we subject to currency exchange risk or commodity price risk.
Interest rate risk is monitored as part of the Banks Asset/Liability Management function.

See the section entitled
Asset/Liability Management for a more detailed discussion of market risk.



43



---

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

LOGO

REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders

MidCarolina Financial Corporation and Subsidiary

Burlington, North Carolina

We have audited the accompanying consolidated statements of financial
condition of MidCarolina Financial Corporation and Subsidiary (hereinafter referred to as the Company) as of December 31, 2010 and 2009, and the related consolidated statements of operations, comprehensive income, changes in
shareholders equity and cash flows for each of the years in the three-year period ended December 31, 2010. These consolidated financial statements are the responsibility of the Companys management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to
perform an audit of the Companys internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material
respects, the financial position of MidCarolina Financial Corporation and Subsidiary as of December 31, 2010 and 2009, and the results of their operations and their cash flows for each of the years in the three-year period ended
December 31, 2010, in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note C
to the consolidated financial statements, effective January 1, 2009 the Company changed its method of accounting for other-than-temporary impairment of debt securities as a result of adopting new accounting guidance.

/s/ Dixon Hughes PLLC

Raleigh, North Carolina

March 15, 2011



44



---

CONSOLIDATED STATEMENTS OF
FINANCIAL CONDITION

December 31, 2010 and 2009



|                                                                                                                                                                                                             |  |                                          |         |   |      |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ---------------------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                                                                                                                                             |  | 2010                                     |         |   | 2009 |  
|                                                                                                                                                                                                             |  | (Amounts in thousands,except share data) |        
|                                                                                                                                                                                                             |  |                                         
|Assets                                                                                                                                                                                                       |  |                                          |         |   |      |   |         |  
|Cash and due from banks                                                                                                                                                                                      |  | $                                        | 1,510   |   |      | $ | 1,581   |  
|Federal funds sold and interest-earning deposits                                                                                                                                                             |  |                                          | 12,196  |   |      |   | 7,848   |  
|Investment securities:                                                                                                                                                                                       |  |                                          |         |   |      |   |         |  
|Available for sale                                                                                                                                                                                           |  |                                          | 90,152  |   |      |   | 70,719  |  
|Loans held for sale                                                                                                                                                                                          |  |                                          | 2,958   |   |      |   | 228     |  
|Loans                                                                                                                                                                                                        |  |                                          | 399,829 |   |      |   | 438,087 |  
|Allowance for loan losses                                                                                                                                                                                    |  |                                          | (9,226  | ) |      |   | (7,307  | )
|                                                                                                                                                                                                             |  |                                          |         |   |      |   |         |  
|Net loans                                                                                                                                                                                                    |  |                                          | 390,603 |   |      |   | 430,780 |  
|Investment in stock of Federal Home Loan Bank of Atlanta                                                                                                                                                     |  |                                          | 2,075   |   |      |   | 2,322   |  
|Investment in life insurance                                                                                                                                                                                 |  |                                          | 8,514   |   |      |   | 8,179   |  
|Premises and equipment, net                                                                                                                                                                                  |  |                                          | 6,652   |   |      |   | 7,063   |  
|Other assets                                                                                                                                                                                                 |  |                                          | 16,540  |   |      |   | 12,284  |  
|                                                                                                                                                                                                             |  |                                          |         |   |      |   |         |  
|Total assets                                                                                                                                                                                                 |  | $                                        | 531,200 |   |      | $ | 541,004 |  
|                                                                                                                                                                                                             |  |                                          |         |   |      |   |         |  
|                                                                                                                                                                                                             |  |                                         
|Liabilities and Shareholders Equity                                                                                                                                                                         |  |                                          |         |   |      |   |         |  
|Deposits:                                                                                                                                                                                                    |  |                                          |         |   |      |   |         |  
|Noninterest-bearing demand deposits                                                                                                                                                                          |  | $                                        | 38,951  |   |      | $ | 41,655  |  
|Interest-bearing demand deposits                                                                                                                                                                             |  |                                          | 227,944 |   |      |   | 144,839 |  
|Savings                                                                                                                                                                                                      |  |                                          | 14,197  |   |      |   | 8,266   |  
|Time                                                                                                                                                                                                         |  |                                          | 184,781 |   |      |   | 270,260 |  
|                                                                                                                                                                                                             |  |                                          |         |   |      |   |         |  
|Total deposits                                                                                                                                                                                               |  |                                          | 465,873 |   |      |   | 465,020 |  
|                                                                                                                                                                                                             |  |                                         
|Short-term borrowings                                                                                                                                                                                        |  |                                          |        |   |      |   | 520     |  
|Long-term debt                                                                                                                                                                                               |  |                                          | 23,764  |   |      |   | 33,764  |  
|Accrued expenses and other liabilities                                                                                                                                                                       |  |                                          | 1,139   |   |      |   | 1,515   |  
|                                                                                                                                                                                                             |  |                                          |         |   |      |   |         |  
|Total liabilities                                                                                                                                                                                            |  |                                          | 490,776 |   |      |   | 500,819 |  
|                                                                                                                                                                                                             |  |                                          |         |   |      |   |         |  
|                                                                                                                                                                                                             |  |                                         
|Shareholders equity:                                                                                                                                                                                        |  |                                          |         |   |      |   |         |  
|Noncumulative, perpetual preferred stock, no par value, liquidation value of $1,000 per share, 20,000,000 shares authorized;
5,000 shares issued and outstanding at December 31, 2010 and 2009, respectively |  |                                          | 4,819   |   |      |   | 4,819   |  
|Common stock, no par value; 80,000,000 shares authorized; 4,927,828 shares issued and outstanding at December 31, 2010 and
2009, respectively                                                                |  |                                          | 15,162  |   |      |   | 14,958  |  
|Retained earnings                                                                                                                                                                                            |  |                                          | 21,418  |   |      |   | 20,805  |  
|Accumulated other comprehensive loss                                                                                                                                                                         |  |                                          | (975    | ) |      |   | (397    | )
|                                                                                                                                                                                                             |  |                                          |         |   |      |   |         |  
|Total shareholders equity                                                                                                                                                                                   |  |                                          | 40,424  |   |      |   | 40,185  |  
|                                                                                                                                                                                                             |  |                                          |         |   |      |   |         |  
|Total liabilities and shareholders equity                                                                                                                                                                   |  | $                                        | 531,200 |   |      | $ | 541,004 |  
|                                                                                                                                                                                                             |  |                                          |         |   |      |   |         |  

See accompanying notes to consolidated financial statements.



45



---

CONSOLIDATED STATEMENTS OF
OPERATIONS

Years Ended December 31, 2010, 2009 and 2008



|                                                         |  |                                               |        |   |      |   |        |      |  |   |        |  
|-------------------------------------------------------- |  | --------------------------------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                         |  | 2010                                          |        |   | 2009 |   |        | 2008 | 
|                                                         |  | (Amounts in thousands, except per share data) |       
|                                                         |  |                                               |       
|Interest Income                                          |  |                                               |        |   |      |   |        |      |  |   |        |  
|Loans                                                    |  | $                                             | 22,943 |   |      | $ | 24,160 |      |  | $ | 25,763 |  
|Investment securities:                                   |  |                                               |        |   |      |   |        |      |  |   |        |  
|Taxable                                                  |  |                                               | 1,539  |   |      |   | 2,248  |      |  |   | 2,725  |  
|Tax-exempt                                               |  |                                               | 1,167  |   |      |   | 1,130  |      |  |   | 836    |  
|Federal funds sold and interest-earning deposits         |  |                                               | 48     |   |      |   | 21     |      |  |   | 131    |  
|Other                                                    |  |                                               | 29     |   |      |   | 24     |      |  |   | 161    |  
|                                                         |  |                                               |        |   |      |   |        |      |  |   |        |  
|Total interest income                                    |  |                                               | 25,726 |   |      |   | 27,583 |      |  |   | 29,616 |  
|                                                         |  |                                               |        |   |      |   |        |      |  |   |        |  
|                                                         |  |                                               |       
|Interest Expense                                         |  |                                               |        |   |      |   |        |      |  |   |        |  
|Demand deposits                                          |  |                                               | 2,733  |   |      |   | 1,510  |      |  |   | 1,275  |  
|Savings deposits                                         |  |                                               | 78     |   |      |   | 20     |      |  |   | 29     |  
|Time deposits                                            |  |                                               | 4,344  |   |      |   | 7,648  |      |  |   | 12,192 |  
|Short-term borrowings                                    |  |                                               |       |   |      |   | 15     |      |  |   | 288    |  
|Long-term debt                                           |  |                                               | 968    |   |      |   | 1,247  |      |  |   | 1,510  |  
|                                                         |  |                                               |        |   |      |   |        |      |  |   |        |  
|Total interest expense                                   |  |                                               | 8,123  |   |      |   | 10,440 |      |  |   | 15,294 |  
|                                                         |  |                                               |        |   |      |   |        |      |  |   |        |  
|                                                         |  |                                               |       
|Net Interest Income                                      |  |                                               | 17,603 |   |      |   | 17,143 |      |  |   | 14,322 |  
|Provision for loan losses                                |  |                                               | 6,418  |   |      |   | 4,455  |      |  |   | 1,665  |  
|                                                         |  |                                               |        |   |      |   |        |      |  |   |        |  
|Net interest income after provision for loan losses      |  |                                               | 11,185 |   |      |   | 12,688 |      |  |   | 12,657 |  
|                                                         |  |                                               |        |   |      |   |        |      |  |   |        |  
|                                                         |  |                                               |       
|Noninterest Income                                       |  |                                               |        |   |      |   |        |      |  |   |        |  
|Service charges on deposit accounts                      |  |                                               | 712    |   |      |   | 910    |      |  |   | 1,152  |  
|Mortgage operations                                      |  |                                               | 786    |   |      |   | 800    |      |  |   | 571    |  
|Investment services                                      |  |                                               | 248    |   |      |   | 245    |      |  |   | 300    |  
|Increase in cash surrender value of life insurance       |  |                                               | 335    |   |      |   | 286    |      |  |   | 299    |  
|Gain on sale of available for sale investments           |  |                                               | 51     |   |      |   | 189    |      |  |   | 29     |  
|Impairment on nonmarketable investments                  |  |                                               |       |   |      |   | (126   | )    |  |   |       |  
|Total other-than-temporary impairment loss               |  |                                               | (110   | ) |      |   | (456   | )    |  |   | (490   | )
|Portion of loss recognized in other comprehensive income |  |                                               | 81     |   |      |   | 308    |      |  |   |       |  
|                                                         |  |                                               |        |   |      |   |        |      |  |   |        |  
|Net impairment loss recognized in earnings               |  |                                               | (29    | ) |      |   | (148   | )    |  |   | (490   | )
|Other                                                    |  |                                               | 556    |   |      |   | 631    |      |  |   | 359    |  
|                                                         |  |                                               |        |   |      |   |        |      |  |   |        |  
|Total noninterest income                                 |  |                                               | 2,659  |   |      |   | 2,787  |      |  |   | 2,220  |  
|                                                         |  |                                               |        |   |      |   |        |      |  |   |        |  
|                                                         |  |                                               |       
|Noninterest Expense                                      |  |                                               |        |   |      |   |        |      |  |   |        |  
|Salaries and employee benefits                           |  |                                               | 5,261  |   |      |   | 5,626  |      |  |   | 5,387  |  
|Occupancy and equipment                                  |  |                                               | 1,506  |   |      |   | 1,582  |      |  |   | 1,133  |  
|Other outside services                                   |  |                                               | 742    |   |      |   | 374    |      |  |   | 307    |  
|Data processing                                          |  |                                               | 1,209  |   |      |   | 931    |      |  |   | 787    |  
|Office supplies and postage                              |  |                                               | 346    |   |      |   | 341    |      |  |   | 350    |  
|Deposit and other insurance                              |  |                                               | 1,253  |   |      |   | 1,280  |      |  |   | 432    |  
|Professional and other services                          |  |                                               | 498    |   |      |   | 734    |      |  |   | 550    |  
|Advertising                                              |  |                                               | 328    |   |      |   | 338    |      |  |   | 387    |  
|Other real estate owned related costs, net               |  |                                               | 734    |   |      |   | 349    |      |  |   | (536   | )
|Other                                                    |  |                                               | 1,004  |   |      |   | 726    |      |  |   | 972    |  
|                                                         |  |                                               |        |   |      |   |        |      |  |   |        |  
|Total noninterest expense                                |  |                                               | 12,881 |   |      |   | 12,281 |      |  |   | 9,462  |  
|                                                         |  |                                               |        |   |      |   |        |      |  |   |        |  
|Income before income taxes                               |  |                                               | 963    |   |      |   | 3,194  |      |  |   | 5,415  |  
|Provision for income tax expense (benefit)               |  |                                               | (14    | ) |      |   | 818    |      |  |   | 1,741  |  
|                                                         |  |                                               |        |   |      |   |        |      |  |   |        |  
|Net income                                               |  |                                               | 977    |   |      |   | 2,376  |      |  |   | 3,674  |  
|Dividends on preferred stock                             |  |                                               | (364   | ) |      |   | (417   | )    |  |   | (417   | )
|                                                         |  |                                               |        |   |      |   |        |      |  |   |        |  
|Net income available to common shareholders              |  | $                                             | 613    |   |      | $ | 1,959  |      |  | $ | 3,257  |  
|                                                         |  |                                               |        |   |      |   |        |      |  |   |        |  
|                                                         |  |                                               |       
|Net Income Per Common Share:                             |  |                                               |        |   |      |   |        |      |  |   |        |  
|Basic                                                    |  | $                                             | .12    |   |      | $ | .40    |      |  | $ | .66    |  
|                                                         |  |                                               |        |   |      |   |        |      |  |   |        |  
|Diluted                                                  |  | $                                             | .12    |   |      | $ | .40    |      |  | $ | .66    |  
|                                                         |  |                                               |        |   |      |   |        |      |  |   |        |  

See accompanying notes to consolidated financial statements.



46



---

CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME

Years Ended December 31, 2010, 2009 and 2008



|                                                                                                  |  |                        |      |   |      |   |       |      |  |   |        |  
|------------------------------------------------------------------------------------------------- |  | ---------------------- | ---- | - | ---- | - | ----- | ---- |  | - | ------ | -
|                                                                                                  |  | 2010                   |      |   | 2009 |   |       | 2008 | 
|                                                                                                  |  | (Amounts in thousands) |     
|                                                                                                  |  |                        |     
|Net income                                                                                        |  | $                      | 977  |   |      | $ | 2,376 |      |  | $ | 3,674  |  
|                                                                                                  |  |                        |      |   |      |   |       |      |  |   |        |  
|                                                                                                  |  |                        |     
|Other comprehensive income (loss):                                                                |  |                        |      |   |      |   |       |      |  |   |        |  
|Securities available for sale:                                                                    |  |                        |      |   |      |   |       |      |  |   |        |  
|Change in unrealized holding gains (losses) on available for sale securities, net of actual gains |  |                        | (839 | ) |      |   | 1,485 |      |  |   | (1,350 | )
|Tax effect                                                                                        |  |                        | 324  |   |      |   | (573  | )    |  |   | 521    |  
|Reclassification of impairment on private label collateralized mortgage obligations               |  |                        | 29   |   |      |   | 148   |      |  |   | 490    |  
|Tax effect                                                                                        |  |                        | (11  | ) |      |   | (57   | )    |  |   | (189   | )
|Reclassification of gains recognized innet income                                                 |  |                        | (51  | ) |      |   | (189  | )    |  |   | (29    | )
|Tax effect                                                                                        |  |                        | 20   |   |      |   | 73    |      |  |   | 10     |  
|Portion of other-than-temporary impairment loss recognized in other comprehensive income          |  |                        | (81  | ) |      |   | (308  | )    |  |   |       |  
|Tax effect                                                                                        |  |                        | 31   |   |      |   | 119   |      |  |   |       |  
|                                                                                                  |  |                        |      |   |      |   |       |      |  |   |        |  
|Total other comprehensive income (loss)                                                           |  |                        | (578 | ) |      |   | 698   |      |  |   | (547   | )
|                                                                                                  |  |                        |      |   |      |   |       |      |  |   |        |  
|                                                                                                  |  |                        |     
|Comprehensive income                                                                              |  | $                      | 399  |   |      | $ | 3,074 |      |  | $ | 3,127  |  
|                                                                                                  |  |                        |      |   |      |   |       |      |  |   |        |  

See accompanying notes to consolidated financial statements.



47



---

CONSOLIDATED STATEMENTS OF
CHANGES IN SHAREHOLDERS EQUITY

Years Ended December 31, 2010, 2009
and 2008



|                                                                     |  |                                           |       |  |              |   |       |          |  |  |               |  |  |               |        |  |             |   |        |        |  |   |      |   |  |   |        |  
|-------------------------------------------------------------------- |  | ----------------------------------------- | ----- |  | ------------ | - | ----- | -------- |  |  | ------------- |  |  | ------------- | ------ |  | ----------- | - | ------ | ------ |  | - | ---- | - |  | - | ------ | -
|                                                                     |  |                                           |       |  |              |   |       |          |  |  |               |  |  |               |        |  | Accumulated |   |        |        | 
|                                                                     |  |                                           |       |  |              |   |       |          |  |  |               |  |  |               |        |  | other       |   |        | Total  | 
|                                                                     |  | Preferred stock                           |       |  | Common stock |   |       | Retained |  |  | comprehensive |  |  | shareholders |       
|                                                                     |  | Shares                                    |       |  | Amount       |   |       | Shares   |  |  | Amount        |  |  | earnings      |        |  | loss        |   |        | equity | 
|                                                                     |  | (Amounts in thousands, except share data) |      
|Balance at December 31, 2007                                         |  |                                           | 5,000 |  |              | $ | 4,819 |          |  |  | 4,618,528     |  |  | $             | 13,290 |  |             | $ | 15,378 |        |  | $ | (337 | ) |  | $ | 33,150 |  
|Net income                                                           |  |                                           |      |  |              |   |      |          |  |  |              |  |  |               |       |  |             |   | 3,674  |        |  |   |     |   |  |   | 3,674  |  
|Other comprehensive loss                                             |  |                                           |      |  |              |   |      |          |  |  |              |  |  |               |       |  |             |   |       |        |  |   | (547 | ) |  |   | (547   | )
|Preferred dividends paid                                             |  |                                           |      |  |              |   |      |          |  |  |              |  |  |               |       |  |             |   | (417   | )      |  |   |     |   |  |   | (417   | )
|Stock options exercised                                              |  |                                           |      |  |              |   |      |          |  |  | 309,300       |  |  |               | 792    |  |             |   |       |        |  |   |     |   |  |   | 792    |  
|Current income tax benefit                                           |  |                                           |      |  |              |   |      |          |  |  |              |  |  |               | 498    |  |             |   |       |        |  |   |     |   |  |   | 498    |  
|Expense recognized in connection with stock awards and stock options |  |                                           |      |  |              |   |      |          |  |  |              |  |  |               | 46     |  |             |   |       |        |  |   |     |   |  |   | 46     |  
|                                                                     |  |                                           |       |  |              |   |       |          |  |  |               |  |  |               |        |  |             |   |        |        |  |   |      |   |  |   |        |  
|Balance at December 31, 2008                                         |  |                                           | 5,000 |  |              |   | 4,819 |          |  |  | 4,927,828     |  |  |               | 14,626 |  |             |   | 18,635 |        |  |   | (884 | ) |  |   | 37,196 |  
|Cumulative effect of accounting method change                        |  |                                           |      |  |              |   |      |          |  |  |              |  |  |               |       |  |             |   | 211    |        |  |   | (211 | ) |  |   |       |  
|Net income                                                           |  |                                           |      |  |              |   |      |          |  |  |              |  |  |               |       |  |             |   | 2,376  |        |  |   |     |   |  |   | 2,376  |  
|Other comprehensive income                                           |  |                                           |      |  |              |   |      |          |  |  |              |  |  |               |       |  |             |   |       |        |  |   | 698  |   |  |   | 698    |  
|Preferred dividends paid                                             |  |                                           |      |  |              |   |      |          |  |  |              |  |  |               |       |  |             |   | (417   | )      |  |   |     |   |  |   | (417   | )
|Expense recognized in connection with stock awards and stock options |  |                                           |      |  |              |   |      |          |  |  |              |  |  |               | 332    |  |             |   |       |        |  |   |     |   |  |   | 332    |  
|                                                                     |  |                                           |       |  |              |   |       |          |  |  |               |  |  |               |        |  |             |   |        |        |  |   |      |   |  |   |        |  
|Balance at December 31, 2009                                         |  |                                           | 5,000 |  |              |   | 4,819 |          |  |  | 4,927,828     |  |  |               | 14,958 |  |             |   | 20,805 |        |  |   | (397 | ) |  |   | 40,185 |  
|Net income                                                           |  |                                           |      |  |              |   |      |          |  |  |              |  |  |               |       |  |             |   | 977    |        |  |   |     |   |  |   | 977    |  
|Other comprehensive loss                                             |  |                                           |      |  |              |   |      |          |  |  |              |  |  |               |       |  |             |   |       |        |  |   | (578 | ) |  |   | (578   | )
|Preferred dividends paid                                             |  |                                           |      |  |              |   |      |          |  |  |              |  |  |               |       |  |             |   | (364   | )      |  |   |     |   |  |   | (364   | )
|Expense recognized in connection with stock awards and stock options |  |                                           |      |  |              |   |      |          |  |  |              |  |  |               | 204    |  |             |   |       |        |  |   |     |   |  |   | 204    |  
|                                                                     |  |                                           |       |  |              |   |       |          |  |  |               |  |  |               |        |  |             |   |        |        |  |   |      |   |  |   |        |  
|Balance at December 31, 2010                                         |  |                                           | 5,000 |  |              | $ | 4,819 |          |  |  | 4,927,828     |  |  | $             | 15,162 |  |             | $ | 21,418 |        |  | $ | (975 | ) |  | $ | 40,424 |  
|                                                                     |  |                                           |       |  |              |   |       |          |  |  |               |  |  |               |        |  |             |   |        |        |  |   |      |   |  |   |        |  

See accompanying notes to consolidated financial statements.



