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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 10-Q







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

For the Quarterly Period Ended September 30, 2010

or



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

For the transition period from  to

Commission File No. 0-24753





ECB Bancorp, Inc.

(Exact name of registrant as specified in its charter)







|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|North Carolina                                                 |  | 56-2090738                          
|(State or other jurisdiction of
incorporation or organization) |  | (I.R.S. Employer Identification No.)

Post Office Box 337, Engelhard,
North Carolina 27824

(Address of principal executive offices) (Zip Code)

(252) 925-9411

(Registrants telephone number, including area code)





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

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

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



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

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

On November 5, 2010, there were 2,849,841 outstanding shares of Registrants common stock.

This Form 10-Q has 45 pages.









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Table of Contents

Index

|                                                                                               |  |                                                                                                                           |    |               |   | 
|---------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------- | -- | ------------- | - | 
|                                                                                               |  |                                                                                                                           |    | Beginson Page |  
|                                                                                               | 
|Part 1  Financial Information                                                                 |  |                                                                                                                           |    |              
|Item 1. Financial Statements:                                                                  |  |                                                                                                                           |    |              
|                                                                                               |  | Consolidated Balance Sheets at September 30, 2010 (unaudited) and December 31,
2009                                       |    |               | 3 | 
|                                                                                               |  | Consolidated Income Statements for Three and Nine Months Ended September 30, 2010 and 2009
(unaudited)                    |    |               | 4 | 
|                                                                                               |  | Consolidated Statements of Changes in Shareholders Equity for Nine Months Ended September 
30, 2010 and 2009 (unaudited) |    |               | 5 | 
|                                                                                               |  | Consolidated Statements of Cash Flows for Nine Months Ended September 30, 2010 and 2009
(unaudited)                       |    |               | 6 | 
|                                                                                               |  | Notes to Consolidated Financial Statements                                                                                |    |               | 7 | 
|Item 
2. Managements Discussion and Analysis of Financial Condition and Results of Operations |  |                                                                                                                           | 22 |              
|Item 3. Quantitative and Qualitative Disclosures About Market Risk                             |  |                                                                                                                           | 37 |              
|Item 4. Controls and Procedures                                                                |  |                                                                                                                           | 38 |              
|                                                                                               | 
|Part II  Other Information                                                                    |  |                                                                                                                           |    |              
|Item 1. Legal Proceedings                                                                      |  |                                                                                                                           | 38 |              
|Item 1A. Risk Factors                                                                          |  |                                                                                                                           | 38 |              
|Item 2. Unregistered Sales of Equity Securities and Use of Proceeds                            |  |                                                                                                                           | 39 |              
|Item 3. Defaults upon Senior Securities                                                        |  |                                                                                                                           | 39 |              
|Item 4. Removed and Reserved                                                                   |  |                                                                                                                           | 39 |              
|Item 5. Other Information                                                                      |  |                                                                                                                           | 39 |              
|Item 6. Exhibits                                                                               |  |                                                                                                                           | 39 |              
|Signatures                                                                                     |  |                                                                                                                           | 40 |              
|Exhibit Index                                                                                  |  |                                                                                                                           | 41 |              



2



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ECB BANCORP, INC. AND SUBSIDIARY

Consolidated Balance Sheets

September 30, 2010 and December 31, 2009

(Dollars in thousands, except per share data)