48



---

CONSOLIDATED STATEMENTS OF
CASH FLOWS

Years Ended December 31, 2010, 2009 and 2008



|                                                                                      |  |                        |         |   |      |   |         |      |  |   |         |  
|------------------------------------------------------------------------------------- |  | ---------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                                      |  | 2010                   |         |   | 2009 |   |         | 2008 | 
|                                                                                      |  | (Amounts in thousands) |        
|Operating Activities                                                                  |  |                        |         |   |      |   |         |      |  |   |         |  
|Net income                                                                            |  | $                      | 977     |   |      | $ | 2,376   |      |  | $ | 3,674   |  
|Depreciation and amortization                                                         |  |                        | 758     |   |      |   | 567     |      |  |   | 481     |  
|Provision for loan losses                                                             |  |                        | 6,418   |   |      |   | 4,455   |      |  |   | 1,665   |  
|Stock option expense                                                                  |  |                        | 204     |   |      |   | 332     |      |  |   | 46      |  
|Deferred income tax benefit                                                           |  |                        | (1,201  | ) |      |   | (1,114  | )    |  |   | (573    | )
|Impairment of nonmarketable investments                                               |  |                        |        |   |      |   | 126     |      |  |   |        |  
|Gain on sale of investment securities available for sale                              |  |                        | (51     | ) |      |   | (189    | )    |  |   | (29     | )
|Impairment of investment securities available for sale                                |  |                        | 29      |   |      |   | 148     |      |  |   | 490     |  
|Other real estate owned related costs, net                                            |  |                        | 734     |   |      |   | 349     |      |  |   | (536    | )
|Gain on sale of loans                                                                 |  |                        | (786    | ) |      |   | (800    | )    |  |   | (571    | )
|Origination of loans held for sale                                                    |  |                        | (35,779 | ) |      |   | (42,750 | )    |  |   | (21,489 | )
|Proceeds from sales of loans held for sale                                            |  |                        | 33,835  |   |      |   | 43,322  |      |  |   | 22,883  |  
|Increase in cash surrender value life insurance                                       |  |                        | (335    | ) |      |   | (286    | )    |  |   | (299    | )
|Changes in assets and liabilities:                                                    |  |                        |         |   |      |   |         |      |  |   |         |  
|Prepayment of FDIC insurance assessment                                               |  |                        | 1,029   |   |      |   | (2,654  | )    |  |   |        |  
|Decrease in other assets                                                              |  |                        | 296     |   |      |   | 124     |      |  |   | 572     |  
|Increase (decrease) in accrued expenses and other liabilities                         |  |                        | 12      |   |      |   | (731    | )    |  |   | (93     | )
|                                                                                      |  |                        |         |   |      |   |         |      |  |   |         |  
|Net cash provided by operating activities                                             |  |                        | 6,116   |   |      |   | 3,275   |      |  |   | 6,221   |  
|                                                                                      |  |                        |         |   |      |   |         |      |  |   |         |  
|                                                                                      |  |                        |        
|Investing Activities                                                                  |  |                        |         |   |      |   |         |      |  |   |         |  
|Purchases of investment securities available for sale                                 |  |                        | (86,008 | ) |      |   | (44,174 | )    |  |   | (51,091 | )
|Maturities and calls of investment securities available for sale                      |  |                        | 5,060   |   |      |   | 8,855   |      |  |   | 25      |  
|Principal paydowns on investment securities available for sale                        |  |                        | 7,493   |   |      |   | 750     |      |  |   | 4,793   |  
|Sales of investment securities available for sale                                     |  |                        | 52,901  |   |      |   | 36,162  |      |  |   | 44,570  |  
|Net (increase) decrease in loans from originations and principal repayments           |  |                        | 25,613  |   |      |   | (10,187 | )    |  |   | (65,347 | )
|(Purchase) redemption of FHLB stock                                                   |  |                        | 247     |   |      |   | (353    | )    |  |   | 997     |  
|Purchases of premises and equipment                                                   |  |                        | (146    | ) |      |   | (185    | )    |  |   | (1,065  | )
|Improvement costs on other real estate owned                                          |  |                        |        |   |      |   | (134    | )    |  |   | (16     | )
|Proceeds from sale of other real estate owned                                         |  |                        | 3,032   |   |      |   | 2,511   |      |  |   | 1,112   |  
|                                                                                      |  |                        |         |   |      |   |         |      |  |   |         |  
|Net cash provided (used) by investing activities                                      |  |                        | 8,192   |   |      |   | 6,755   |      |  |   | (66,022 | )
|                                                                                      |  |                        |         |   |      |   |         |      |  |   |         |  
|Financing Activities                                                                  |  |                        |         |   |      |   |         |      |  |   |         |  
|Net increase (decrease) in deposits                                                   |  |                        | 853     |   |      |   | (2,928  | )    |  |   | 94,051  |  
|Net increase (decrease) in short-term borrowings                                      |  |                        | (520    | ) |      |   | 520     |      |  |   | (19,000 | )
|Proceeds from (repayment of) long-term debt                                           |  |                        | (10,000 | ) |      |   |        |      |  |   | (5,000  | )
|Non-cumulative perpetual preferred stock dividends paid                               |  |                        | (364    | ) |      |   | (417    | )    |  |   | (417    | )
|Proceeds from stock options exercised                                                 |  |                        |        |   |      |   |        |      |  |   | 792     |  
|Tax benefit from exercise of stock options                                            |  |                        |        |   |      |   |        |      |  |   | 498     |  
|                                                                                      |  |                        |         |   |      |   |         |      |  |   |         |  
|Net cash provided (used) by financing activities                                      |  |                        | (10,031 | ) |      |   | (2,825  | )    |  |   | 70,924  |  
|                                                                                      |  |                        |         |   |      |   |         |      |  |   |         |  
|Net increase (decrease) in cash and cash equivalents                                  |  |                        | 4,277   |   |      |   | (6,305  | )    |  |   | 11,123  |  
|Cash and cash equivalents, beginning of year                                          |  |                        | 9,429   |   |      |   | 15,734  |      |  |   | 4,611   |  
|                                                                                      |  |                        |         |   |      |   |         |      |  |   |         |  
|Cash and cash equivalents, end of year                                                |  | $                      | 13,706  |   |      | $ | 9,429   |      |  | $ | 15,734  |  
|                                                                                      |  |                        |         |   |      |   |         |      |  |   |         |  
|Supplemental Cash Flow Disclosure                                                     |  |                        |         |   |      |   |         |      |  |   |         |  
|Interest paid on deposits and borrowed funds                                          |  | $                      | 8,265   |   |      | $ | 10,697  |      |  | $ | 15,305  |  
|Income taxes paid                                                                     |  |                        | 1,096   |   |      |   | 1,621   |      |  |   | 2,349   |  
|Summary of Noncash Investing and Financing Activities                                 |  |                        |         |   |      |   |         |      |  |   |         |  
|Unrealized gain (loss) on investment securities available for sale, net of tax effect |  | $                      | (578    | ) |      | $ | 698     |      |  | $ | (547    | )
|Transfer of loans to other real estate owned                                          |  |                        | 8,146   |   |      |   | 3,982   |      |  |   | 1,904   |  

See accompanying notes to
consolidated financial statements.



49



---

NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008



Note A - Organization and Operations

In April 2002, the shareholders of MidCarolina Bank (the Bank) approved an Agreement and Plan of Reorganization pursuant to which the Bank became a wholly owned banking subsidiary of
MidCarolina Financial Corporation (the Company), a North Carolina corporation formed as a holding company for the Bank. At the closing of the holding company reorganization, one share of the Companys no par value common stock was
exchanged for each of the outstanding shares of the Banks common stock.

The Bank was incorporated and began operations on
August 14, 1997. The Bank is engaged in general commercial banking primarily in Alamance and Guilford Counties, North Carolina, and operates under the banking laws of North Carolina and the Rules and Regulations of the Federal Deposit Insurance
Corporation. The Bank undergoes periodic examinations by those regulatory authorities.

Note B - Summary of Significant Accounting Policies

Basis of Consolidation

The consolidated financial statements include the accounts and transactions of the Company, the Bank, and the Banks wholly owned subsidiary,
MidCarolina Investments, Inc. The Company wholly owns the capital trusts used to issue trust preferred securities. The trusts are not consolidated as a part of these financial statements. All intercompany transactions and balances have been
eliminated in consolidation.

Use of Estimates

Preparing consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ
from those estimates. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses.

Cash and Cash Equivalents

For the purpose of presentation in the consolidated statements
of cash flows, cash and cash equivalents include cash and due from banks, federal funds sold and interest-earning deposits. Federal regulations require institutions to set aside specified amounts of cash as reserves against transactions and time
deposits. As of December 31, 2010, the daily average gross reserve requirement was $139,000. Due from bank balances are maintained in other financial institutions. Federal funds sold are generally purchased and sold for one-day periods, but may
from time to time have longer terms.

Investment Securities

Investment securities that the Company has the positive intent and ability to hold to maturity are classified as held to maturity and reported at amortized cost. Investment securities held for current
resale are classified as trading securities and reported at fair value, with unrealized gains and losses included in earnings. The Company currently has no such securities. Investment securities not classified either as securities held to maturity
or trading securities are classified as available for sale and reported at fair value, with net unrealized gains and losses net of related taxes excluded from earnings and reported as accumulated other comprehensive income in shareholders
equity. The classification of investment securities as held to maturity, trading or available for sale is determined at the date of purchase. Realized gains and losses from sales of investment securities are determined based upon the specific
identification method on a trade-date basis. Premiums and discounts are recognized in interest income using the interest method over the terms of the securities.



50



---

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008



Loans and Interest Income

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off generally are reported at their unpaid principal balances, less unearned income and net of
any deferred loan origination fees and costs. Loan origination fees and certain direct origination costs are capitalized and recognized as an adjustment of the yield of the related loan. Interest income is recorded as earned on an accrual basis. The
Company discontinues the recognition of interest income when, in the opinion of management, collection of such interest is doubtful. It is the general policy of the Company to discontinue the accrual of interest on loans, including loans impaired
when principal or interest payments are contractually delinquent 90 days or more. Any unpaid amounts previously accrued on these loans are reversed from income. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest
income is subsequently recognized only to the extent cash payments are received in excess of principal due. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments
are reasonably assured.

A loan is considered impaired when, in managements judgment, based on current information and events, it is
probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status,
collateral value, and the probability of collecting scheduled principal and interest payments when due. Management determines when loans become impaired through its normal loan administration and review functions. Loans identified as troubled debt
restructurings (TDRs) are considered impaired. Loans identified as substandard or doubtful as a result of the loan review process are potentially impaired loans. Loans that experience insignificant payment delays and payment shortfalls generally are
not classified as impaired, provided that management expects to collect all amounts due, including interest accrued at the contractual interest rate for the period of delay. Impairment is measured on a loan by loan basis for commercial and
construction loans by either the present value of expected future cash flows discounted at the loans effective interest rate, the loans observable market price, or the fair value of the collateral if the loan is collateral dependent.
Interest revenue on impaired loans is discontinued when the loans meet the criteria for nonaccrual status described above.

Loans Held for
Sale

The Company originates single family, residential first mortgage loans on a presold basis. Loans held for sale are carried at the
lower of cost or fair value in the aggregate as determined by outstanding commitments from investors. At closing, these loans, together with their servicing rights, are sold to other financial institutions under prearranged terms. The Company
recognizes certain origination and servicing release fees upon the sale which are classified as mortgage operations on the consolidated statements of operations.

Allowance for Loan Losses

The allowance for loan losses is established through a provision
for loan losses charged to expense. Loans are charged-off against the allowance when management believes that the collectibility of principal is unlikely. Recoveries of amounts previously charged-off are credited to the allowance.

The allowance for loan losses is evaluated on a regular basis by management and is based upon managements periodic review of the collectibility of
the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrowers ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. This
evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available.



51



---

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008



The Companys allowance for possible loan losses consists of three elements: (i) specific
valuation allowance determined in accordance with ASC Topic 310 based on probable losses on specific loans; (ii) historical valuation allowances determined in accordance with ASC Topic 450 based on historical loan loss experience for similar
loans with similar characteristics and trends, adjusted, as necessary, to reflect the impact of current conditions; and (iii) general valuation allowances determined in accordance with ASC Topic 450 based on general conditions and other
qualitative risk factors both internal and external to the Company.

The general reserves are determined by applying loss percentages to the
portfolio that are based on recent historical loss experience and managements evaluation and risk grading of the loan portfolio. The historical loss experience is a weighted average calculation using a rolling 12-quarters worth of
net charge-offs and weighted to the most recent quarter using the sum of the years digits. Additionally, the general economic and business conditions affecting key lending areas, credit quality trends, collateral values, loan volumes and
concentrations, seasoning of the loan portfolio, the findings of internal and external credit reviews and results from external bank regulatory examinations are included in this evaluation. The specific reserves are determined on a loan-by-loan
basis based on managements evaluation of the Companys exposure for each credit, given the current payment status of the loan and the value of any underlying collateral. These are loans classified by management as doubtful, substandard or
special mention. For such loans that are also classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan.

In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Companys allowance
for loan losses. Such agencies may require the Company to recognize adjustments to the allowance based on their judgments of information available to them at the time of their examination.

Premises and Equipment

Land is carried at cost. Premises and equipment are stated at cost
less accumulated depreciation. Depreciation and amortization is calculated on the straight-line method over the estimated useful lives of the respective assets as follows:



|                        |  |                                  
|----------------------- |  | ---------------------------------
|Buildings               |  | 15 - 40 years                    
|Leasehold improvements  |  | Shorter of lease term or 15 years
|Furniture and equipment |  | 3 - 10 years                     

Other Real Estate Owned

Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value less estimated costs
to sell at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management to ensure the assets are carried at fair value less cost to sell. If there are subsequent declines in
fair value, the assets are written down to its then current fair value through a charge to operations. Revenue and expenses from operations and the impact of any subsequent changes in the carrying value are included in other noninterest expense.

Stock in Federal Home Loan Bank of Atlanta

As a requirement for membership, the Company invests in stock of the Federal Home Loan Bank of Atlanta (FHLB). At December 31, 2010 and 2009, the balance of FHLB stock held by the Company
was $2.1 million and $2.3 million, respectively. Due to the redemption provisions of the FHLB, the Company estimated that fair value equals cost and that this investment was not impaired at December 31, 2010.

Income Taxes

Deferred income taxes are
recognized for the tax consequences of temporary differences between financial statement carrying amounts and the tax bases of existing assets and liabilities that will result in taxable or deductible amounts in future years. These temporary
differences are multiplied by the enacted income tax rate expected to be in effect



52



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NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008



when the taxes become payable or receivable. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred tax assets are
reduced, if necessary, by the amount of such benefits that are not expected to be realized based on available evidence.

Accumulated Other
Comprehensive Income (Loss)

Comprehensive income is defined as the change in equity during a period for non-owner transactions and is
composed of net income and other comprehensive income (loss). Other comprehensive income includes revenues, expenses, gains and losses that are excluded from earnings under current accounting standards. As of and for the years presented, the
components of other comprehensive income for the Company consisted of the unrealized gains and losses, net of taxes, in the Companys available for sale securities portfolio.

Accumulated other comprehensive income (loss) at December 31, 2010 and 2009 consists of the following:



|                                                              |  |                        |        |   |      |   |      |  
|------------------------------------------------------------- |  | ---------------------- | ------ | - | ---- | - | ---- | -
|                                                              |  | 2010                   |        |   | 2009 |  
|                                                              |  | (Amounts in thousands) |       
|                                                              |  |                       
|Unrealized holding losses - securities available for sale     |  | $                      | (1,587 | ) |      | $ | (645 | )
|Deferred income taxes                                         |  |                        | 612    |   |      |   | 248  |  
|                                                              |  |                        |        |   |      |   |      |  
|Net unrealized holding losses - securities available for sale |  |                        | (975   | ) |      |   | (397 | )
|                                                              |  |                        |        |   |      |   |      |  
|                                                              |  |                       
|Total other accumulated other comprehensive loss              |  | $                      | (975   | ) |      | $ | (397 | )
|                                                              |  |                        |        |   |      |   |      |  

Stock Compensation Plans

U.S. Generally Accepted Accounting Principals (GAAP) requires recognition of the cost of employee services received in exchange for an award of equity instruments in the financial statements over the
period the employee is required to perform the services in exchange for the award (usually the vesting period). SFAS No. 123R also requires measurement of the cost of employee services received in exchange for an award based on the grant-date
fair value of the award. GAAP also requires that excess tax benefits be reported as financing cash inflows, rather than as a reduction of taxes paid, which is included within operating cash flows.

The Company awarded 99,500 options in 2009 and recognized stock compensation expense of $332,000. No stock options were exercised during 2009 or 2010.
Cash flows provided by financing activities from the exercise of stock options amounted to $1.3 million for the year ended December 31, 2008. There were no cash flows provided by financing activities from the exercise of stock options for the
years ended December 31, 2010 and 2009.

Net Income Per Common Share

Basic and diluted net income per share has been computed based on the weighted average number of shares outstanding during each period after retroactively adjusting for all applicable declared stock
splits effected in the form of stock dividends. Diluted net income per share reflect additional shares of common stock that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that
would result from the assumed issuance. Stock options that have exercise prices greater than the average market price of the common shares are considered antidilutive. At December 31, 2010, 2009 and 2008 there were 371,504, 269,774 and 148,228
antidilutive options respectively.



53



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NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008



Basic and diluted net income per share have been computed based upon net income available to common
shareholders as presented in the accompanying consolidated statements of operations divided by the weighted average number of common shares outstanding or assumed to be outstanding as summarized below:



|                                                                                                                             |  |      |           |  |      |  |           |      |  |  |           | 
|---------------------------------------------------------------------------------------------------------------------------- |  | ---- | --------- |  | ---- |  | --------- | ---- |  |  | --------- | 
|                                                                                                                             |  | 2010 |           |  | 2009 |  |           | 2008 | 
|                                                                                                                             |  |      |          
|Weighted average number of common shares used in computing basic net income per share                                        |  |      | 4,927,828 |  |      |  | 4,927,828 |      |  |  | 4,915,350 | 
|                                                                                                                             |  |      |          
|Effect of dilutive stock options                                                                                             |  |      |          |  |      |  | 2,482     |      |  |  | 1,526     | 
|                                                                                                                             |  |      |           |  |      |  |           |      |  |  |           | 
|                                                                                                                             |  |      |          
|Weighted average number of common shares and dilutive potential common shares used in computing diluted net income per
share |  |      | 4,927,828 |  |      |  | 4,930,310 |      |  |  | 4,916,876 | 
|                                                                                                                             |  |      |           |  |      |  |           |      |  |  |           | 

Segment Reporting

GAAP requires management to report selected financial and descriptive information about reportable operating segments. It also establishes standards for related disclosures about products and services,
geographic areas and major customers. Generally, disclosures are required for segments internally identified to evaluate performance and resource allocation. In all material respects, the Companys operations are entirely within the commercial
banking segment, and the consolidated financial statements presented herein reflect the results of that segment. Also, the Company has no foreign operations or customers.

Reclassification

There were no reclassifications made to prior period amounts in order to
conform to reclassifications used in 2010.

Recent Accounting Pronouncements

In June 2009, the FASB issued SFAS No. 166, Accounting for Transfers of Financial Assets  an amendment of FASB Statement No. 140,which was subsequently codified by the FASB under
ASC Topic 860 (Topic 860). Topic 860 seeks to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets;
the effects of a transfer on its financial position, financial performance, and cash flows; and a transferors continuing involvement, if any, in transferred financial assets. Specifically, Topic 860 eliminates the concept of a qualifying
special-purpose entity, creates more stringent conditions for reporting a transfer of a portion of a financial asset as a sale, clarifies other sale-accounting criteria, and changes the initial measurement of a transferors interest in
transferred financial assets. SFAS No. 166 as codified under ASC Topic 860 is effective for financial asset transfers occurring after the beginning of fiscal years beginning after November 15, 2009. The adoption of this statement did not
have a material impact on the Companys consolidated financial statements.



54



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NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008



In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R),which was subsequently codified by the FASB as ASC Topic 810 (Topic 810-10). Topic 810 amends FASB Interpretation No. 46(R), Variable Interest Entities,for determining whether an entity is a variable interest entity
(VIE) and requires an enterprise to perform an analysis to determine whether the enterprises variable interest or interests give it a controlling financial interest in a VIE. Under Topic 810, an enterprise has a controlling
financial interest when it has (a) the power to direct the activities of a VIE that most significantly impact the entitys economic performance, and (b) the obligation to absorb losses of the entity or the right to receive benefits
from the entity that could potentially be significant to the VIE. Topic 810 also requires an enterprise to assess whether it has an implicit financial responsibility to ensure that a VIE operates as designed when determining whether it has power to
direct the activities of the VIE that most significantly impact the entitys economic performance. Topic 810 also requires ongoing assessments of whether an enterprise is the primary beneficiary of a VIE, requires enhanced disclosures and
eliminates the scope exclusion for qualifying special-purpose entities. SFAS No. 167 as codified under ASC Topic 810 is effective as of the beginning of fiscal years beginning after November 15, 2009, and is applied using a cumulative
effect adjustment to retained earnings for any carrying amount adjustments. The adoption of this statement did not have a material impact on the Companys consolidated financial statements.

In January 2010, the FASB issued Accounting Standards Update No. 2010-06, Fair Value Measurements Disclosures, which amends Subtopic 820-10
of the FASB Accounting Standards Codification to require new disclosures for fair value measurements and provides clarification for existing disclosures requirements. More specifically, this update will require (a) an entity to disclose
separately the amounts of significant transfers in and out of Levels 1 and 2 fair value measurements and to describe the reasons for the transfers; and (b) information about purchases, sales, issuances and settlements to be presented separately
(i.e. present the activity on a gross basis rather than net) in the reconciliation for fair value measurements using significant unobservable inputs (Level 3 inputs). This update clarifies existing disclosure requirements for the level of
disaggregation used for classes of assets and liabilities measured at fair value and requires disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements using Level 2
and Level 3 inputs. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances and
settlements in the roll forward activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The Company has included the
required disclosures within the consolidated financial statements

In July 2010, the FASB issued Accounting Standards Update No 2010-20,
Receivables (ASC 310-30): Disclosure about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.The objective of this ASU is for an entity to provide disclosures that facilitate financial
statement users evaluation of the following:



| |  |  | The nature of credit risk inherent in the entitys portfolio of financing receivables;
| | - |  | --------------------------------------------------------------------------------------



| |  |  | How that risk is analyzed and assessed in arriving at the allowance for credit losses; and
| | - |  | ------------------------------------------------------------------------------------------



| |  |  | The changes and reasons for those changes in the allowance for credit losses.
| | - |  | -----------------------------------------------------------------------------

To achieve these objectives, an entity should provide disclosures on a disaggregated basis on two defined levels: (1) portfolio segment; and
(2) class of financing receivable. The ASU makes changes to existing disclosure requirements and includes additional disclosure requirements about financing receivables, including:



| |  |  | Credit quality indicators of financing receivables at the end of the reporting period by class of financing receivables;
| | - |  | ------------------------------------------------------------------------------------------------------------------------



| |  |  | The aging of past due financing receivables at the end of the reporting period by class of financing receivables; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------



| |  |  | The nature and extent of troubled debt restructurings that occurred during the period by class of financing receivables and their effect on the
allowance for credit losses.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



55



---

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008



For public entities, the disclosures as of the end of a reporting period are effective for interim and
annual reporting periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010. These
disclosures have been included in year-end 2010 reporting as applicable.

From time to time the FASB issues exposure drafts for proposed
statements of financial accounting standards. Such exposure drafts are subject to comment from the public, to revisions by the FASB and to final issuance by the FASB as statements of financial accounting standards. Management considers the effect of
the proposed statements on the consolidated financial statements of the Company and monitors the status of changes to and proposed effective dates of exposure drafts.

Note C - Investment Securities

The following is a summary of investment securities by
major classification at December 31, 2010 and 2009:



|                                  |  |                        |        |  |                      |   |     |                       |  |   |            |  |  |   |        | 
|--------------------------------- |  | ---------------------- | ------ |  | -------------------- | - | --- | --------------------- |  | - | ---------- |  |  | - | ------ | 
|                                  |  | December 31, 2010      |       
|                                  |  | Amortizedcost          |        |  | Grossunrealizedgains |   |     | Grossunrealizedlosses |  |   | Fair value | 
|                                  |  | (Amounts in thousands) |       
|Securities available for sale:    |  |                        |        |  |                      |   |     |                       |  |   |            |  |  |   |        | 
|U.S. government agency securities |  | $                      | 10,590 |  |                      | $ | 45  |                       |  | $ | 130        |  |  | $ | 10,505 | 
|Mortgage-backed securities        |  |                        | 39,278 |  |                      |   | 299 |                       |  |   | 363        |  |  |   | 39,214 | 
|GSE CMOs                         |  |                        | 8,757  |  |                      |   | 29  |                       |  |   | 93         |  |  |   | 8,693  | 
|Private label CMOs               |  |                        | 810    |  |                      |   |    |                       |  |   | 84         |  |  |   | 726    | 
|State and municipal               |  |                        | 31,804 |  |                      |   | 72  |                       |  |   | 1,172      |  |  |   | 30,704 | 
|Subordinated debentures           |  |                        | 500    |  |                      |   |    |                       |  |   | 190        |  |  |   | 310    | 
|                                  |  |                        |        |  |                      |   |     |                       |  |   |            |  |  |   |        | 
|Total                             |  | $                      | 91,739 |  |                      | $ | 446 |                       |  | $ | 2,032      |  |  | $ | 90,152 | 
|                                  |  |                        |        |  |                      |   |     |                       |  |   |            |  |  |   |        | 



|                                  |  |                        |        |  |                      |   |       |                       |  |   |            |  |  |   |        | 
|--------------------------------- |  | ---------------------- | ------ |  | -------------------- | - | ----- | --------------------- |  | - | ---------- |  |  | - | ------ | 
|                                  |  | December 31, 2009      |       
|                                  |  | Amortizedcost          |        |  | Grossunrealizedgains |   |       | Grossunrealizedlosses |  |   | Fair value | 
|                                  |  | (Amounts in thousands) |       
|Securities available for sale:    |  |                        |        |  |                      |   |       |                       |  |   |            |  |  |   |        | 
|U.S. government agency securities |  | $                      | 12,113 |  |                      | $ | 13    |                       |  | $ | 69         |  |  | $ | 12,057 | 
|Mortgage-backed securities        |  |                        | 23,690 |  |                      |   | 1,246 |                       |  |   | 19         |  |  |   | 24,917 | 
|Private label CMOs               |  |                        | 5,683  |  |                      |   | 6     |                       |  |   | 713        |  |  |   | 4,976  | 
|State and municipal               |  |                        | 29,379 |  |                      |   | 191   |                       |  |   | 1,121      |  |  |   | 28,449 | 
|Subordinated debentures           |  |                        | 500    |  |                      |   |      |                       |  |   | 180        |  |  |   | 320    | 
|                                  |  |                        |        |  |                      |   |       |                       |  |   |            |  |  |   |        | 
|Total                             |  | $                      | 71,365 |  |                      | $ | 1,456 |                       |  | $ | 2,102      |  |  | $ | 70,719 | 
|                                  |  |                        |        |  |                      |   |       |                       |  |   |            |  |  |   |        | 

Information pertaining to securities with gross unrealized losses at December 31, 2010 and 2009, aggregated by
investment category and length of time that individual securities have been in a continuous loss position follows:



56



---

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008



|                                                    |  |                        |        |  |                   |   |       |       |  |   |            |  |  |       |     |  |            |   |        |  |  |   |       | 
|--------------------------------------------------- |  | ---------------------- | ------ |  | ----------------- | - | ----- | ----- |  | - | ---------- |  |  | ----- | --- |  | ---------- | - | ------ |  |  | - | ----- | 
|                                                    |  | 2010                   |       
|                                                    |  | Less Than 12 Months    |        |  | 12 Months or More |   |       | Total | 
|                                                    |  | Fair                   |        |  | Unrealized        |   |       | Fair  |  |   | Unrealized |  |  | Fair  |     |  | Unrealized |  
|                                                    |  | value                  |        |  | losses            |   |       | value |  |   | losses     |  |  | value |     |  | losses     |  
|                                                    |  | (Amounts in thousands) |       
|Securities available for sale:                      |  |                        |        |  |                   |   |       |       |  |   |            |  |  |       |     |  |            |   |        |  |  |   |       | 
|U.S. government agency securities                   |  | $                      | 7,434  |  |                   | $ | 130   |       |  | $ |           |  |  | $     |    |  |            | $ | 7,434  |  |  | $ | 130   | 
|Mortgage-backed securities                          |  |                        | 17,236 |  |                   |   | 363   |       |  |   |           |  |  |       |    |  |            |   | 17,236 |  |  |   | 363   | 
|GSE CMOs                                           |  |                        | 4,031  |  |                   |   | 93    |       |  |   |           |  |  |       |    |  |            |   | 4,031  |  |  |   | 93    | 
|Private label CMOs                                 |  |                        |       |  |                   |   |      |       |  |   |           |  |  |       |    |  |            |   |       |  |  |   |      | 
|State and municipal                                 |  |                        | 23,177 |  |                   |   | 811   |       |  |   | 2,415      |  |  |       | 361 |  |            |   | 25,592 |  |  |   | 1,172 | 
|Subordinated debentures                             |  |                        |       |  |                   |   |      |       |  |   | 310        |  |  |       | 190 |  |            |   | 310    |  |  |   | 190   | 
|                                                    |  |                        |        |  |                   |   |       |       |  |   |            |  |  |       |     |  |            |   |        |  |  |   |       | 
|Total temporarily impaired securities               |  | $                      | 51,878 |  |                   | $ | 1,397 |       |  | $ | 2,725      |  |  | $     | 551 |  |            | $ | 54,603 |  |  | $ | 1,948 | 
|                                                    |  |                        |        |  |                   |   |       |       |  |   |            |  |  |       |     |  |            |   |        |  |  |   |       | 
|                                                    |  |                        |        |  |                   |  
|Other than temporary impairment Private label CMOs |  | $                      |       |  |                   | $ |      |       |  | $ | 726        |  |  | $     | 84  |  |            | $ | 726    |  |  | $ | 84    | 
|                                                    |  |                        |        |  |                   |   |       |       |  |   |            |  |  |       |     |  |            |   |        |  |  |   |       | 
|Total other than temporarily impaired securities    |  | $                      |       |  |                   | $ |      |       |  | $ | 726        |  |  | $     | 84  |  |            | $ | 726    |  |  | $ | 84    | 
|                                                    |  |                        |        |  |                   |   |       |       |  |   |            |  |  |       |     |  |            |   |        |  |  |   |       | 



|                                                    |  |                        |        |  |                   |   |     |       |  |   |            |  |  |       |       |  |            |   |        |  |  |   |       | 
|--------------------------------------------------- |  | ---------------------- | ------ |  | ----------------- | - | --- | ----- |  | - | ---------- |  |  | ----- | ----- |  | ---------- | - | ------ |  |  | - | ----- | 
|                                                    |  | 2009                   |       
|                                                    |  | Less Than 12 Months    |        |  | 12 Months or More |   |     | Total | 
|                                                    |  | Fair                   |        |  | Unrealized        |   |     | Fair  |  |   | Unrealized |  |  | Fair  |       |  | Unrealized |  
|                                                    |  | value                  |        |  | losses            |   |     | value |  |   | losses     |  |  | value |       |  | losses     |  
|                                                    |  | (Amounts in thousands) |       
|Securities available for sale:                      |  |                        |        |  |                   |   |     |       |  |   |            |  |  |       |       |  |            |   |        |  |  |   |       | 
|U.S. government agency securities                   |  | $                      | 7,095  |  |                   | $ | 69  |       |  | $ |           |  |  | $     |      |  |            | $ | 7,095  |  |  | $ | 69    | 
|Mortgage-backed securities                          |  |                        | 2,039  |  |                   |   | 19  |       |  |   |           |  |  |       |      |  |            |   | 2,039  |  |  |   | 19    | 
|Private label CMOs                                 |  |                        |       |  |                   |   |    |       |  |   | 2,295      |  |  |       | 405   |  |            |   | 2,295  |  |  |   | 405   | 
|State and municipal                                 |  |                        | 9,042  |  |                   |   | 273 |       |  |   | 7,384      |  |  |       | 848   |  |            |   | 16,426 |  |  |   | 1,121 | 
|Subordinated debentures                             |  |                        |       |  |                   |   |    |       |  |   | 320        |  |  |       | 180   |  |            |   | 320    |  |  |   | 180   | 
|                                                    |  |                        |        |  |                   |   |     |       |  |   |            |  |  |       |       |  |            |   |        |  |  |   |       | 
|Total temporarily impaired securities               |  | $                      | 18,176 |  |                   | $ | 361 |       |  | $ | 9,999      |  |  | $     | 1,433 |  |            | $ | 28,175 |  |  | $ | 1,794 | 
|                                                    |  |                        |        |  |                   |   |     |       |  |   |            |  |  |       |       |  |            |   |        |  |  |   |       | 
|                                                    |  |                        |        |  |                   |  
|Other than temporary impairment Private label CMOs |  | $                      | 1,051  |  |                   | $ | 153 |       |  | $ | 729        |  |  | $     | 155   |  |            | $ | 1,780  |  |  | $ | 308   | 
|                                                    |  |                        |        |  |                   |   |     |       |  |   |            |  |  |       |       |  |            |   |        |  |  |   |       | 
|Total other than temporarily impaired securities    |  | $                      | 1,051  |  |                   | $ | 153 |       |  | $ | 729        |  |  | $     | 155   |  |            | $ | 1,780  |  |  | $ | 308   | 
|                                                    |  |                        |        |  |                   |   |     |       |  |   |            |  |  |       |       |  |            |   |        |  |  |   |       | 

The Company had 54 securities with gross unrealized losses at December 31, 2010. These securities include four U.S.
government agency bonds, nine mortgage-backed securities, three government sponsored enterprise collateralized mortgage obligations, one private label collateralized mortgage obligation, 36 state and municipal securities and one subordinated
debenture. The government sponsored enterprise collateralized mortgage obligations were comprised of GNMA issues. Management feels that the unrealized loss is attributable to a limited market for trading these types of securities and the interest
rate spreads. None of the unrealized losses identified on temporarily impaired securities as of December 31, 2010 or 2009 relate to the issuers ability to honor redemption obligations or the marketability of the securities. The bond
ratings of the municipal securities include two AAA rated bonds, twenty-nine AA rated bonds and five A rated bonds. No municipal securities have a rating below A. The municipal securities portfolio is geographically diversified. It is not more
likely than not that these securities will have to be sold prior to recovery.



57



---

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008



The aggregate amortized cost and fair value of debt securities at December 31, 2010, by remaining
contractual maturity, are shown below. Actual expected maturities for may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.



|                                    |  |                        |        |  |           |   |        | 
|----------------------------------- |  | ---------------------- | ------ |  | --------- | - | ------ | 
|                                    |  | Available for Sale     |       
|                                    |  | Amortizedcost          |        |  | Fairvalue |  
|                                    |  | (Amounts in thousands) |       
|                                    |  |                       
|U.S. agency securities:             |  |                        |        |  |           |   |        | 
|Due in 1 year or less               |  | $                      | 6,566  |  |           | $ | 6,451  | 
|Due in 1 year through 5 years       |  |                        | 3,024  |  |           |   | 3,075  | 
|Due after 5 years through 10 years  |  |                        | 1,000  |  |           |   | 979    | 
|Due after 10 years                  |  |                        |       |  |           |   |       | 
|State and municipal securities:     |  |                        |        |  |           |   |        | 
|Due in 1 year or less               |  |                        |       |  |           |   |       | 
|Due in 1 year through 5 years       |  |                        | 7,398  |  |           |   | 7,178  | 
|Due after 5 years through 10 years  |  |                        | 11,638 |  |           |   | 11,474 | 
|Due after 10 years                  |  |                        | 12,768 |  |           |   | 12,052 | 
|Subordinated debentures:            |  |                        |        |  |           |   |        | 
|Due after 5 years through 10 years  |  |                        | 500    |  |           |   | 310    | 
|Other equity securities             |  |                        |       |  |           |   |       | 
|Government service enterprise CMOs |  |                        | 8,757  |  |           |   | 8,693  | 
|Private label CMOs                 |  |                        | 810    |  |           |   | 726    | 
|Mortgage-backed securities          |  |                        | 39,278 |  |           |   | 39,214 | 
|                                    |  |                        |        |  |           |   |        | 
|                                    |  |                       
|Total                               |  | $                      | 91,739 |  |           | $ | 90,152 | 
|                                    |  |                        |        |  |           |   |        | 

Proceeds from sales of investment securities available for sale amounted to $52.9 million, $36.2 million and $44.6 million
for the years ended December 31, 2010, 2009 and 2008, respectively. Aggregate gross realized gains from the sales of investment securities available for sale amounted to $954,000, $406,000 and $29,000 for the years ended December 31, 2010,
2009 and 2008, respectively. Gross realized losses from the sale of investment securities available for sale amounted to $903,000, $217,000, and $0 for the years ended December 31, 2010, 2009 and 2008. Realized losses from the impairment of
private label mortgage backed securities amounted to $29,000 for the year ended December 31, 2010, $148,000 for the year ended December 31 2009 and $490,000 for the year ended December 31, 2008, resulting from increased default rates
on underlying collateral payments and credit rating deterioration.

Debt securities were divided into two groups, those rated investment grade
by at least one nationally-recognized rating agency and those rated below investment grade by all nationally-recognized agencies. Impairment of debt securities consistently rated investment grade is considered temporary unless specific contrary
information is identified. None of the debt securities consistently rated investment grade were considered to be other-than-temporarily impaired at December 31, 2010 and December 31, 2009.

At December 31, 2010 approximately $1.3 million (based on amortized cost before impairment charges) of our taxable portfolio, (consisting of one
private label mortgage-backed security and one subordinated debenture) was rated below investment grade by all nationally-recognized rating agencies. At December 31, 2010, the aggregate unrealized loss on the private label mortgage-backed
security and subordinated debenture totaled $274,000 before recognition of any other-than-temporary impairment charges. Impairment of securities rated below investment grade were evaluated to determine if we expect to recover the entire amortized
cost basis of the security. This evaluation for the private label CMO was based on projections of estimated cash flows based on individual loans underlying each security using current and anticipated increases in unemployment and default rates,
decreases in housing prices and increases in loss severity at foreclosure. The evaluation of the subordinated debentures was based on an analysis of the issuers financial statements, debt service reserves, past debt service performance as well
as other factors.





58



---

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008



The primary assumptions used in this evaluation were:

Prepayments  starting with current refinancing and payoff prepayment vector statistics based on information derived from the trustee. The
bonds prepayment vector (VPR) anticipates 6 VPR for 2 months and then returns to historical norms of 4 VPR to maturity.

Default rate
 The model takes the consumer default rate from the mortgage backed bonds 2 month average default rate from 5.4% and ramps it up to 17.5% over the next 12 months, where it remains for another 12 months and down to 4.0% through maturity.

Loss severity  Recoveries on liquidation collateral for this bond have been relatively high for Alternative A collateral in the current
economic environment, most likely due to the low initial loan-to-value and geographic diversity in this deal. During the past two quarters severity was 37%, therefore, estimated foreclosure rate assumptions are 35% over the life of the instrument.
Loss severity includes estimated holding and disposal expenses.

Discount rates  estimated cash flows were discounted at 6.00% based on
our purchase yield of the private label CMO analyzed.

The evaluation uses an adjusted loan to value ratio as part of our evaluation of
whether the unrealized losses on this security are temporary or other-than-temporary. The adjusted loan to value ratio is based on the original loan to value ratio inherent in the security, adjusted for changes in housing prices, prepayment speeds,
default rates and credit enhancements. A higher adjusted loan to value ratio indicates a greater likelihood that projected cash flows may result in losses. A shortfall between our current amortized cost and the present value of expected cash flows
we are likely to collect, based on all available information, is referred to as the credit loss, which is the amount recognized in net income.

The evaluation of previously recognized other-than-temporary impairment at December 31, 2008 was $490,000. In accordance with the provision set
forth in ASC 320-10-65-1 of the other-than-temporary impairment charge recognized in 2008, $343,000 was determined to relate to other non-credit-related factors in the market place. This resulted in an adjustment to the opening balance of retained
earnings with a corresponding adjustment to accumulated other comprehensive income in the amount of $211,000, net of tax effect.

Based on our
evaluation, one security was identified with other-than-temporary impairment at December 31, 2010. For the year-ended December 31, 2010 total other than temporary impairment losses totaled $110,000 and of this amount estimated credit
losses totaled $29,000 on this security, which was charged against earnings. For the year-ended December 31, 2009 total other than temporary impairment losses totaled $456,000 and of this amount estimated credit losses totaled $148,000 on this
security, which was charged against earnings. The difference between total unrealized losses and estimated credit losses on these securities was charged against accumulated other comprehensive income, net of deferred taxes.

The following table shows a roll forward of the amount related to credit losses recognized on debt securities held by the Company for which a portion of
an other-than-temporary impairment was recognized in other comprehensive income.



|                                                                                                                      |  |                                  |     |  |                        |   |     | 
|--------------------------------------------------------------------------------------------------------------------- |  | -------------------------------- | --- |  | ---------------------- | - | --- | 
|                                                                                                                      |  | Twelve Months Ended December 31, |    
|                                                                                                                      |  | 2010                             |     |  | 2009                   |  
|                                                                                                                      |  | (Amounts in thousands)           |     |  | (Amounts in thousands) |  
|                                                                                                                      |  |                                 
|Balance of credit losses on debt securities at the beginning of the period                                            |  | $                                | 148 |  |                        | $ |    | 
|                                                                                                                      |  |                                 
|Additional increase related to the credit loss for which an other-than-temporary impairment was previously
recognized |  |                                  | 29  |  |                        |   | 148 | 
|                                                                                                                      |  |                                  |     |  |                        |   |     | 
|                                                                                                                      |  |                                 
|Balance of credit losses on debt securities at the end of the current period                                          |  | $                                | 177 |  |                        | $ | 148 | 
|                                                                                                                      |  |                                  |     |  |                        |   |     | 



59



---

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008



At December 31, 2010, the balance of Federal Home Loan Bank (FHLB) of Atlanta stock
held by the Company is $2.2 million. On May 11, 2010, the FHLB announced that it would pay a dividend for the first quarter of 2010. On June 30, 2010, the FHLB also announced its intentions of repurchasing up to $300 million of its
stockholders capital that its members owned in excess of amounts the members are required to own. This repurchase was transacted on July 15, 2010. On July 29, 2010, the FHLB announced that it would pay a dividend for the
second quarter of 2010. On October 29, 2010, the FHLB announced that it would pay a dividend for the third quarter of 2010. The FHLB also announced on October 29, 2010 its intentions of repurchasing up to $300 million of its
stockholders capital that its members owned in excess of amounts the members are required to own. This repurchase did take place on November 15, 2010. Given this, management believes that its investment in FHLB stock was not
other-than-temporarily impaired as of December 31, 2010. However, there can be no assurance that the impact of recent or future legislation on the Federal Home Loan Banks will not cause a decrease in the value of the FHLB stock held by the
Company.

Investment securities with amortized cost of $25.0 million and fair value of $24.7 million at December 31, 2010 were pledged to
secure both financing from the FHLB and for public monies on deposit as required by law.

Note D - Loans

Following is a summary of loans at December 31, 2010 and 2009:



|                                                                           |  |                        |         |  |      |   |         |  
|-------------------------------------------------------------------------- |  | ---------------------- | ------- |  | ---- | - | ------- | -
|                                                                           |  | 2010                   |         |  | 2009 |  
|                                                                           |  | (Amounts in thousands) |        
|Real estate:                                                               |  |                        |         |  |      |   |         |  
|Construction loans                                                         |  | $                      | 43,934  |  |      | $ | 67,635  |  
|Commercial mortgage loans                                                  |  |                        | 173,275 |  |      |   | 174,926 |  
|Home equity lines of credit                                                |  |                        | 43,611  |  |      |   | 44,627  |  
|Residential mortgage loans                                                 |  |                        | 72,370  |  |      |   | 81,377  |  
|                                                                           |  |                        |         |  |      |   |         |  
|Total real estate loans                                                    |  |                        | 333,190 |  |      |   | 368,565 |  
|                                                                           |  |                       
|Commercial and industrial loans                                            |  |                        | 61,230  |  |      |   | 64,173  |  
|Loans to individuals for household, family and other personal expenditures |  |                        | 5,398   |  |      |   | 5,383   |  
|Unamortized net deferred loan origination (fees) costs                     |  |                        | 11      |  |      |   | (34     | )
|                                                                           |  |                        |         |  |      |   |         |  
|                                                                           |  |                       
|Total loans                                                                |  | $                      | 399,829 |  |      | $ | 438,087 |  
|                                                                           |  |                        |         |  |      |   |         |  

The recorded investment in loans on nonaccrual status was $7.5 million and $7.3 million as of December 31, 2010 and
2009, respectively. At December 31, 2010 and 2009, the recorded investment in loans considered impaired totaled $20.2 million and $11.0 million, respectively. Impaired loans of $6.7 million and $8.2 million at December 31, 2010 and 2009
had corresponding valuation allowances of $695,000 and $1.2 million, respectively. At December 31, 2010, $4.6 million of the $20.2 million of impaired loans was attributed to twelve troubled debt restructurings (TDRs) and represented $273,000
of the $695,000 valuation allowance. Eight of the twelve TDRs are accruing interest as of December 31, 2010. At December 31, 2009, $2.6 million of the $11.0 million of impaired loans was attributed to two troubled debt restructurings
(TDRs) and represented $597,000 of the $1.2 valuation allowance. The two TDRs are accruing interest as of December 31, 2009. Impaired loans of $13.4 million and $2.8 million at December 31, 2010 and 2009 had no valuation allowances. For
the years ended December 31, 2010, 2009 and 2008, the average recorded investment in impaired loans was approximately $23.1 million, $5.7 million and $2.9 million, respectively. The amount of interest recognized on impaired loans during the
portion of the year that they were impaired was $1.0 million for 2010 and was not material for 2009 and 2008.



60



---

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008



Loan Origination/Risk Management. The Company has certain lending policies and procedures in
place that are designed to maximize loan income within an acceptable level of risk. Management reviews and approves these policies and procedures on a regular basis. A reporting system supplements the review process by providing management with
frequent reports related to loan production, loan quality, concentrations of credit, loan delinquencies and non-performing and potential problem loans. Diversification in the loan portfolio is a means of managing risk associated with fluctuations in
economic conditions.

Commercial and industrial loans are underwritten after evaluating and understanding the borrowers ability to
operate profitably and prudently expand its business. Underwriting standards are designed to promote relationship banking rather than transactional banking. Once it is determined that the borrowers management possesses sound ethics and solid
business acumen, the Companys management examines current and projected cash flows to determine the ability of the borrower to repay their obligations as agreed. Commercial and industrial loans are primarily made based on the identified cash
flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial and industrial
loans are secured by the assets being financed or other business assets such as accounts receivable, inventory or equipment and usually incorporate a personal guarantee; however, some short-term loans may be made on an unsecured basis. In the case
of loans secured by accounts receivable, the availability of the funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.

Commercial real estate and commercial mortgage loans are subject to underwriting standards and processes similar to commercial and industrial loans, in
addition to those of real estate loans. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these
loans is generally largely dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in real estate
markets or the general economy. The properties securing the Corporations commercial real estate portfolio are diverse in terms of type. Management monitors and evaluates commercial real estate loans based on collateral, geography and risk
grade criteria. As a general rule, the Company avoids financing single-purpose projects unless other underwriting factors are present to help mitigate risk. The Company also utilizes third-party experts to provide insight and guidance about economic
conditions and trends affecting market areas it serves. In addition, management tracks the level of owner-occupied commercial real estate loans versus non-owner occupied loans. At December 31, 2010, approximately 22.1% of the outstanding
principal balance of the Companys commercial real estate loans were secured by owner-occupied properties.

With respect to loans to
developers and builders that are secured by non-owner occupied properties that the Corporation may originate from time to time, the Company generally requires the borrower to have an existing relationship with Company and have a proven record of
success. Commercial and Residential Construction loans are underwritten utilizing independent appraisal reviews, sensitivity analysis of absorption and lease rates and financial analysis of the developers and property owners. Construction loans are
generally based upon estimates of costs and value associated with the complete project. These estimates may be inaccurate. Construction loans often involve the disbursement of substantial funds with the repayment substantially dependent on the
success of the ultimate project. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property or an interim loan commitment from the Company until permanent financing
is obtained. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, governmental regulation of real
property, general economic conditions and the availability of long-term financing.

Most residential mortgage loans originated by the Company
are sold into the secondary market adhering to secondary market underwriting requirements. However, residential mortgage loans retained in-house are underwritten with a bias toward first liens against the borrowers primary residence, generally
located in the Companys target market area. In-house residential mortgages must meet loan-to-value appraisal and debt ratio guidelines.



61



---

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008



The Company originates consumer loans utilizing a computer based credit score analysis to supplement the
underwriting process. To monitor and manage consumer loan risk, policies and procedures are developed and modified, as needed, jointly by line and staff personnel. This activity, coupled with relatively small loan amounts that are spread across many
individual borrowers, minimize risk. Additionally, trend and outlook reports are viewed by management on a regular basis.

Underwriting
standards for home equity loans are heavily influenced by statutory requirements, which include, but are not limited to, a maximum loan-to-value percentage of 90%, collection remedies, the number of such loans a borrower can have at one time and
documentation requirements.

The Company maintains an independent loan review function that reviews and validates the credit risk program on a
periodic basis. Results of these reviews are presented to management. The loan review process compliments and reinforces the risk identification and assessment decisions made by lenders and credit personnel, as well as the Companys policies
and procedures.

Concentrations of Credit. Most of the Companys lending activity occurs within the counties of Alamance and
Guilford counties in the state of North Carolina as well as other markets. The majority of the Companys loan portfolio consists of commercial and industrial and commercial real estate loans. As of December 31, 2010 and 2009, there was no
concentration of loans related to any single industry in excess of 11% of total loans.

The Companys lending is concentrated primarily
in Alamance and Guilford Counties and the surrounding areas. The Company had loan and deposit relationships with most of its directors and executive officers and with companies with which certain directors and executive officers are associated. The
following is a reconciliation of loans directly outstanding to executive officers, directors and their affiliates (amounts in thousands):



|                             |  |   |        |  
|---------------------------- |  | - | ------ | -
|Balance at December 31, 2009 |  | $ | 9,659  |  
|New loans                    |  |   | 3,190  |  
|Principal repayments         |  |   | (2,694 | )
|                             |  |   |        |  
|                             | 
|Balance at December 31, 2010 |  | $ | 10,155 |  
|                             |  |   |        |  

As a matter of policy, these loans and credit lines are approved by the Banks Board of Directors and are made with
interest rates, terms, and collateral requirements comparable to those required of other borrowers. In the opinion of management, these loans do not involve more than the normal risk of collectability.

Non-Accrual and Past Due Loans. The following past due and nonaccrual policy applies to all classes of loans. Loans are considered past due if the
required principal and interest payments have not been received as of the date such payments were due. Loans are placed on non-accrual status when, in managements opinion, the borrower may be unable to meet payment obligations as they become
due, as well as when required by regulatory provisions. Loans may be placed on non-accrual status regardless of whether or not such loans are considered past due. When interest accrual is discontinued, all unpaid accrued interest is reversed.
Interest income is subsequently recognized only to the extent cash payments are received in excess of principal due. Loans are returned to accrual status when all principal and interest amounts contractually are brought current and future payments
are reasonably assured.

Charge-off of Uncollectible Loans.When any loan or portion thereof becomes uncollectible, the loan will be
charged down or charged off against the allowance for loan and lease losses. Residential mortgages are charged-off or written down to fair value when the loan has been foreclosed and the balance exceeds the market value of the collateral. Home
equity lines of credit are either charged-off or written down to fair value, when determined that there is not sufficient equity in the loan to cover the Companys exposure. Loans in any portfolio may be charged-off prior to the policies
described above when a loss confirming event occurred, such as bankruptcy (unsecured), continued delinquency, or receipt of an asset valuation indicating collateral deficiency for an asset serving as sole source of repayment.



62



---

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008



Age Analysis of Past Due Loans

As of December 31, 2010 (in thousands)



|                                |  |                     |       |  |                                 |   |       |               |  |   |         |  |  |            |         |  |                                         |   |         |  |  |   |   | 
|------------------------------- |  | ------------------- | ----- |  | ------------------------------- | - | ----- | ------------- |  | - | ------- |  |  | ---------- | ------- |  | --------------------------------------- | - | ------- |  |  | - | - | 
|                                |  | 30- 89 DaysPast Due |       |  | Greater than90 DaysPast Due (1) |   |       | TotalPast Due |  |   | Current |  |  | TotalLoans |         |  | RecordedInvestment >90 Days andAccruing |  
|Loans:                          |  |                     |       |  |                                 |   |       |               |  |   |         |  |  |            |         |  |                                         |   |         |  |  |   |   | 
|Commercial construction loans   |  | $                   | 195   |  |                                 | $ |      |               |  | $ | 195     |  |  | $          | 9,214   |  |                                         | $ | 9,409   |  |  | $ |  | 
|Commercial mortgage loans       |  |                     | 362   |  |                                 |   | 4,868 |               |  |   | 5,230   |  |  |            | 168,045 |  |                                         |   | 173,275 |  |  |   |  | 
|Commercial and industrial loans |  |                     | 311   |  |                                 |   | 99    |               |  |   | 410     |  |  |            | 60,820  |  |                                         |   | 61,230  |  |  |   |  | 
|Residential construction loans  |  |                     |      |  |                                 |   | 3,383 |               |  |   | 3,383   |  |  |            | 31,142  |  |                                         |   | 34,525  |  |  |   |  | 
|Residential mortgage loans      |  |                     | 807   |  |                                 |   | 455   |               |  |   | 1,262   |  |  |            | 71,119  |  |                                         |   | 72,381  |  |  |   |  | 
|Consumer loans                  |  |                     | 184   |  |                                 |   | 53    |               |  |   | 237     |  |  |            | 5,161   |  |                                         |   | 5,398   |  |  |   |  | 
|Home equity lines of credit     |  |                     | 33    |  |                                 |   | 221   |               |  |   | 254     |  |  |            | 43,357  |  |                                         |   | 43,611  |  |  |   |  | 
|                                |  |                     |       |  |                                 |   |       |               |  |   |         |  |  |            |         |  |                                         |   |         |  |  |   |   | 
|                                |  |                     |       |  |                                 |  
|Total                           |  | $                   | 1,892 |  |                                 | $ | 9,079 |               |  | $ | 10,971  |  |  | $          | 388,858 |  |                                         | $ | 399,829 |  |  | $ |  | 
|                                |  |                     |       |  |                                 |   |       |               |  |   |         |  |  |            |         |  |                                         |   |         |  |  |   |   | 



|(1) | As the Company has no loans past due 90 or more days and still accruing, this category only includes non-accrual loans.
|--- | -----------------------------------------------------------------------------------------------------------------------

Impaired Loans.The following impaired loan policy applies to all classes of loans. Impaired loans are considered impaired when, based on current
information and events, it is probable the Company will be unable to collect all amounts in accordance with the original contractual terms of the loan agreement, including scheduled principal and interest payments. Impairment is evaluated in total
for smaller-balance loans of a similar nature and on an individual loan basis for other loans. If a loan is impaired, a specific valuation allowance is allocated, if necessary, so that the loan is reported net, at the present value of estimated
future cash flows using the loans existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Interest payments on impaired loans are typically applied to principal unless collectability of the
principal amount is reasonably assured, in which case interest is recognized on a cash basis. Impaired loans, or portions thereof, are charged off when deemed uncollectable. Year-end impaired loans are set forth in the following table.

For the twelve months ended December 31, 2010 (in thousands)



|                                    |  |                        |        |  |                    |   |        |                  |  |   |                           |  |  |                          |        |  |  |   |       | 
|----------------------------------- |  | ---------------------- | ------ |  | ------------------ | - | ------ | ---------------- |  | - | ------------------------- |  |  | ------------------------ | ------ |  |  | - | ----- | 
|                                    |  | UnpaidPrincipalBalance |        |  | RecordedInvestment |   |        | RelatedAllowance |  |   | AverageRecordedInvestment |  |  | InterestIncomeRecognized |       
|With no related allowance recorded: |  |                        |        |  |                    |   |        |                  |  |   |                           |  |  |                          |        |  |  |   |       | 
|Commercial construction loans       |  | $                      |       |  |                    | $ |       |                  |  | $ |                          |  |  | $                        |       |  |  | $ |       | 
|Commercial mortgage Loans           |  |                        | 6,382  |  |                    |   | 6,382  |                  |  |   |                          |  |  |                          | 7,332  |  |  |   | 289   | 
|Commercial and industrial loans     |  |                        | 3,365  |  |                    |   | 3,365  |                  |  |   |                          |  |  |                          | 4,549  |  |  |   | 144   | 
|Residential construction loans      |  |                        | 3,013  |  |                    |   | 3,013  |                  |  |   |                          |  |  |                          | 3,635  |  |  |   | 172   | 
|Residential mortgage Loans          |  |                        | 362    |  |                    |   | 362    |                  |  |   |                          |  |  |                          | 402    |  |  |   | 26    | 
|Consumer Loans                      |  |                        | 75     |  |                    |   | 75     |                  |  |   |                          |  |  |                          | 69     |  |  |   | 5     | 
|Home equity lines of credit         |  |                        | 223    |  |                    |   | 223    |                  |  |   |                          |  |  |                          | 446    |  |  |   | 20    | 
|                                    |  |                        |        |  |                    |   |        |                  |  |   |                           |  |  |                          |        |  |  |   |       | 
|Subtotal                            |  |                        | 13,420 |  |                    |   | 13,420 |                  |  |   |                          |  |  |                          | 16,433 |  |  |   | 656   | 
|                                    |  |                        |        |  |                    |   |        |                  |  |   |                           |  |  |                          |        |  |  |   |       | 
|With a related allowance recorded:  |  |                        |        |  |                    |   |        |                  |  |   |                           |  |  |                          |        |  |  |   |       | 
|Commercial construction Loans       |  |                        |       |  |                    |   |       |                  |  |   |                          |  |  |                          |       |  |  |   |      | 
|Commercial mortgage loans           |  |                        | 1,907  |  |                    |   | 1,907  |                  |  |   | 352                       |  |  |                          | 1,796  |  |  |   | 92    | 
|Commercial and Industrial Loans     |  |                        | 1,640  |  |                    |   | 1,640  |                  |  |   | 40                        |  |  |                          | 1,784  |  |  |   | 98    | 
|Residential construction loans      |  |                        | 2,032  |  |                    |   | 2,032  |                  |  |   | 253                       |  |  |                          | 2,038  |  |  |   | 100   | 
|Residential mortgage loans          |  |                        | 1,152  |  |                    |   | 1,152  |                  |  |   | 46                        |  |  |                          | 1,059  |  |  |   | 72    | 
|Consumer Loans                      |  |                        | 7      |  |                    |   | 7      |                  |  |   | 4                         |  |  |                          |       |  |  |   |      | 
|Home Equity Lines of credit         |  |                        |       |  |                    |   |       |                  |  |   |                          |  |  |                          |       |  |  |   |      | 
|                                    |  |                        |        |  |                    |   |        |                  |  |   |                           |  |  |                          |        |  |  |   |       | 
|Subtotal                            |  |                        | 6,738  |  |                    |   | 6,738  |                  |  |   | 695                       |  |  |                          | 6,677  |  |  |   | 362   | 
|                                    |  |                        |        |  |                    |   |        |                  |  |   |                           |  |  |                          |        |  |  |   |       | 
|Totals                              |  |                        |        |  |                    |   |        |                  |  |   |                           |  |  |                          |        |  |  |   |       | 
|Commercial construction loans       |  |                        |       |  |                    |   |       |                  |  |   |                          |  |  |                          |       |  |  |   |      | 
|Commercial mortgage loans           |  |                        | 8,289  |  |                    |   | 8,289  |                  |  |   | 352                       |  |  |                          | 9,129  |  |  |   | 381   | 
|Commercial and Industrial Loans     |  |                        | 5,005  |  |                    |   | 5,005  |                  |  |   | 40                        |  |  |                          | 6,333  |  |  |   | 242   | 
|Residential construction loans      |  |                        | 5,045  |  |                    |   | 5,045  |                  |  |   | 253                       |  |  |                          | 5,673  |  |  |   | 272   | 
|Residential mortgage loans          |  |                        | 1,514  |  |                    |   | 1,514  |                  |  |   | 46                        |  |  |                          | 1,461  |  |  |   | 98    | 
|Consumer loans                      |  |                        | 82     |  |                    |   | 82     |                  |  |   | 4                         |  |  |                          | 69     |  |  |   | 5     | 
|Home equity lines of credit         |  |                        | 223    |  |                    |   | 223    |                  |  |   |                          |  |  |                          | 445    |  |  |   | 20    | 
|                                    |  |                        |        |  |                    |   |        |                  |  |   |                           |  |  |                          |        |  |  |   |       | 
|Grand total                         |  | $                      | 20,158 |  |                    | $ | 20,158 |                  |  | $ | 695                       |  |  | $                        | 23,110 |  |  | $ | 1,018 | 
|                                    |  |                        |        |  |                    |   |        |                  |  |   |                           |  |  |                          |        |  |  |   |       | 

Of the $13.4 million of impaired loans with no related allowance recorded, $7.0 million is recorded at fair value after
previous recognition of $2.1 million of charge-offs prior to year-end.



63



---

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008



Credit Quality Indicators. As part of the on-going monitoring of the credit quality of the
Companys loan portfolio, management tracks certain credit quality indicators including trends related to (i) the weighted average risk grade commercial loans, (ii) the level of classified commercial loans, (iii) net
charge-offs, (iv) non-performing loans (see details above) and (v) the general economic conditions in the state of North Carolina.

The Company utilizes a risk grading matrix to assign a risk grade to each of its commercial loans. Loans are graded on a scale of 1 to 9. A description
of the general characteristics of the 9 grades is as follows:



| |  |  | Grade 1  Virtually no risk  Credits in this grade are virtually risk-free. Credits are secured by assignment of certificates of deposits
issued by the Company, US Treasury notes or properly margined, readily marketable securities. Positive control must be maintained by the Company. The repayment program is well-defined and achievable and repayment sources numerous.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Grade 2  Minimal credit risk  This grade is reserved for new and existing loans where the borrower has documented significant overall
financial strength. A liquid financial statement with substantial liquid assets, particularly relative to the debts. Borrowers are required to show excellent sources of repayment, with no significant identifiable risk of collection.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Grade 3  Average credit risk  These loans have excellent sources of repayment, with no significant identifiable risk of collection. The
borrowers have documented historical cash flow that meets or exceeds required minimum Companys guidelines. The borrower must have adequate secondary sources to liquidate the debt, or liquidation value for the net worth of the borrower or
guarantor.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Grade 4  Average credit risk  These loans have adequate sources of repayment, with little identifiable risk of collection.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------



| |  |  | Grade 5  Above average credit risk  These loans show signs of weakness in either adequate sources of repayment or collateral, but have
demonstrated mitigating factors that minimize the risk of delinquency or loss.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Grade 6  Special mention  These loans have clearly defined weaknesses in primary source of repayment that, if not corrected, could cause a
loss to the Company. The loans constitute an undue and unwarranted credit risk to the Company, but are not considered so severe as to meet the definition of Substandard.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Grade 7  Substandard  This grade includes loans that are inadequately protected by the current net worth and paying capacity of the
obligator or of the collateral pledged. The loans have well defined weaknesses that jeopardize the liquidation of the debt and are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not
corrected.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Grade 8  Doubtful  This category has the weaknesses inherent in substandard loans and the added characteristic that the weaknesses make
collection or liquidation in full highly questionable and improbable. The loans are not yet graded as loss because certain events may occur that could salvage the outstanding debt such as the injection of capital, alternative financing is obtained,
or the pledging of additional collateral. Doubtful is a temporary grade where loss is anticipated but is not quantified with any degree of accuracy.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Grade 9  Loss  These loans are considered uncollectable and of such little value that their continuance as a bankable asset is not
warranted. Loss is not intended to imply that the loan or some portion of it will never be paid, nor does it in any way imply that there has been a forgiveness of debt.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



64



---

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008



Commercial Credit Exposure

Credit Risk Profile by Internally Assigned Grade



|                          |  |                        |       |  |                    |   |         |                         |  |   |        | 
|------------------------- |  | ---------------------- | ----- |  | ------------------ | - | ------- | ----------------------- |  | - | ------ | 
|Code                      |  | CommercialConstruction |       |  | CommercialMortgage |   |         | CommercialandIndustrial | 
|Virtually no credit risk  |  | $                      |      |  |                    | $ |        |                         |  | $ | 692    | 
|Minimal credit risk       |  |                        |      |  |                    |   |        |                         |  |   | 983    | 
|Good credit risk          |  |                        |      |  |                    |   | 11,364  |                         |  |   | 9,808  | 
|Acceptable credit risk    |  |                        | 2,061 |  |                    |   | 94,969  |                         |  |   | 30,997 | 
|Above average credit risk |  |                        | 3,954 |  |                    |   | 43,906  |                         |  |   | 13,857 | 
|Special mention           |  |                        | 1,567 |  |                    |   | 12,911  |                         |  |   | 3,443  | 
|Substandard               |  |                        | 1,827 |  |                    |   | 10,125  |                         |  |   | 1,450  | 
|Doubtful                  |  |                        |      |  |                    |   |        |                         |  |   |       | 
|Loss                      |  |                        |      |  |                    |   |        |                         |  |   |       | 
|                          |  |                        |       |  |                    |   |         |                         |  |   |        | 
|                          |  |                        |      
|                          |  | $                      | 9,409 |  |                    | $ | 173,275 |                         |  | $ | 61,230 | 
|                          |  |                        |       |  |                    |   |         |                         |  |   |        | 

Consumer Credit Exposure

Credit Risk Profile by Creditworthiness Category



|                          |  |                         |        |  |                     |   |        |          |  |   |                           |  |  |   |        | 
|------------------------- |  | ----------------------- | ------ |  | ------------------- | - | ------ | -------- |  | - | ------------------------- |  |  | - | ------ | 
|Grade                     |  | ResidentialConstruction |        |  | ResidentialMortgage |   |        | Consumer |  |   | Home EquityLines ofCredit | 
|                          |  |                         |        | 
|Virtually no credit risk  |  | $                       |       |  |                     | $ |       |          |  | $ |                          |  |  | $ |       | 
|Minimal credit risk       |  |                         |       |  |                     |   | 639    |          |  |   | 70                        |  |  |   | 26     | 
|Good credit risk          |  |                         | 967    |  |                     |   | 708    |          |  |   | 207                       |  |  |   | 444    | 
|Acceptable credit risk    |  |                         | 6,300  |  |                     |   | 43,131 |          |  |   | 4,800                     |  |  |   | 40,660 | 
|Above average credit risk |  |                         | 12,644 |  |                     |   | 21,407 |          |  |   | 294                       |  |  |   | 1,886  | 
|Special mention           |  |                         | 8,575  |  |                     |   | 4,496  |          |  |   | 26                        |  |  |   | 456    | 
|Substandard               |  |                         | 6,039  |  |                     |   | 1,989  |          |  |   | 1                         |  |  |   | 139    | 
|Doubtful                  |  |                         |       |  |                     |   |       |          |  |   |                          |  |  |   |       | 
|Loss                      |  |                         |       |  |                     |   |       |          |  |   |                          |  |  |   |       | 
|                          |  |                         |        |  |                     |   |        |          |  |   |                           |  |  |   |        | 
|                          |  |                         |        | 
|                          |  | $                       | 34,525 |  |                     | $ | 72,370 |          |  | $ | 5,398                     |  |  | $ | 43,611 | 
|                          |  |                         |        |  |                     |   |        |          |  |   |                           |  |  |   |        | 

Consumer and Commercial Credit Exposure

Credit Risk Profile Based on Payment History



|              |  |              |        |  |                    |   |         |                           |  |   |                     |  |  |                         |        |  |          |   |        |  |  |   |       | 
|------------- |  | ------------ | ------ |  | ------------------ | - | ------- | ------------------------- |  | - | ------------------- |  |  | ----------------------- | ------ |  | -------- | - | ------ |  |  | - | ----- | 
|Status        |  | Construction |        |  | CommercialMortgage |   |         | Home EquityLines ofCredit |  |   | ResidentialMortgage |  |  | CommercialandIndustrial |        |  | Consumer |  
|              |  |              |        |  |                    |  
|Performing    |  | $            | 40,551 |  |                    | $ | 168,407 |                           |  | $ | 43,390              |  |  | $                       | 71,915 |  |          | $ | 61,131 |  |  | $ | 5,345 | 
|Nonperforming |  |              | 3,383  |  |                    |   | 4,868   |                           |  |   | 221                 |  |  |                         | 455    |  |          |   | 99     |  |  |   | 53    | 
|              |  |              |        |  |                    |   |         |                           |  |   |                     |  |  |                         |        |  |          |   |        |  |  |   |       | 
|              |  |              |        |  |                    |  
|              |  | $            | 43,934 |  |                    | $ | 173,275 |                           |  | $ | 43,611              |  |  | $                       | 72,370 |  |          | $ | 61,230 |  |  | $ | 5,398 | 
|              |  |              |        |  |                    |   |         |                           |  |   |                     |  |  |                         |        |  |          |   |        |  |  |   |       | 



65



---

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008



Note E - Allowance for Loan Losses

The allowance for loan losses is a reserve established through a provision for possible loan losses charged to expense, which represents managements best estimate of probable losses that have been
incurred within the existing portfolio of loans. The allowance, in the judgment of management, is necessary to reserve for estimated loan losses and risks inherent in the loan portfolio. The Companys allowance for possible loss methodology
includes allowance allocations calculated in accordance with ASC Topic 310, Receivables and allowance allocations calculated in accordance with ASC Topic 450, Contingencies. Accordingly, the methodology is based on historical loss
experience by type of credit and internal risk grade, specific homogeneous risk pools and specific loss allocations, with adjustments for current events and conditions. The corporations process for determining the appropriate level of the
allowance for possible loan losses is designed to account for credit deterioration as it occurs. The provision for possible loan losses reflects loan quality trends, including the levels of and trends related to non-accrual loans, past due loans,
potential problem loans, criticized loans and net charge-offs or recoveries, among other factors. The provision for possible loan losses also reflects the totality of actions taken on all loans for a particular period. In other words, the amount of
the provision reflects not only the necessary increases in the allowance for possible loan losses related to newly identified criticized loans, but it also reflects actions taken related to other loans including among other things, any necessary
increases or decreases in required allowances for specific loans or loan pools.

The level of the allowance reflects managements
continuing evaluation of industry concentrations, specific credit risks, loan loss experience, current loan portfolio quality, resent economic, political and regulatory conditions and unidentified losses inherent in the current loan portfolio.
Portions of the allowance may be allocated for specific credits; however, the entire allowance is available for any credit that, in managements judgment, should be charged off. While management utilizes its best judgment and information
available, the ultimate adequacy of the allowance is dependent upon a variety of factors beyond the Companys control, including, among other things, the performance of the Companys loan portfolio, the economy, changes in interest rates
and the view of the regulatory authorities toward loan classifications.

The Companys allowance for possible loan losses consists of
three elements: (i) specific valuation allowance determined in accordance with ASC Topic 310 based on probable losses on specific loans; (ii) historical valuation allowances determined in accordance with ASC Topic 450 based on historical
loan loss experience for similar loans with similar characteristics and trends, adjusted, as necessary, to reflect the impact of current conditions; and (iii) general valuation allowances determined in accordance with ASC Topic 450 based on
general conditions and other qualitative risk factors both internal and external to the Company.

The allowance established for probable
losses on specific loans are based on a regular analysis and evaluation of problem loans. Loans are classified based on an internal credit risk grading process that evaluates, among other things; (i) obligors ability to repay;
(ii) the underlying collateral, if any; and (iii) the economic environment and industry in which the borrower operates. This analysis is performed at the relationship manager level for all commercial loans. When a loan has a calculated
grade of 7 or higher a special assets officer analyzes the loan to determine whether the loan is impaired and, if impaired, the need to specifically allocate a portion of the allowance for possible loan losses to the loan. Specific valuation
allowances are determined by analyzing the borrowers ability to repay amounts owed, collateral deficiencies, the relative risk grade of the loan and economic conditions affecting the borrowers industry, among other things.

Historical valuation allowances are calculated based on the historical loss experience of specific types of loans and the internal risk grade of such
loans at the time they were charged-off. The Company calculates historical loss ratios for pools of similar loans with similar characteristics based on the proportion of actual charge-offs experienced to the total population of loans in the pool.
The historical loss ratios are periodically updated based on actual charge-off experience. A historical valuation allowance is established for each pool of similar loans based on the product of the historical loss ratio and the total dollar amount
of the loans in the pool. The Companys pools of similar loans include similar risk-graded groups of commercial and industrial loans, commercial real estate loans, consumer real estate loans and consumer and other loans.



66



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NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008



General valuation allowances are based on general economic conditions and other qualitative risk factors
both internal and external to the Company. In general, such valuation allowances are determined by evaluating among other things; (i) the experience, ability and effectiveness of the Banks lending management and staff; (ii) the
effectiveness of the Companys loan policies, procedures and internal controls; (iii) changes in asset quality; (iv) changes in loan portfolio volume; (v) the composition and concentrations of credit; (vi) the impact of
competition on loan structuring and pricing; (vii) the effectiveness of the internal loan review function; (viii) the impact of environmental risks on portfolio risks: and (ix) the impact of rising interest rates on portfolio risk.
Management evaluates the degree of risk that each one of these components has on the quality of the loan portfolio on a quarterly basis. Each component is determined to have either a high, moderate or low degree of risk. The results are then input
into a general allocation matrix to determine an appropriate general valuation allowance.

Included in the general valuation
allowances are allocations for groups of similar loans with risk characteristics that exceed certain concentration limits established by management. Concentration risk limits have been established, among other things, for certain industry
concentrations, large balance and highly leveraged credit relationships that exceed specified risk grades, and loans originated with policy exceptions that exceed specified risk grades.

Loans identified as losses by management, internal loan review and/or bank examiners are charged-off. Furthermore, consumer loan accounts are charged-off automatically based on regulatory requirement.

An analysis of activity in the allowance for loan losses for the years ended December 31, 2010, 2009 and 2008 follows:



|                             |  |                        |        |   |      |   |        |      |  |   |       |  
|---------------------------- |  | ---------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ----- | -
|                             |  | 2010                   |        |   | 2009 |   |        | 2008 | 
|                             |  | (Amounts in thousands) |       
|Balance at beginning of year |  | $                      | 7,307  |   |      | $ | 5,632  |      |  | $ | 4,462 |  
|Provision for loan losses    |  |                        | 6,418  |   |      |   | 4,455  |      |  |   | 1,665 |  
|                             |  |                        |       
|Charge-offs                  |  |                        | (4,810 | ) |      |   | (3,025 | )    |  |   | (533  | )
|Recoveries                   |  |                        | 311    |   |      |   | 245    |      |  |   | 38    |  
|                             |  |                        |        |   |      |   |        |      |  |   |       |  
|                             |  |                        |       
|Net charge-offs              |  |                        | (4,499 | ) |      |   | (2,780 | )    |  |   | (495  | )
|                             |  |                        |        |   |      |   |        |      |  |   |       |  
|                             |  |                        |       
|Balance at end of year       |  | $                      | 9,226  |   |      | $ | 7,307  |      |  | $ | 5,632 |  
|                             |  |                        |        |   |      |   |        |      |  |   |       |  



67



---

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008



Allowance for Loan Losses and Recorded Investment in Loans

For the Twelve Months Ended December 31, 2010 (in thousands)



|                                      |  |                   |        |  |                         |   |         |                          |  |   |                          |  |  |                              |        |  |               |   |        |       |  |   |       |  |  |   |         | 
|------------------------------------- |  | ----------------- | ------ |  | ----------------------- | - | ------- | ------------------------ |  | - | ------------------------ |  |  | ---------------------------- | ------ |  | ------------- | - | ------ | ----- |  | - | ----- |  |  | - | ------- | 
|                                      |  | Real Estate       |        |  |                         |   |         |                          |  |   |                          | 
|                                      |  | ConstructionLoans |        |  | CommercialMortgageLoans |   |         | HomeEquityLines ofCredit |  |   | ResidentialMortgageLoans |  |  | CommercialandIndustrialLoans |        |  | ConsumerLoans |   |        | Total | 
|Allowance for loan losses             |  |                   |        |  |                         |   |         |                          |  |   |                          |  |  |                              |        |  |               |   |        |       |  |   |       |  |  |   |         | 
|Beginning balance                     |  | $                 | 1,127  |  |                         | $ | 2,918   |                          |  | $ | 744                      |  |  | $                            | 1,358  |  |               | $ | 1,071  |       |  | $ | 89    |  |  | $ | 7,307   | 
|Charge-offs                           |  |                   | 2,388  |  |                         |   | 965     |                          |  |   | 319                      |  |  |                              | 462    |  |               |   | 611    |       |  |   | 65    |  |  |   | 4,810   | 
|Recoveries                            |  |                   | 131    |  |                         |   | 2       |                          |  |   |                         |  |  |                              | 25     |  |               |   | 103    |       |  |   | 50    |  |  |   | 311     | 
|Provision                             |  |                   | 3,209  |  |                         |   | 1,284   |                          |  |   | 385                      |  |  |                              | 642    |  |               |   | 834    |       |  |   | 64    |  |  |   | 6,418   | 
|                                      |  |                   |        |  |                         |   |         |                          |  |   |                          |  |  |                              |        |  |               |   |        |       |  |   |       |  |  |   |         | 
|Ending balance                        |  | $                 | 2,079  |  |                         | $ | 3,239   |                          |  | $ | 810                      |  |  | $                            | 1,563  |  |               | $ | 1,397  |       |  | $ | 138   |  |  | $ | 9,226   | 
|                                      |  |                   |        |  |                         |   |         |                          |  |   |                          |  |  |                              |        |  |               |   |        |       |  |   |       |  |  |   |         | 
|                                      |  |                   |        |  |                         |   |        
|Portion of ending balance:            |  |                   |        |  |                         |   |         |                          |  |   |                          |  |  |                              |        |  |               |   |        |       |  |   |       |  |  |   |         | 
|Individually evaluated for impairment |  | $                 | 253    |  |                         | $ | 352     |                          |  | $ |                         |  |  | $                            | 46     |  |               | $ | 40     |       |  | $ | 4     |  |  | $ | 695     | 
|Collectively evaluated for impairment |  |                   | 1,826  |  |                         |   | 2,887   |                          |  |   | 810                      |  |  |                              | 1,517  |  |               |   | 1,357  |       |  |   | 134   |  |  |   | 8,531   | 
|                                      |  |                   |        |  |                         |   |         |                          |  |   |                          |  |  |                              |        |  |               |   |        |       |  |   |       |  |  |   |         | 
|Total loans evaluated for impairment  |  | $                 | 2,079  |  |                         | $ | 3,239   |                          |  | $ | 810                      |  |  | $                            | 1,563  |  |               | $ | 1,397  |       |  | $ | 138   |  |  | $ | 9,226   | 
|                                      |  |                   |        |  |                         |   |         |                          |  |   |                          |  |  |                              |        |  |               |   |        |       |  |   |       |  |  |   |         | 
|                                      |  |                   |        |  |                         |   |        
|Loans                                 |  |                   |        |  |                         |   |         |                          |  |   |                          |  |  |                              |        |  |               |   |        |       |  |   |       |  |  |   |         | 
|Ending balance                        |  | $                 | 43,934 |  |                         | $ | 173,275 |                          |  | $ | 43,611                   |  |  | $                            | 72,381 |  |               | $ | 61,230 |       |  | $ | 5,398 |  |  | $ | 399,829 | 
|                                      |  |                   |        |  |                         |   |         |                          |  |   |                          |  |  |                              |        |  |               |   |        |       |  |   |       |  |  |   |         | 
|                                      |  |                   |        |  |                         |   |        
|Portion of ending balance:            |  |                   |        |  |                         |   |         |                          |  |   |                          |  |  |                              |        |  |               |   |        |       |  |   |       |  |  |   |         | 
|Individually evaluated for impairment |  | $                 | 5,045  |  |                         | $ | 8,289   |                          |  | $ | 223                      |  |  | $                            | 1,514  |  |               |   | 5,005  |       |  | $ | 82    |  |  | $ | 20,158  | 
|Collectively evaluated for impairment |  |                   | 38,889 |  |                         |   | 164,986 |                          |  |   | 43,388                   |  |  |                              | 70,867 |  |               |   | 56,225 |       |  |   | 5,316 |  |  |   | 379,671 | 
|                                      |  |                   |        |  |                         |   |         |                          |  |   |                          |  |  |                              |        |  |               |   |        |       |  |   |       |  |  |   |         | 
|Total loans evaluated for impairment  |  | $                 | 43,934 |  |                         | $ | 173,275 |                          |  | $ | 43,611                   |  |  | $                            | 72,381 |  |               | $ | 61,230 |       |  | $ | 5,398 |  |  | $ | 399,829 | 
|                                      |  |                   |        |  |                         |   |         |                          |  |   |                          |  |  |                              |        |  |               |   |        |       |  |   |       |  |  |   |         | 

Note F - Premises and Equipment

The following is a summary of premises and equipment:



|                                     |  |                        |       |  |      |   |        |  
|------------------------------------ |  | ---------------------- | ----- |  | ---- | - | ------ | -
|                                     |  | 2010                   |       |  | 2009 |  
|                                     |  | (Amounts in thousands) |      
|Land                                 |  | $                      | 1,864 |  |      | $ | 1,864  |  
|Buildings and leasehold improvements |  |                        | 5,458 |  |      |   | 5,458  |  
|Furniture and equipment              |  |                        | 2,485 |  |      |   | 2,338  |  
|                                     |  |                        |       |  |      |   |        |  
|                                     |  |                        | 9,807 |  |      |   | 9,660  |  
|                                     |  |                       
|Less accumulated depreciation        |  |                        | 3,155 |  |      |   | (2,597 | )
|                                     |  |                        |       |  |      |   |        |  
|                                     |  |                       
|Total                                |  | $                      | 6,652 |  |      | $ | 7,063  |  
|                                     |  |                        |       |  |      |   |        |  

Depreciation expense for the years ended December 31, 2010, 2009 and 2008 amounted to approximately $557,000, $577,000
and $444,000, respectively.



68



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NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008



Note G - Time Deposits

Time deposits in denominations of $100,000 or more were $158.8 million and $227.9 million at December 31, 2010 and 2009, respectively. Interest expense on such deposits aggregated approximately $3.9
million and $6.6 million in 2010 and 2009, respectively. Related party deposits totaled $5.5 million at December 31, 2010 and $8.0 million at December 31, 2009. Time deposits in denominations of $100,000 or more, maturing subsequent to
December 31, 2010 are as follows (amounts in thousands):



|     |  |   |         | 
|---- |  | - | ------- | 
|2011 |  | $ | 110,349 | 
|2012 |  |   | 39,138  | 
|2013 |  |   | 5,340   | 
|2014 |  |   | 4,000   | 
|     |  |   |         | 
|     | 
|     |  | $ | 158,827 | 
|     |  |   |         | 

Note H - Leases

As of December 31, 2010, the Company leases office space under non-cancelable operating leases. Future minimum lease payments required under the leases are as follows (amounts in thousands):



|                         |  |   |       | 
|------------------------ |  | - | ----- | 
|Year Ending December 31, |  |   |       | 
|2011                     |  | $ | 417   | 
|2012                     |  |   | 408   | 
|2013                     |  |   | 400   | 
|2014                     |  |   | 364   | 
|2015                     |  |   | 364   | 
|Thereafter               |  |   | 987   | 
|                         |  |   |       | 
|                         | 
|                         |  | $ | 2,940 | 
|                         |  |   |       | 

The leases contain options for renewals after the expiration of the current lease terms. The cost of such rentals is not
included above. Total rent expense for the years ended December 31, 2010, 2009 and 2008 amounted to $430,000, $387,000 and $189,000, respectively.

Note I - Borrowings

Short-term borrowings

The Company has remaining credit availability totaling approximately $150.5 million from the FHLB, with no short term outstanding balances at
December 31, 2010 or December 31, 2009. The Company also has credit availability totaling approximately $50.5 million from the Federal Reserve Bank (FRB), with no short term outstanding balances at December 31, 2010 or
December 31, 2009. Any outstanding borrowings held by the Bank are appropriately collateralized. The Company had no short-term balances outstanding at December 31, 2010. The Company had $520,000 short-term borrowings at the daily rate of
0.25% with Pacific Coast Bankers Bank at December 31, 2009. The balance was outstanding for one day.



69



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NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008



Long-term debt

The Company is a member of the FHLB. As a member, the Company is required to invest in the stock of the FHLB. The stock is carried at cost since it has no quoted fair value. All stock in the FHLB,
together with various investment securities and a blanket lien of $110.8 million on qualifying loans, are pledged as collateral to secure any borrowings. At December 31, there were the following borrowings:



|                   |  |                    |      |   |                        |   |        |      |  |   |        | 
|------------------ |  | ------------------ | ---- | - | ---------------------- | - | ------ | ---- |  | - | ------ | 
|Maturity           |  | FixedInterest Rate |      |   | 2010                   |   |        | 2009 | 
|                   |  |                    |      |   | (Amounts in thousands) |  
|                   |  |                    |     
|March 17, 2010     |  |                    | 5.92 | % |                        | $ |       |      |  | $ | 1,500  | 
|March 17, 2010     |  |                    | 5.71 | % |                        |   |       |      |  |   | 2,500  | 
|September 21, 2010 |  |                    | 3.98 | % |                        |   |       |      |  |   | 6,000  | 
|February 28, 2011  |  |                    | 2.37 | % |                        |   | 5,000  |      |  |   | 5,000  | 
|November 30, 2017  |  |                    | 2.98 | % |                        |   | 10,000 |      |  |   | 10,000 | 
|                   |  |                    |      |   |                        |   |        |      |  |   |        | 
|                   |  |                    |      |   |                        | $ | 15,000 |      |  | $ | 25,000 | 
|                   |  |                    |      |   |                        |   |        |      |  |   |        | 

At December 31, 2010 and 2009, the weighted average interest rates on the above advances were 2.78% and 3.54%,
respectively. The above borrowings have been classified as long-term debt in the balance sheet.

The Company has issued $8.8 million of Junior
Subordinated debentures to its wholly owned capital trusts, MidCarolina I and MidCarolina Trust II, to fully and unconditionally guarantee the preferred securities issued by the Trusts. These long term obligations, which currently qualify as Tier I
capital for the Company, constitute a full and unconditional guarantee by the Company of the Trusts obligations under the Capital Trust Securities. The trusts are not consolidated in the Companys financial statements.

A description of the Junior Subordinated debentures outstanding payable to the trusts is as follows:



|                     |  |          |            |  |          |  |            |          |  |  |                        |  |  |      |       |  |  |   |       | 
|-------------------- |  | -------- | ---------- |  | -------- |  | ---------- | -------- |  |  | ---------------------- |  |  | ---- | ----- |  |  | - | ----- | 
|                     |  |          |            |  |          |  |            |          |  |  | (Amounts in thousands) | 
|                     |  | Date of  |            |  | Interest |  |            | Maturity |  |  | Principal Amount       | 
|Issuing Entity       |  | Issuance |            |  | Rate     |  |            | Date     |  |  | 2010                   |  |  | 2009 |      
|                     |  |          |            |  |         
|MidCarolina I        |  |          | 10/29/2002 |  |          |  | Libor plus |          |  |  | 11/07/2032             |  |  | $    | 5,155 |  |  | $ | 5,155 | 
|                     |  |          |            |  |          |  | 3.45%      |          |  |  |                        |  |  |      |       |  |  |   |       | 
|                     |  |          |            |  |         
|MidCarolina Trust II |  |          | 12/03/2003 |  |          |  | Libor plus |          |  |  | 10/07/2033             |  |  |      | 3,609 |  |  |   | 3,609 | 
|                     |  |          |            |  |          |  |            |          |  |  |                        |  |  |      |       |  |  |   |       | 
|                     |  |          |            |  |          |  | 2.90%      |          |  |  |                        |  |  |      |       |  |  |   |       | 
|                     |  |          |            |  |          |  |            |          |  |  |                        |  |  | $    | 8,764 |  |  | $ | 8,764 | 
|                     |  |          |            |  |          |  |            |          |  |  |                        |  |  |      |       |  |  |   |       | 

The Company is able to repay the debt five years after the issuance date.

Note J - Income Taxes

The significant
components of the provision for income taxes are as follows for the years ended December 31:



|                                  |  |                        |        |   |      |   |        |      |  |   |       |  
|--------------------------------- |  | ---------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ----- | -
|                                  |  | 2010                   |        |   | 2009 |   |        | 2008 | 
|                                  |  | (Amounts in thousands) |       
|Current tax provision:            |  |                        |        |   |      |   |        |      |  |   |       |  
|Federal                           |  | $                      | 905    |   |      | $ | 1,521  |      |  | $ | 1,836 |  
|State                             |  |                        | 282    |   |      |   | 411    |      |  |   | 478   |  
|                                  |  |                        |        |   |      |   |        |      |  |   |       |  
|                                  |  |                        | 1,187  |   |      |   | 1,932  |      |  |   | 2,314 |  
|                                  |  |                        |        |   |      |   |        |      |  |   |       |  
|Deferred tax provision (benefit): |  |                        |        |   |      |   |        |      |  |   |       |  
|Federal                           |  |                        | (989   | ) |      |   | (927   | )    |  |   | (458  | )
|State                             |  |                        | (212   | ) |      |   | (187   | )    |  |   | (115  | )
|                                  |  |                        |        |   |      |   |        |      |  |   |       |  
|                                  |  |                        | (1,201 | ) |      |   | (1,114 | )    |  |   | (573  | )
|                                  |  |                        |        |   |      |   |        |      |  |   |       |  
|Net provision for income taxes    |  | $                      | (14    | ) |      | $ | 818    |      |  | $ | 1,741 |  
|                                  |  |                        |        |   |      |   |        |      |  |   |       |  



70



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NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008



A reconciliation of expected income taxes at the statutory federal income tax rate of 34% with the
recorded provision for income taxes follows:



|                                                  |  |                        |      |   |      |   |       |      |  |   |       |  
|------------------------------------------------- |  | ---------------------- | ---- | - | ---- | - | ----- | ---- |  | - | ----- | -
|                                                  |  | 2010                   |      |   | 2009 |   |       | 2008 | 
|                                                  |  | (Amounts in thousands) |     
|                                                  |  |                        |     
|Income tax at statutory rate                      |  | $                      | 327  |   |      | $ | 1,086 |      |  | $ | 1,841 |  
|                                                  |  |                        |     
|Increase (decrease) in income tax resulting from: |  |                        |      |   |      |   |       |      |  |   |       |  
|State income taxes, net of federal tax effect     |  |                        | 46   |   |      |   | 148   |      |  |   | 240   |  
|Income from bank-owned life insurance             |  |                        | (114 | ) |      |   | (97   | )    |  |   | (102  | )
|Nontaxable interest                               |  |                        | (366 | ) |      |   | (349  | )    |  |   | (246  | )
|Other                                             |  |                        | 92   |   |      |   | 30    |      |  |   | 7     |  
|                                                  |  |                        |      |   |      |   |       |      |  |   |       |  
|                                                  |  |                        |     
|Provision for income taxes                        |  | $                      | (14  | ) |      | $ | 818   |      |  | $ | 1,741 |  
|                                                  |  |                        |      |   |      |   |       |      |  |   |       |  

The tax effects of temporary differences that give rise to significant portions of deferred tax assets (liabilities) at
December 31 were are follows:



|                                                                      |  |                        |       |   |      |   |       |  
|--------------------------------------------------------------------- |  | ---------------------- | ----- | - | ---- | - | ----- | -
|                                                                      |  | 2010                   |       |   | 2009 |  
|                                                                      |  | (Amounts in thousands) |      
|Deferred tax assets relating to:                                      |  |                        |       |   |      |   |       |  
|Allowance for loan losses                                             |  | $                      | 3,495 |   |      | $ | 2,709 |  
|Deferred compensation                                                 |  |                        | 575   |   |      |   | 496   |  
|Impairment of investment securities                                   |  |                        | 125   |   |      |   | 114   |  
|Write-downs of other real estate owned                                |  |                        | 272   |   |      |   | 114   |  
|Nonqualified stock options                                            |  |                        | 175   |   |      |   | 108   |  
|Other                                                                 |  |                        | 45    |   |      |   | 37    |  
|Unrealized holding losses on investment securities available for sale |  |                        | 612   |   |      |   | 248   |  
|                                                                      |  |                        |       |   |      |   |       |  
|Total deferred tax assets                                             |  |                        | 5,299 |   |      |   | 3,826 |  
|                                                                      |  |                        |       |   |      |   |       |  
|                                                                      |  |                       
|Deferred tax liabilities relating to:                                 |  |                        |       |   |      |   |       |  
|Property and equipment                                                |  |                        | (61   | ) |      |   | (127  | )
|Deferred loan fees                                                    |  |                        | (137  | ) |      |   | (163  | )
|                                                                      |  |                        |       |   |      |   |       |  
|Total deferred tax liabilities                                        |  |                        | (198  | ) |      |   | (290  | )
|                                                                      |  |                        |       |   |      |   |       |  
|                                                                      |  |                       
|Net recorded deferred tax asset                                       |  | $                      | 5,101 |   |      | $ | 3,536 |  
|                                                                      |  |                        |       |   |      |   |       |  

It is the Banks policy to recognize interest and penalties associated with uncertain tax positions as components of
income taxes. There were no interest or penalties accrued during the year. The Banks federal and state income tax returns are subject to examination for fiscal years ending on or after December 31, 2007.



71



---

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008



Note K - Noncumulative Perpetual Preferred Stock

On August 15, 2005, the Company issued $4.8 million of noncumulative, perpetual preferred stock, with no par value and liquidation preference of
$1,000. The preferred stock is non-voting, other than having class voting rights on certain matters, and pays noncumulative dividends quarterly at a fixed rate of 8.432% through August 15, 2010 and then floats, based upon the London Interbank
Offered Rate (LIBOR) plus 3.75%. Liquidation is restricted for the first five years. Beginning on August 15, 2010 the preferred stock is callable based upon the following table:



|                                                          |  |                                |       |  
|--------------------------------------------------------- |  | ------------------------------ | ----- | -
|Redemption During the 12-Month
Period Beginning August 15 |  | Percentage ofPrincipal 
Amount |      
|                                                          | 
|2010                                                      |  |                                | 105.0 | %
|2011                                                      |  |                                | 104.5 |  
|2012                                                      |  |                                | 104.0 |  
|2013                                                      |  |                                | 103.5 |  
|2014                                                      |  |                                | 103.0 |  
|2015                                                      |  |                                | 102.5 |  
|2016                                                      |  |                                | 102.0 |  
|2017                                                      |  |                                | 101.5 |  
|2018                                                      |  |                                | 101.0 |  
|2019                                                      |  |                                | 100.5 |  
|2020                                                      |  |                                | 100.0 |  

Note L - Savings Plan

The Company maintains a contributory savings plan under Section 401(k) of the Internal Revenue Code covering all employees who have
completed three months of service and are at least eighteen years of age. Under the plan, employee contributions are matched by the Company in an amount equal to 100% of the first 6% of compensation contributed by the employee. Total savings plan
expense for the years ended December 31, 2010, 2009 and 2008 was $107,000, $114,000 and $223,000, respectively.

Note M - Stock
Options

During 2008, the Board of Directors and shareholders of the Bank approved a Non-Qualified Stock Option Plan for certain original
directors of the Bank and 250,000 shares of authorized and unissued stock were reserved for award.

In 2008, the Board of Directors and
shareholders of the Bank amended the Incentive Stock Option Plan for officers and key employees, originally approved in 2004, to increase the number of shares available for award by 159,571. Under the provisions of the Plan, grants are made at the
discretion of an administrative committee appointed by the Board of Directors at the fair value of the stock on the date of grant. The Board originally reserved 326,700 shares of authorized and unissued stock for grant.

In 2004, the Board of Directors and shareholders of the Company approved the MidCarolina Financial Corporation Omnibus Stock Ownership and Long Term
Incentive Plan (2004 Omnibus Plan) for officers and key employees. Under the provisions of the 2004 Omnibus Plan, Rights (as defined in the 2004 Omnibus Plan) are awarded at the discretion of an administrative committee appointed by the
Board of Directors at the fair value of the stock on the date of grant. The Board reserved 412,500 shares of authorized and unissued stock for grant.



72



---

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008



A summary of the Companys stock option activity and related information for the year ended
December 31, 2010:



|                                 |  |                     |         |  |                      |   |      |              |  |  |                        |  |  |   |      | 
|-------------------------------- |  | ------------------- | ------- |  | -------------------- | - | ---- | ------------ |  |  | ---------------------- |  |  | - | ---- | 
|                                 |  | Outstanding Options |         |  | Exercisable Options  |  
|                                 |  | Numbershares        |         |  | AverageExercisePrice |   |      | Numbershares |  |  | AggregateExercisePrice | 
|                                 |  |                     |         | 
|At December 31, 2009             |  |                     | 395,429 |  |                      | $ | 8.59 |              |  |  | 308,790                |  |  | $ | 8.70 | 
|Options granted/vested           |  |                     |        |  |                      |   |     |              |  |  |                       |  |  |   |     | 
|Options exercised                |  |                     |        |  |                      |   |     |              |  |  |                       |  |  |   |     | 
|Options forfeited                |  |                     | 23,925  |  |                      |   | 6.97 |              |  |  |                       |  |  |   |     | 
|                                 |  |                     |         |  |                      |   |      |              |  |  |                        |  |  |   |      | 
|                                 |  |                     |         | 
|Outstanding at December 31, 2010 |  |                     | 371,504 |  |                      | $ | 8.70 |              |  |  | 308,790                |  |  | $ | 8.82 | 
|                                 |  |                     |         |  |                      |   |      |              |  |  |                        |  |  |   |      | 



|                                       |  |                 |        |  |                                     |   |      | 
|-------------------------------------- |  | --------------- | ------ |  | ----------------------------------- | - | ---- | 
|                                       |  | Numberof shares |        |  | WeightedAverageGrant DateFair Value |  
|                                       |  |                
|Non vested shares at December 31, 2009 |  |                 | 86,657 |  |                                     | $ | 8.22 | 
|Options vested                         |  |                 | 1,496  |  |                                     |   | 8.82 | 
|Options exercised                      |  |                 |       |  |                                     |   |     | 
|Options forfeited                      |  |                 | 23,925 |  |                                     |   | 6.97 | 
|                                       |  |                 |        |  |                                     |   |      | 
|                                       |  |                
|Non vested shares at December 31, 2010 |  |                 | 61,236 |  |                                     | $ | 8.08 | 
|                                       |  |                 |        |  |                                     |   |      | 

The weighted average remaining contractual term of options outstanding and options exercisable at December 31, 2010 and
2009 is 6.14 years and 6.93 years, respectively.

The estimated per share fair value of options granted together with the assumptions used in
estimating these fair values, are displayed below:



|                                        |  |      |   |  |      |   |      |      |  |   |      | 
|--------------------------------------- |  | ---- | - |  | ---- | - | ---- | ---- |  | - | ---- | 
|                                        |  | 2010 |   |  | 2009 |   |      | 2008 | 
|                                        |  |      |  
|Estimated fair value of options granted |  | $    |  |  |      | $ | 2.87 |      |  | $ | 3.16 | 
|                                        |  |      |   |  |      |   |      |      |  |   |      | 

The risk-free interest rate is based upon a U.S. Treasury instrument with a life that is similar to the expected life of the
option grant. Expected volatility is based upon the historical volatility of the Company based upon the previous 3 years trading history. The expected term of the options is based upon the average life of previously issued stock options. The
expected dividend yield is based upon current yield on date of grant. No post-vesting restrictions exist for these options. The following table illustrates the assumptions for the Black-Scholes model used in determining the fair value of options
granted to employees in the year ended December 31, 2009 and 2008.

The estimated average per share fair value of options granted, using
the Black-Scholes methodology, together with the assumptions used in estimating those fair values, are displayed below.



|                                         |  |      |           |   |      |  |           |  
|---------------------------------------- |  | ---- | --------- | - | ---- |  | --------- | -
|                                         |  | 2009 |           |   | 2008 | 
|Assumptions in estimating option values: |  |      |           |   |      |  |           |  
|Risk-free rate                           |  |      | 2.40      | % |      |  | 3.22      | %
|Dividend yield                           |  |      | 0         | % |      |  | 0         | %
|Volatility                               |  |      | 30.13     | % |      |  | 29.26     | %
|Expected life                            |  |      | 8.0 years |   |      |  | 6.5 years |  



73



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NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008



For the years ended December 31, 2010, 2009 and 2008, the intrinsic value of options exercised was
approximately:



|     |  |      |   |  |      |   |             | 
|---- |  | ---- | - |  | ---- | - | ----------- | 
|2010 |  | 2009 |   |  | 2008 |  
|     |  |     
|$   |  | $    |  |  |      | $ | 2.6 million | 

There were no options exercised
during 2010 or 2009. Cash received from options exercised under all share-based payment arrangements for year ended December 31, 2008 was approximately $792,000. The actual tax benefit in shareholders equity realized for the tax deduction from
option exercise in the share-based payment arrangements totaled $498,000 for the year ended December 31, 2008.

The unrecognized
compensation expense for outstanding options at December 31, 2010 was $588,000 which will be recognized over the service period to vesting of each award.

Note N - Officers Deferred Compensation

In 2002, the Company implemented a
non-qualifying deferred compensation plan for certain key executive officers. The Company has purchased life insurance policies on the participating officers in order to offset the cost of benefit payments. Benefits for each officer participating in
the plan will accrue and vest during the period of employment, and will be paid in monthly benefit payments over the participants life after retirement. The plan also provides for payment of disability or death benefits in the event a
participating officer becomes permanently disabled or dies while employed at the Bank. Provisions of $205,000 in 2010, $192,000 in 2009 and $180,000 in 2008 were expensed for future benefits to be provided under this plan. The total liability under
this plan was $ 1.3 million at December 31, 2009 and $1.1 million at December 31, 2008, and is included in accrued expenses and other liabilities in the accompanying consolidated statements of financial condition.

Note O - Employment Agreement

The
Company has entered into employment agreements with certain key officers to ensure a stable and competent management base. In the event of a change in control of the Company, as defined in the agreements, the acquirer will be bound to the terms of
the agreements.

Note P - Contingent Liabilities and Commitments

The Companys consolidated financial statements do not reflect various commitments and contingent liabilities which arise in the normal course of business and which involve elements of credit risk,
interest rate risk and liquidity risk. These commitments and contingent liabilities are commitments to extend credit, letters of credit and commitments to sell loans.

A summary of the Companys commitments and contingent liabilities at December 31, 2010 is as follows (amounts in thousands):



|                                                                                                |  |      |        | 
|----------------------------------------------------------------------------------------------- |  | ---- | ------ | 
|                                                                                                |  | 2010 |       
|Unfunded commitments to extend credit under existing equity line and commercial lines of credit |  | $    | 54,378 | 
|Commitments to sell loans held for sale                                                         |  |      | 2,958  | 
|Financial standby letters of credit, net                                                        |  |      | 2,138  | 

Commitments to originate new loans or
extend credit and letters of credit all include exposure to some credit loss in the event of nonperformance by the customer. The Companys credit policies and procedures for credit commitments are the same as those for extensions of credit that
are recorded in the balance sheets. Because these instruments have fixed maturity dates, and because many of them expire without being drawn upon, they do not generally present any significant liquidity risk to the Company. The Company has not
incurred any losses on its commitments in 2010, 2009 or 2008.



74



---

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008



The capital and credit markets have experienced volatility for more than a year. More recently, the
volatility and disruption has increased, and the markets have produced a downward pressure on stock prices and credit availability for many issuers without regard to their underlying financial strength. This has been particularly the case with
respect to financial institutions, and the market prices of the stock of financial services companies in general, including the Companys, are at their lowest levels in recent history. If current levels of market disruption and volatility
continue or worsen, there can be no assurance that we will not experience an adverse effect, which may be material, on the Companys ability to access capital and on our business, financial condition and results of operations.

Commitments to sell loans held for sale are agreements to sell loans to a third party at an agreed upon price. The aggregate fair value of the
commitments is immaterial.

Financial standby letters of credit are conditional lending commitments issued by the Company to guarantee the
performance of a customer to a third party. Those letters of credit are primarily issued to support public and private borrowing arrangements. Essentially all letters of credit issued have expiration dates within one year. The credit risk involved
in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.

Note Q -
Shareholders Equity

Regulatory Matters

During June 2010, the Banks Board of Directors entered into an agreement called a Memorandum of Understanding (the Memorandum) with the FDIC and North Carolina Commissioner of Banks
under which the Bank will move in good faith to take various actions designed to improve the Banks lending procedures and other conditions related to its operations. The Memorandum provides for the Board to (i) review and formulate
objectives relative to liquidity and growth, including a reduction in reliance on volatile liabilities, (ii) formulate plans for the reduction and improvement in adversely classified assets, (iii) review compliance with and, as necessary,
modify written policies regarding asset/liability, investment and funds management, (iv) oversee and enforce loan underwriting procedures and implement policies regarding other real estate and an effective loan documentation system,
(v) not pay any dividend without the approval of the regulators, (vi) review officer performance and consider additional staffing needs, and (vii) provide progress reports and submit various other information to the regulators.

During October 2010, the Companys Board of Directors entered into a separate Memorandum of Understanding with the Federal Reserve Bank
of Richmond (the FRB) under which the Company may not receive dividends from the Bank, pay dividends on the Companys common or preferred stock or payments on its trust preferred securities, incur additional debt, or redeem any
outstanding stock, without prior regulatory approval.

As a North Carolina banking corporation, the Bank may pay cash dividends to the Company
only out of undivided profits as determined pursuant to North Carolina banking laws. However, regulatory authorities may limit payment of dividends when it is determined that such a limitation is in the public interest and is necessary to ensure a
banks financial soundness.

The Bank is subject to the capital requirements of the FDIC. The FDIC requires the Bank to maintain minimum
ratios of Tier I capital to total risk-weighted assets and total capital to risk-weighted assets of 4% and 8%, respectively. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the Banks financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines
that involve quantitative measures of the Banks assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Banks capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings and other factors. To be well-capitalized, the FDIC requires ratios of Tier I capital to risk-weighted assets and total capital to risk-weighted assets of 6% and 10%,
respectively. Tier I capital consists of total shareholders equity calculated in accordance with accounting principles generally accepted in the United States of America less intangible assets, and total capital is comprised of Tier I capital
plus certain adjustments, the only one of which applicable to the Bank is



75



---

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008



the allowance for loan losses. Risk-weighted assets refer to the on- and off-balance sheet exposures of the Bank adjusted for their relative risk levels using formulas set forth in FDIC
regulations. The Bank is also subject to a FDIC leverage capital requirement, which calls for a minimum ratio of Tier I capital to quarterly average total assets of 4% and a ratio of 5% to be well-capitalized.

As of December 31, 2010 and 2009, the Banks capital ratios exceeded levels deemed well-capitalized under the regulatory framework
for prompt corrective action. There are no events or conditions since the notification that management believes have changed the Banks category. However, the Bank is subject to discretionary actions by regulators. Currently the Company may not
receive dividends from the Bank, pay dividends on the Companys common or preferred stock or payments on its trust preferred securities, incur additional debt, or redeem any outstanding stock, without prior regulatory approval.



|                                                          |  |                        |        |  |                      |  |       |                     |  |  |                       |   |  |  |       |  
|--------------------------------------------------------- |  | ---------------------- | ------ |  | -------------------- |  | ----- | ------------------- |  |  | --------------------- | - |  |  | ----- | -
|                                                          |  | For the Bank           |        |  | Minimum Requirements | 
|                                                          |  | CapitalAmount          |        |  | CapitalRatio         |  |       | For CapitalAdequacy |  |  | To Be WellCapitalized |  
|                                                          |  | (Dollars in thousands) |       
|As of December 31, 2010                                   |  |                        |        |  |                      |  |       |                     |  |  |                       |   |  |  |       |  
|Tier I capital (to risk-weighted assets)                  |  | $                      | 49,321 |  |                      |  | 11.77 | %                   |  |  | 4.00                  | % |  |  | 6.00  | %
|Total capital - Tier II capital (to risk-weighted assets) |  |                        | 54,609 |  |                      |  | 13.03 | %                   |  |  | 8.00                  | % |  |  | 10.00 | %
|Leverage - Tier I capital (to average assets)             |  |                        | 49,321 |  |                      |  | 9.03  | %                   |  |  | 4.00                  | % |  |  | 5.00  | %
|                                                          |  |                        |        | 
|As of December 31, 2009                                   |  |                        |        |  |                      |  |       |                     |  |  |                       |   |  |  |       |  
|Tier I capital (to risk-weighted assets)                  |  | $                      | 48,436 |  |                      |  | 10.54 | %                   |  |  | 4.00                  | % |  |  | 6.00  | %
|Total capital - Tier II capital (to risk-weighted assets) |  |                        | 54,197 |  |                      |  | 11.80 | %                   |  |  | 8.00                  | % |  |  | 10.00 | %
|Leverage - Tier I capital (to average assets)             |  |                        | 48,436 |  |                      |  | 8.67  | %                   |  |  | 4.00                  | % |  |  | 5.00  | %

The Company is also subject to these
capital requirements except for the prompt corrective action requirements of the FDIC.

Note R - Fair Value of Financial Instruments

ASC 820, Fair Value Measurements and Disclosures, requires a company to disclose the fair value of its financial instruments,
whether or not recognized in the balance sheet, where it is practical to estimate that value.

Fair value estimates are made at a specific
point in time based on relevant market information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Companys entire holding of a particular
financial instrument. In cases where quoted market prices are not available, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments
and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates. In
addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates. Finally, the fair value estimates presented herein are
based on pertinent information available to management as of December 31, 2010 and 2009, respectively.



76



---

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008



The following methods and assumptions were used to estimate the fair value of each class of financial
instruments for which it is practicable to estimate that value:

Cash and Due from Banks, Federal Funds Sold and Interest-Earning Deposits

The carrying amounts for cash and due from banks, federal funds sold and interest-earning deposits approximate fair value because of the
short maturities of those instruments. These instruments are considered cash and cash equivalents.

Investment Securities

Fair value for investment securities, excluding FHLB stock, is based on quoted market price if such information is available. If a quoted market price is
not available, fair value is estimated using quoted market prices for similar securities. The carrying value of FHLB stock approximates fair value based on the redemption provisions of the FHLB.

Loans Held for Sale

Fair values of
mortgage loans held for sale are based on commitments on hand from investors or prevailing market prices.

Loans

For certain homogeneous categories of loans, such as residential mortgages, fair value is estimated using the quoted market prices for securities backed
by similar loans, adjusted for differences in loan characteristics. The fair value of other types of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar
credit ratings and for the same remaining maturities. However, the values derived likely do not represent exit prices due to the distressed market conditions; therefore, incremental market risks and liquidity discounts of approximately 8% were
subtracted to reflect the illiquid and distressed conditions at December 31, 2010 and 2009.

Investment in Life Insurance

The carrying value of life insurance approximates fair value because this investment is carried at cash surrender value, as determined by
the insurer.

Deposits, Short-term Borrowings and Long-term Debt

Deposits and short-term borrowings without a stated maturity, or insignificant term to maturity, including demand, interest bearing demand, savings accounts and FHLB borrowings are reported at their
carrying value. No value has been assigned to the franchise value of deposits. For other types of deposits and long-term debt, with fixed rates and longer maturities is estimated based upon the discounted value of projected future cash outflows
using the rates currently offered for instruments of similar remaining maturities.

Accrued Interest Receivable and Accrued Interest
Payable

The carrying amounts of accrued interest receivable and accrued interest payable are assumed to approximate fair values.

Financial Instruments with Off-Balance Sheet Risk

With regard to financial instruments with off-balance sheet risk discussed in Note P, it is not practicable to estimate the fair value of future financing commitments.



77



---

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008



The following table presents the carrying values and estimated fair values of the Companys
financial instruments at December 31, 2010 and 2009:



|                                         |  |                        |         |  |                     |   |         | 
|---------------------------------------- |  | ---------------------- | ------- |  | ------------------- | - | ------- | 
|                                         |  | Carryingvalue          |         |  | Estimatedfair value |  
|                                         |  | (Amounts in thousands) |        
|As of December 31, 2010                  |  |                        |         |  |                     |   |         | 
|Financial assets:                        |  |                        |         |  |                     |   |         | 
|Cash and cash equivalents                |  | $                      | 13,706  |  |                     | $ | 13,706  | 
|Investment securities available for sale |  |                        | 90,152  |  |                     |   | 90,152  | 
|Loans held for sale                      |  |                        | 2,958   |  |                     |   | 2,958   | 
|Loans, net                               |  |                        | 390,603 |  |                     |   | 367,483 | 
|Federal Home Loan Bank stock             |  |                        | 2,075   |  |                     |   | 2,075   | 
|Investment in life insurance             |  |                        | 8,514   |  |                     |   | 8,514   | 
|Accrued interest receivable              |  |                        | 1,801   |  |                     |   | 1,801   | 
|Financial liabilities:                   |  |                        |         |  |                     |   |         | 
|Deposits                                 |  | $                      | 465,873 |  |                     | $ | 461,447 | 
|Short-term borrowings                    |  |                        |        |  |                     |   |        | 
|Long-term debt                           |  |                        | 23,764  |  |                     |   | 24,124  | 
|Accrued interest payable                 |  |                        | 279     |  |                     |   | 279     | 
|                                         |  |                       
|As of December 31, 2009                  |  |                        |         |  |                     |   |         | 
|Financial assets:                        |  |                        |         |  |                     |   |         | 
|Cash and cash equivalents                |  | $                      | 9,429   |  |                     | $ | 9,429   | 
|Investment securities available for sale |  |                        | 70,719  |  |                     |   | 70,719  | 
|Loans held for sale                      |  |                        | 228     |  |                     |   | 228     | 
|Loans, net                               |  |                        | 430,780 |  |                     |   | 402,646 | 
|Federal Home Loan Bank stock             |  |                        | 2,322   |  |                     |   | 2,322   | 
|Investment in life insurance             |  |                        | 8,179   |  |                     |   | 8,179   | 
|Accrued interest receivable              |  |                        | 2,150   |  |                     |   | 2,150   | 
|Financial liabilities:                   |  |                        |         |  |                     |   |         | 
|Deposits                                 |  | $                      | 465,020 |  |                     | $ | 462,740 | 
|Short-term borrowings                    |  |                        | 520     |  |                     |   | 520     | 
|Long-term debt                           |  |                        | 33,674  |  |                     |   | 34,684  | 
|Accrued interest payable                 |  |                        | 485     |  |                     |   | 485     | 



78



---

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008



Note S - FAIR VALUE MEASUREMENTS

The Company adopted FASBs Accounting Standards Codification (ASC) Topic 820, Fair Value Measurements and Disclosures, effective January 1, 2009, which defines fair value, establishes a
framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. The Company utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value
disclosures. Securities available-for-sale are recorded at fair value on a recurring basis. From time to time, the Company may be required to record at fair value other assets on a nonrecurring basis, such as loans held for sale and other real
estate owned. These nonrecurring fair value adjustments typically involve application of lower of cost or market accounting write-downs of individual assets.

The following is a description of valuation methodologies used for assets and liabilities recorded at fair value.

Investment Securities Available-for-Sale

Investment securities available-for-sale are
recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques
such as present value of future cash flows, adjusted for the securitys credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange, such as the New York
Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include mortgage-backed securities issued by government sponsored entities, municipal bonds,
private label collateralized mortgage obligations and corporate debt securities.

Securities classified as Level 3 include asset-backed
securities and corporate debt securities in less liquid markets.

Loans Held for Sale

Loans held for sale are carried at the lower of cost or market value. The fair value of loans held for sale is based on what secondary markets are
currently offering for portfolios with similar characteristics. As such, the Company classifies loans subject to nonrecurring fair value adjustments as Level 2.

Loans

The Company does not record loans at fair value on a recurring basis. However, from
time to time, a loan is considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are
considered impaired. Once a loan is identified as impaired, management measures impairment on an individual basis. The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt,
enterprise value, liquidation value and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. As of
December 31, 2010, the Bank identified $20.2 million in impaired loans. Of these impaired loans, $9.1 million required a specific reserve of $2.1 million, which was charged off prior to year-end resulting in a net fair value of $7.0 million, in
addition to $6.7 million in impaired loans maintaining a specific reserve of $695,000 at year-end, for a net fair value of impaired loans of $13.0 million. As of December 31, 2009, the Bank identified $11.0 million in impaired loans. Of these
impaired loans, $8.2 million were identified to have impairment of $1.2 million for a net fair value of $7.0 million. The determination of impairment was based on the estimated fair market value of collateral for each loan determined through the use
of appraisals and subjected to further discounts by management, which is considered to be a Level 3 input.

Other Real Estate Owned

Other real estate owned is adjusted to fair value at the date of transfer subject to future impairment. Fair value is based upon
independent market prices, appraised values of the collateral or managements estimation of the value of the collateral. When fair value of the collateral is based on an observable market price or a current appraised value, the Company records
the other real estate owned as nonrecurring Level 2. When an appraised value is not available



79



---

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008



or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the other real estate owned as
nonrecurring Level 3.

There were no transfers between Level 1 and Level 2 for the year-ended December 31, 2010. The following table
summarizes quantitative disclosures about the fair value measurement for each category of assets carried at fair value as of December 31, 2010 (Dollars in thousands):



|                               |  |                  |        |  |                                                             |   |   |                                             |  |   |                                        |  |  |   |        | 
|------------------------------ |  | ---------------- | ------ |  | ----------------------------------------------------------- | - | - | ------------------------------------------- |  | - | -------------------------------------- |  |  | - | ------ | 
|Description                    |  | December 31,2010 |        |  | Quoted Prices inActive Markets forIdentical Assets(Level 1) |   |   | Significant 
OtherObservableInputs(Level 2) |  |   | SignificantUnobservableInputs(Level
3) | 
|                               |  |                  |        | 
|Available for sale securities: |  |                  |        |  |                                                             |   |   |                                             |  |   |                                        |  |  |   |        | 
|U.S. Agency securities         |  | $                | 10,505 |  |                                                             | $ |  |                                             |  | $ | 10,505                                 |  |  | $ |       | 
|Mortgage backed securities     |  |                  | 39,214 |  |                                                             |   |  |                                             |  |   | 39,214                                 |  |  |   |       | 
|Government enterprise CMOs    |  |                  | 8,693  |  |                                                             |   |  |                                             |  |   | 8,693                                  |  |  |   |       | 
|Private label CMOs            |  |                  | 726    |  |                                                             |   |  |                                             |  |   | 726                                    |  |  |   |       | 
|State and municipal securities |  |                  | 30,704 |  |                                                             |   |  |                                             |  |   | 30,704                                 |  |  |   |       | 
|Subordinated debenture         |  |                  | 310    |  |                                                             |   |  |                                             |  |   |                                       |  |  |   | 310    | 
|                               |  |                  |        |  |                                                             |   |   |                                             |  |   |                                        |  |  |   |        | 
|                               |  |                  | 90,152 |  |                                                             |   |  |                                             |  |   | 89,842                                 |  |  |   | 310    | 
|                               |  |                  |        | 
|Impaired loans                 |  |                  | 13,037 |  |                                                             |   |  |                                             |  |   |                                       |  |  |   | 13,037 | 
|Other real estate owned        |  |                  | 7,244  |  |                                                             |   |  |                                             |  |   |                                       |  |  |   | 7,244  | 

The following table summarizes
quantitative disclosures about the fair value measurement for each category of assets carried at fair value as of December 31, 2009 (Dollars in thousands):



|                               |  |                  |        |  |                                                             |   |   |                                             |  |   |                                        |  |  |   |       | 
|------------------------------ |  | ---------------- | ------ |  | ----------------------------------------------------------- | - | - | ------------------------------------------- |  | - | -------------------------------------- |  |  | - | ----- | 
|Description                    |  | December 31,2009 |        |  | Quoted Prices inActive Markets forIdentical Assets(Level 1) |   |   | Significant 
OtherObservableInputs(Level 2) |  |   | SignificantUnobservableInputs(Level
3) | 
|                               |  |                  |        | 
|Available for sale securities: |  |                  |        |  |                                                             |   |   |                                             |  |   |                                        |  |  |   |       | 
|U.S. Agency securities         |  | $                | 12,057 |  |                                                             | $ |  |                                             |  | $ | 12,057                                 |  |  | $ |      | 
|Mortgage backed securities     |  |                  | 24,917 |  |                                                             |   |  |                                             |  |   | 24,917                                 |  |  |   |      | 
|Private label CMOs            |  |                  | 4,976  |  |                                                             |   |  |                                             |  |   | 4,976                                  |  |  |   |      | 
|State and municipal securities |  |                  | 28,449 |  |                                                             |   |  |                                             |  |   | 28,449                                 |  |  |   |      | 
|Subordinated debenture         |  |                  | 320    |  |                                                             |   |  |                                             |  |   |                                       |  |  |   | 320   | 
|                               |  |                  |        |  |                                                             |   |   |                                             |  |   |                                        |  |  |   |       | 
|                               |  |                  | 70,719 |  |                                                             |   |  |                                             |  |   | 70,399                                 |  |  |   | 320   | 
|                               |  |                  |        | 
|Impaired loans                 |  |                  | 7,042  |  |                                                             |   |  |                                             |  |   |                                       |  |  |   | 7,042 | 
|Other real estate owned        |  |                  | 2,876  |  |                                                             |   |  |                                             |  |   |                                       |  |  |   | 2,876 | 



80



---

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008



The table below presents reconciliation for the period of December 31, 2009 to December 31,
2010 for all Level 3 assets that are measured at fair value on a recurring basis. At December 31, 2009, $2.3 million of securities were transferred from Level 3 to Level 2 resulting from enhanced measurement capabilities of third party
valuations.



|                                               |  |                              |     |  
|---------------------------------------------- |  | ---------------------------- | --- | -
|                                               |  | Available-for-salesecurities |    
|                                               |  | (Dollars in thousands)       |    
|                                               | 
|Beginning Balance December 31, 2009            |  | $                            | 320 |  
|Total realized and unrealized gains or losses: |  |                              |     |  
|Included in earnings                           |  |                              |    |  
|Included in other comprehensive income         |  |                              | (10 | )
|Purchases, issuances and settlements           |  |                              |    |  
|Transfers in (out) of Level 3                  |  |                              |    |  
|                                               |  |                              |     |  
|                                               | 
|Ending Balance December 31, 2010               |  | $                            | 310 |  
|                                               |  |                              |     |  

Note T - Parent Company Financial Data

The Companys condensed statement of financial condition as of December 31, 2010 and 2009, and its related condensed statements of operations and cash flows for the three year period ended
December 31, 2010, are as follows:

Condensed Statement of Financial Condition

December 31, 2010 and 2009

(Amounts in thousands)



|                                           |  |      |        |   |      |   |        |  
|------------------------------------------ |  | ---- | ------ | - | ---- | - | ------ | -
|                                           |  | 2010 |        |   | 2009 |  
|Assets:                                    |  |      |        |   |      |   |        |  
|Cash in banks                              |  | $    | 446    |   |      | $ |       |  
|Investment in subsidiaries                 |  |      | 48,610 |   |      |   | 48,302 |  
|Other assets                               |  |      | 186    |   |      |   | 698    |  
|                                           |  |      |        |   |      |   |        |  
|                                           |  |     
|Total assets                               |  | $    | 49,242 |   |      | $ | 49,000 |  
|                                           |  |      |        |   |      |   |        |  
|                                           |  |     
|Liabilities and Shareholders Equity:      |  |      |        |   |      |   |        |  
|Liabilities:                               |  |      |        |   |      |   |        |  
|Junior subordinated debentures             |  | $    | 8,764  |   |      | $ | 8,764  |  
|Other liabilities                          |  |      | 54     |   |      |   | 51     |  
|                                           |  |      |        |   |      |   |        |  
|Total liabilities                          |  |      | 8,818  |   |      |   | 8,815  |  
|                                           |  |      |        |   |      |   |        |  
|                                           |  |     
|Shareholders Equity:                      |  |      |        |   |      |   |        |  
|Preferred stock                            |  |      | 4,819  |   |      |   | 4,819  |  
|Common stock                               |  |      | 15,162 |   |      |   | 14,958 |  
|Retained earnings                          |  |      | 21,418 |   |      |   | 20,805 |  
|Accumulated other comprehensive loss       |  |      | (975   | ) |      |   | (397   | )
|                                           |  |      |        |   |      |   |        |  
|Total shareholders equity                 |  |      | 40,424 |   |      |   | 40,185 |  
|                                           |  |      |        |   |      |   |        |  
|                                           |  |     
|Total liabilities and shareholders equity |  | $    | 49,242 |   |      | $ | 49,000 |  
|                                           |  |      |        |   |      |   |        |  



81



---

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008



Condensed Statements of Operations

Years ended December 31, 2010, 2009 and 2008

(Amounts in thousands)



|                                            |  |      |      |   |      |   |       |      |  |   |       |  
|------------------------------------------- |  | ---- | ---- | - | ---- | - | ----- | ---- |  | - | ----- | -
|                                            |  | 2010 |      |   | 2009 |   |       | 2008 | 
|                                            |  |      |     
|Undistributed earnings of subsidiaries      |  | $    | 682  |   |      | $ | 1,755 |      |  | $ | 3,105 |  
|Subsidiary dividend income                  |  |      | 615  |   |      |   | 980   |      |  |   | 1,140 |  
|Interest expense                            |  |      | (320 | ) |      |   | (359  | )    |  |   | (571  | )
|Income tax benefit                          |  |      |     |   |      |   |      |      |  |   |      |  
|                                            |  |      |      |   |      |   |       |      |  |   |       |  
|                                            |  |      |     
|Net income                                  |  |      | 977  |   |      |   | 2,376 |      |  |   | 3,674 |  
|Dividends on preferred stock                |  |      | (364 | ) |      |   | (417  | )    |  |   | (417  | )
|                                            |  |      |      |   |      |   |       |      |  |   |       |  
|                                            |  |      |     
|Net income available to common shareholders |  | $    | 613  |   |      | $ | 1,959 |      |  | $ | 3,257 |  
|                                            |  |      |      |   |      |   |       |      |  |   |       |  



82



---

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008



Condensed Statements of Cash Flow

Years ended December 31, 2010, 2009 and 2008

(Amounts in thousands)



|                                                                              |  |      |      |   |      |   |        |      |  |   |        |  
|----------------------------------------------------------------------------- |  | ---- | ---- | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                                              |  | 2010 |      |   | 2009 |   |        | 2008 | 
|                                                                              |  |      |     
|Cash flows from operating activities:                                         |  |      |      |   |      |   |        |      |  |   |        |  
|Net income                                                                    |  | $    | 977  |   |      | $ | 2,376  |      |  |   | 3,674  |  
|Adjustments to reconcile net income to net cash used by operating activities: |  |      |      |   |      |   |        |      |  |   |        |  
|Equity in undistributed earnings of subsidiaries                              |  |      | (682 | ) |      |   | (1,755 | )    |  |   | (3,105 | )
|Stock compensation expense                                                    |  |      | 204  |   |      |   | 332    |      |  |   | 46     |  
|Amortization                                                                  |  |      | 9    |   |      |   | 9      |      |  |   | 9      |  
|Increase in other assets                                                      |  |      | (512 | ) |      |   | (157   | )    |  |   | (144   | )
|Increase (decrease) in other liabilities                                      |  |      | (6   | ) |      |   | (55    | )    |  |   | (18    | )
|                                                                              |  |      |      |   |      |   |        |      |  |   |        |  
|                                                                              |  |      |     
|Net cash provided by operating activities                                     |  |      | 810  |   |      |   | 750    |      |  |   | 462    |  
|                                                                              |  |      |      |   |      |   |        |      |  |   |        |  
|                                                                              |  |      |     
|Cash flows from investing activities:                                         |  |      |      |   |      |   |        |      |  |   |        |  
|Capital contributions to bank subsidiary                                      |  |      | (204 | ) |      |   | (333   | )    |  |   | (1,335 | )
|                                                                              |  |      |      |   |      |   |        |      |  |   |        |  
|                                                                              |  |      |     
|Net cash used by investing activities                                         |  |      | (204 | ) |      |   | (333   | )    |  |   | (1,335 | )
|                                                                              |  |      |      |   |      |   |        |      |  |   |        |  
|                                                                              |  |      |     
|Cash flows from financing activities:                                         |  |      |      |   |      |   |        |      |  |   |        |  
|Proceeds from exercise of stock options                                       |  |      |     |   |      |   |       |      |  |   | 792    |  
|Tax benefit from exercise of stock options                                    |  |      |     |   |      |   |       |      |  |   | 498    |  
|Non-cumulative perpetual preferred stock dividends paid                       |  |      | (364 | ) |      |   | (417   | )    |  |   | (417   | )
|                                                                              |  |      |      |   |      |   |        |      |  |   |        |  
|                                                                              |  |      |     
|Net cash (used) provided by financing activities                              |  |      | (160 | ) |      |   | (417   | )    |  |   | 873    |  
|                                                                              |  |      |      |   |      |   |        |      |  |   |        |  
|                                                                              |  |      |     
|Net increase in cash and cash equivalents                                     |  |      | 446  |   |      |   |       |      |  |   |       |  
|                                                                              |  |      |     
|Cash and cash equivalents, beginning                                          |  |      |     |   |      |   |       |      |  |   |       |  
|                                                                              |  |      |      |   |      |   |        |      |  |   |        |  
|                                                                              |  |      |     
|Cash and cash equivalents, ending                                             |  | $    | 446  |   |      | $ |       |      |  | $ |       |  
|                                                                              |  |      |      |   |      |   |        |      |  |   |        |  



83



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Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

N/A

ITEM 9A. DISCLOSURE CONTROLS AND PROCEDURES.

MidCarolinas management is responsible for establishing and maintaining effective disclosure controls and procedures, as defined under Rules 13a-15(e) and 15d-15(e) of the Exchange Act. As of
December 31, 2010, an evaluation was performed under the supervision and with the participation of MidCarolinas management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and
operation of MidCarolinas disclosure controls and procedures. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that MidCarolinas disclosure controls and procedures were effective at
December 31, 2010, to provide reasonable assurance that information required to be disclosed by MidCarolina in reports it files under the Exchange Act is recorded, processed, summarized, and reported on a timely basis.

MANAGEMENTS REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING.

Management is responsible for establishing and maintaining adequate internal control over financial reporting for MidCarolina.
MidCarolinas internal control over financial reporting is a process designed under supervision of MidCarolinas Chief Executive Officer and Chief Financial Officer to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of MidCarolinas financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles. Management has made a comprehensive review, evaluation and assessment of
MidCarolinas internal control over financial reporting as of December 31, 2010. In making its assessment of internal control over financial reporting, management used the criteria issued by the Commission Sponsoring Organization of the
Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on this assessment, management believes that, as of December 31, 2010, MidCarolinas internal control over financial reporting is effective. In
accordance with Section 404 of the Sarbanes-Oxley Act of 2002, management makes the following assertions:



| |  |  | Management has implemented a process to monitor and assess both design and operating effectiveness of internal control over financial reporting.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

In connection with the above evaluation of MidCarolinas disclosure controls and procedures, no change in MidCarolinas
internal control over financial reporting was identified that occurred during the quarter ended December 31, 2010 that has materially affected, or are reasonably likely to materially affect, MidCarolinas internal control over financial
reporting.

ITEM 9B. OTHER INFORMATION

None.



84



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PART III

Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Directors and Executive Officers. Information regarding MidCarolinas directors and executive officers under the
headings Proposal 1: Election of Directors and Executive Officers in MidCarolinas definitive Proxy Statement filed in connection with its 2011 Annual Meeting is incorporated into this Report by reference.

Audit Committee. Information regarding the Audit Committee of MidCarolinas board of directors under the
captions Committees of Our Board - General and - Audit Committee in MidCarolinas definitive Proxy Statement filed in connection with its 2011 Annual Meeting is incorporated into this Report by reference.

Audit Committee Financial Expert.Information regarding the determination of MidCarolinas Board of
Directors that its Audit Committee includes an audit committee financial expert under the caption Committees of Our Board - Audit Committee in MidCarolinas definitive Proxy Statement filed in connection with its 2011 Annual
Meeting is incorporated into this Report by reference.

Code of Ethics. Information regarding MidCarolinas
Code of Ethics that applies to its directors and to all its executive officers, including without limitation its principal executive officer and principal financial officer, is incorporated by reference from the information under the caption
Code of Ethics in MidCarolinas definitive Proxy Statement filed in connection with its 2011 Annual Meeting.

Section 16(a) Beneficial Ownership Reporting Compliance.Information regarding compliance by MidCarolinas directors, executive officers and principal shareholders with the
reporting requirements of Section 16(a) of the Securities Exchange Act of 1934 under the caption Section 16(a) Beneficial Ownership Reporting Compliance in MidCarolinas definitive Proxy Statement filed in connection
with its 2011 Annual Meeting incorporated into this Report by reference.

Item 11. EXECUTIVE COMPENSATION

Information regarding compensation paid or provided to MidCarolinas executive officers and directors under the headings
Executive Compensation and Director Compensation in MidCarolinas definitive Proxy Statement filed in connection with its 2011 Annual Meeting of Shareholders is incorporated into this Report by reference.

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS

Beneficial Ownership of Securities. Information regarding the beneficial ownership of
MidCarolinas common stock by its directors, executive officers and principal shareholders under the caption Beneficial Ownership of Our Common Stock in MidCarolinas definitive Proxy Statement filed in connection with
its 2011 Annual Meeting is incorporated into this Report by reference.



85



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Securities Authorized for Issuance Under Equity Compensation Plans. The
following table summarizes all compensation plans and individual compensation arrangements which were in effect on December 31, 2010, and under which shares of MidCarolinas common stock have been authorized for issuance.



|                                                           |  |                                                                     |         |  |                                                         |   |      |                                                                                                                                      |  |  |         | 
|---------------------------------------------------------- |  | ------------------------------------------------------------------- | ------- |  | ------------------------------------------------------- | - | ---- | ------------------------------------------------------------------------------------------------------------------------------------ |  |  | ------- | 
|EQUITY COMPENSATION PLAN
INFORMATION                       | 
|                                                           |  |                                                                     |        
|Plan category                                              |  | (a)Number of 
sharesto be issued uponexercise ofoutstanding options |         |  | (b)Weighted-averageexercise price ofoutstanding options |   |      | (c)Number of shares 
remainingavailable for future issuance underequity compensation plans (excludingshares reflected in column (a)) | 
|                                                           |  |                                                                     |        
|Equity compensation plans approved by security holders (1) |  |                                                                     | 371,504 |  |                                                         | $ | 8.70 |                                                                                                                                      |  |  | 425,050 | 
|Equity compensation plans not approved by security holders |  |                                                                     |        |  |                                                         |   |     |                                                                                                                                      |  |  |        | 
|Total                                                      |  |                                                                     | 371,504 |  |                                                         | $ | 8.70 |                                                                                                                                      |  |  | 425,050 | 



|(1) | Of the 371,504 stock options outstanding under the Plans, a total of 317,168 of those stock options had vested or were exercisable within 60 days after
December 31, 2010.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS,
AND DIRECTOR INDEPENDENCE

Related Person Transactions. Information regarding transactions between
MidCarolina and its directors, executive officers and other related persons under the caption Transactions with Related Persons in MidCarolinas definitive Proxy Statement filed in connection with its 2011 Annual Meeting is
incorporated into this Report by reference.

Director Independence. Information regarding MidCarolinas
independent directors under the caption Corporate Governance  Director Independence in MidCarolinas definitive Proxy Statement filed in connection with its 2011 Annual Meeting is incorporated into this Report by
reference.

Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Information regarding services provided by, and fees paid to, MidCarolinas independent accountants under the caption
Services and Fees During 2010 and 2009 in MidCarolinas definitive Proxy Statement filed in connection with its 2011 Annual Meeting is incorporated into this Report by reference.



86



---

Part IV



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

(a) Financial Statements. The following financial statements are included in Item 8 of this report.



|                                                                                                                 |  |          |    | 
|---------------------------------------------------------------------------------------------------------------- |  | -------- | -- | 
|                                                                                                                 |  | Page No. |   
|                                                                                                                 | 
|Report of Independent Registered Public Accounting Firm                                                          |  |          | 44 | 
|                                                                                                                 | 
|Consolidated Statements of Financial Condition as of December 31, 2010 and 2009                                  |  |          | 45 | 
|                                                                                                                 | 
|Consolidated Statements of Operations for the years ended December 31, 2010, 2009 and
2008                       |  |          | 46 | 
|                                                                                                                 | 
|Consolidated Statements of Comprehensive Income for the years ended December 31, 2010, 2009 and
2008             |  |          | 47 | 
|                                                                                                                 | 
|Consolidated Statements of Changes in Shareholders Equity for the years ended December 
31, 2010, 2009 and 2008 |  |          | 48 | 
|                                                                                                                 | 
|Consolidated Statements of Cash Flows for the years ended December 31, 2010, 2009 and
2008                       |  |          | 49 | 
|                                                                                                                 | 
|Notes to Consolidated Financial Statements                                                                       |  |          | 50 | 

(b) Exhibits. An index listing
exhibits that are being filed or furnished with, or incorporated by reference into, this Report appears immediately following the signature page and is incorporated herein by reference.



87



---

SIGNATURES

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



|                     |  |                                       |  |                                  
|-------------------- |  | ------------------------------------- |  | ---------------------------------
|                     |  |                                       |  | MIDCAROLINA FINANCIAL CORPORATION
|                     |  |                                      
|Date: March 15, 2011 |  | By:                                   |  | /s/ CHARLES T. CANADAY, JR.      
|                     |  | Charles T. Canaday, Jr.              
|                     |  | President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates
indicated.



|                           |  |                            |  |               
|-------------------------- |  | -------------------------- |  | --------------
|Signature                  |  | Title                      |  | Date          
|                           |  |                           
|/s/ CHARLES T. CANADAY     |  | President, Chief Executive |  | March 15, 2011
|Charles T. Canaday         |  | Officer and Director       |  |               
|                           |  |                           
|/s/ CHRISTOPHER B. REDCAY  |  | Senior Vice President and  |  | March 15, 2011
|Christopher B. Redcay      |  | Chief Financial Officer    |  |               
|                           |  |                           
|/s/ JAMES R. COPLAND III   |  | Chairman and Director      |  | March 15, 2011
|James R. Copland, III      |  |                            |  |               
|                           |  |                           
|/s/ DEXTER R. BARBEE, SR.  |  | Director                   |  | March 15, 2011
|Dexter R. Barbee, Sr.      |  |                            |  |               
|                           |  |                           
|/s/ H. THOMAS BOBO         |  | Director                   |  | March 15, 2011
|H. Thomas Bobo             |  |                            |  |               
|                           |  |                           
|/s/ JAMES B. CROUCH, JR    |  | Director                   |  | March 15, 2011
|James B. Crouch, Jr.       |  |                            |  |               
|                           |  |                           
|/s/ THOMAS E. CHANDLER     |  | Director                   |  | March 15, 2011
|Thomas E. Chandler         |  |                            |  |               
|                           |  |                           
|/s/ J. ANTHONY HOLT        |  | Director                   |  | March 15, 2011
|J. Anthony Holt            |  |                            |  |               
|                           |  |                           
|/s/ F. D. HORNADAY         |  | Vice Chairman and Director |  | March 15, 2011
|F.D. Hornaday, III         |  |                            |  |               
|                           |  |                           
|/s/ TEENA M. KOURY         |  | Director                   |  | March 15, 2011
|Teena M. Koury             |  |                            |  |               
|                           |  |                           
|/s/ JOHN LOVE              |  | Director                   |  | March 15, 2011
|John Love                  |  |                            |  |               
|                           |  |                           
|/s/ JAMES B. POWELL        |  | Director                   |  | March 15, 2011
|James B. Powell            |  |                            |  |               
|                           |  |                           
|/s/ JOHN K. ROBERTS        |  | Director                   |  | March 15, 2011
|John K. Roberts            |  |                            |  |               
|                           |  |                           
|/s/ JAMES H. SMITH, JR.    |  | Director                   |  | March 15, 2011
|James H. Smith, Jr.        |  |                            |  |               
|                           |  |                           
|/s/ GEORGE C, WALDREP, JR. |  | Director                   |  | March 15, 2011
|George C. Waldrep, Jr.     |  |                            |  |               
|                           |  |                           
|/s/ ROBERT A. WARD         |  | Director                   |  | March 15, 2011
|Robert A. Ward             |  |                            |  |               



88



---

INDEX TO EXHIBITS



|              |  |                                                                                                                                                                                                                                                                                                                                                                                             
|------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No.   |  | Description                                                                                                                                                                                                                                                                                                                                                                                 
|              | 
|Exhibit 3.1   |  | Amended and Restated Articles of Incorporation, incorporated herein by reference to Exhibit 3(i) to the Form 8-A12G filed with the SEC on June 5, 2002, as amended on August 15, 2005
by Articles of Amendment, incorporated herein by reference to Exhibit 3(i) to the Form 8-K filed with the SEC on August 29, 2005.                                                                     
|              | 
|Exhibit 3.2   |  | Bylaws, incorporated herein by reference to Exhibit 3(ii) to the Form 8-A12G filed with the SEC on June 5, 2002.                                                                                                                                                                                                                                                                            
|              | 
|Exhibit 4.1   |  | Form of Stock Certificate, incorporated herein by reference to the Form 10-QSB filed with the SEC on November 12, 2002.                                                                                                                                                                                                                                                                     
|              | 
|Exhibit 4.2   |  | Certain instruments defining the rights of the holders of long-term debt of the Company and of a subsidiary, involving a total amount of indebtedness not in excess of 10% of the
total assets of the Company and its subsidiaries on a consolidated basis, have not been filed as exhibits. The Company hereby agrees to furnish a copy of any of these agreements to the SEC upon request.
|              | 
|Exhibit 10.1  |  | Bank Employee Stock Option Plan, incorporated herein by reference to Exhibit 6(ii) to the Form 10-SB filed with the FDIC on April 30, 1998.                                                                                                                                                                                                                                                 
|              | 
|Exhibit 10.2  |  | Land Lease dated October 15, 1997 between the Bank and Crescent Center Associates, incorporated herein by reference to Exhibit 10(iv) to the Form 10-KSB for the fiscal year ended
December 31, 1998.                                                                                                                                                                                       
|              | 
|Exhibit 10.3  |  | Lease dated June 27, 2000 between the Bank and Cum-Park Plaza, LLC incorporated herein by reference to Exhibit 10(v) to the Form 10-KSB, filed with the SEC for the fiscal year ended
December 31, 2000.                                                                                                                                                                                    
|              | 
|Exhibit 10.4  |  | Form of stock option award agreements for incentive stock options and nonqualified stock options granted under the Omnibus Stock Ownership and Long-Term Incentive Plan, incorporated
herein by reference to Exhibit 10.7 to the Form 10-KSB, filed with the SEC on March 29, 2006.                                                                                                         
|              | 
|Exhibit 10.5  |  | Amendment of Stock Option Agreements granted under the Bank Employee Stock Option Plan, incorporated herein by reference to Exhibit 99.2 to the Form 8-K, filed with the SEC on
December 27, 2005.                                                                                                                                                                                          
|              | 
|Exhibit 10.6  |  | Amendment of Stock Option Agreement, with resale restrictions, granted under the Bank Employee Stock Option Plan, incorporated herein by reference to Exhibit 99.3 to the Form 8-K,
filed with the SEC on December 27, 2005.                                                                                                                                                                
|              | 
|Exhibit 10.7  |  | Employment Agreement dated May 27, 2008 between the Company and Charles T. Canaday, incorporated herein by reference to Exhibits to Form 10-Q for the quarter ended June 30,
2008.                                                                                                                                                                                                          
|              | 
|Exhibit 10.8  |  | Employment Agreement dated May 27, 2008 between the Company and Christopher Redcay, incorporated herein by reference to Exhibits to Form 10-Q for the quarter ended June 30,
2008.                                                                                                                                                                                                          
|              | 
|Exhibit 10.9  |  | Employment Agreement dated May 27, 2008 between the Company and R. Craig Patterson, incorporated herein by reference to Exhibits to the Form 10-Q for the quarter ended June 30,
2008.                                                                                                                                                                                                      
|              | 
|Exhibit 10.10 |  | Salary Continuation Agreement dated May 27, 2008 between the Company and Charles T. Canaday, incorporated herein by reference to Exhibits to the Form 10-Q for the quarter ended June
30, 2008.                                                                                                                                                                                             
|              | 
|Exhibit 10.11 |  | Salary Continuation Agreement dated May 27, 2008 between the Company and Christopher Redcay, incorporated herein by reference to Exhibits to the Form 10-Q for the quarter ended June
30, 2008.                                                                                                                                                                                             
|              | 
|Exhibit 10.12 |  | Salary Continuation Agreement dated May 27, 2008 between the Company and R. Craig Patterson, Incorporated herein by reference to Exhibits to the Form 10-Q for the quarter ended June
30, 2008.                                                                                                                                                                                             



---

|              |  |                                                                                                                                                                                                                                                                                                        
|------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|              | 
|Exhibit 10.13 |  | Indemnification Agreement with directors, incorporated herein by reference to Exhibit 99.1 to the Form 8-K, filed with the SEC on December 27, 2005.                                                                                                                                                   
|              | 
|Exhibit 10.14 |  | 2008 Director Stock Option Plan, incorporated by reference from appendices to registrants Definitive Proxy Statement filed with the Commission in connection with its 2008
Annual Meeting.                                                                                                            
|              | 
|Exhibit 10.15 |  | Omnibus Stock Ownership and Long Term Incentive Plan, as amended and restated as of January 1, 2005, and as further amended on May 27, 2008, incorporated by reference from
appendices to registrants Definitive Proxy Statement filed with the Commission in connection with its 2008 Annual Meeting.
|              | 
|Exhibit 10.16 |  | Form of Amendment to Endorsement Split Dollar Agreement, between MidCarolina Bank and (i) Charles T. Canaday; and (ii) Christopher B. Redcay, dated December 7, 2007, incorporated
herein by reference to Exhibit 10.01 to the Form 8-K, filed with the SEC on March 21, 2008.                         
|              | 
|Exhibit 10.17 |  | Form of Amendment to Endorsement Split Dollar Agreement, between MidCarolina Bank and R. Craig. Patterson; dated December 7, 2007 incorporated herein by reference to Exhibit 10.01
to the Form 8-K, filed with the SEC on March 21, 2008.                                                             
|              | 
|Exhibit 14    |  | Code of Ethics incorporated herein by reference to Exhibit 14 to the Form 10-KSB for the fiscal year ended December 31, 2003.                                                                                                                                                                          
|              | 
|Exhibit 21    |  | Schedule of Subsidiaries incorporated herein by reference to Exhibit 21 to the Form 10-k for the fiscal year ended December 31, 2009.                                                                                                                                                                  
|              | 
|Exhibit 23    |  | Consent of Dixon Hughes PLLC, filed herewith                                                                                                                                                                                                                                                           
|              | 
|Exhibit 31.1  |  | Rule 13a-14(a)/15d-14(a) Certification by Chief Executive Officer, filed herewith                                                                                                                                                                                                                      
|              | 
|Exhibit 31.2  |  | Rule 13a-14(a)/15d-14(a) Certification by Chief Financial Officer, filed herewith                                                                                                                                                                                                                      
|              | 
|Exhibit 32    |  | Section 1350 Certifications, filed herewith