|                                                                                                                              |  |                   |            |   |                   |   |            |  
|----------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ---------- | - | ----------------- | - | ---------- | -
|                                                                                                                              |  | September 30,2010 |            |   | December 31,2009* |  
|                                                                                                                              |  | (unaudited)       |            |   |                   |  
|Assets                                                                                                                        |  |                   |            |   |                   |   |            |  
|Non-interest bearing deposits and cash                                                                                        |  | $                 | 8,666      |   |                   | $ | 9,076      |  
|Interest bearing deposits                                                                                                     |  |                   | 20         |   |                   |   | 870        |  
|Overnight investments                                                                                                         |  |                   | 31,720     |   |                   |   | 7,865      |  
|                                                                                                                              |  |                   |            |   |                   |   |            |  
|Total cash and cash equivalents                                                                                               |  |                   | 40,406     |   |                   |   | 17,811     |  
|                                                                                                                              |  |                   |            |   |                   |   |            |  
|                                                                                                                              |  |                  
|Investment securities                                                                                                         |  |                   |            |   |                   |   |            |  
|Available-for-sale, at market value (cost of $258,148 and $237,594 at September 30, 2010 and December 31, 2009,
respectively) |  |                   | 263,946    |   |                   |   | 239,332    |  
|                                                                                                                              |  |                  
|Loans held for sale                                                                                                           |  |                   | 2,103      |   |                   |   |           |  
|                                                                                                                              |  |                  
|Loans                                                                                                                         |  |                   | 575,003    |   |                   |   | 577,791    |  
|Allowance for loan losses                                                                                                     |  |                   | (13,187    | ) |                   |   | (9,725     | )
|                                                                                                                              |  |                   |            |   |                   |   |            |  
|Loans, net                                                                                                                    |  |                   | 561,816    |   |                   |   | 568,066    |  
|                                                                                                                              |  |                   |            |   |                   |   |            |  
|                                                                                                                              |  |                  
|Real estate and repossessions acquired in settlement of loans, net                                                            |  |                   | 5,253      |   |                   |   | 5,443      |  
|Federal Home Loan Bank common stock, at cost                                                                                  |  |                   | 4,749      |   |                   |   | 5,116      |  
|Bank premises and equipment, net                                                                                              |  |                   | 25,897     |   |                   |   | 25,329     |  
|Accrued interest receivable                                                                                                   |  |                   | 5,176      |   |                   |   | 4,967      |  
|Bank owned life insurance                                                                                                     |  |                   | 8,880      |   |                   |   | 8,657      |  
|Other assets                                                                                                                  |  |                   | 13,983     |   |                   |   | 13,999     |  
|                                                                                                                              |  |                   |            |   |                   |   |            |  
|Total                                                                                                                         |  | $                 | 932,209    |   |                   | $ | 888,720    |  
|                                                                                                                              |  |                   |            |   |                   |   |            |  
|                                                                                                                              |  |                  
|Liabilities and Shareholders Equity                                                                                          |  |                   |            |   |                   |   |            |  
|Deposits                                                                                                                      |  |                   |            |   |                   |   |            |  
|Demand, noninterest bearing                                                                                                   |  | $                 | 105,628    |   |                   | $ | 93,492     |  
|Demand, interest bearing                                                                                                      |  |                   | 215,346    |   |                   |   | 141,956    |  
|Savings                                                                                                                       |  |                   | 25,972     |   |                   |   | 19,595     |  
|Time                                                                                                                          |  |                   | 443,646    |   |                   |   | 499,687    |  
|                                                                                                                              |  |                   |            |   |                   |   |            |  
|Total deposits                                                                                                                |  |                   | 790,592    |   |                   |   | 754,730    |  
|                                                                                                                              |  |                   |            |   |                   |   |            |  
|                                                                                                                              |  |                  
|Accrued interest payable                                                                                                      |  |                   | 982        |   |                   |   | 1,121      |  
|Short-term borrowings                                                                                                         |  |                   | 13,534     |   |                   |   | 22,910     |  
|Long-term obligations                                                                                                         |  |                   | 34,500     |   |                   |   | 21,000     |  
|Other liabilities                                                                                                             |  |                   | 4,969      |   |                   |   | 4,584      |  
|                                                                                                                              |  |                   |            |   |                   |   |            |  
|Total liabilities                                                                                                             |  |                   | 844,577    |   |                   |   | 804,345    |  
|                                                                                                                              |  |                   |            |   |                   |   |            |  
|                                                                                                                              |  |                  
|Shareholders equity                                                                                                          |  |                   |            |   |                   |   |            |  
|Preferred stock, Series A                                                                                                     |  |                   | 17,246     |   |                   |   | 17,122     |  
|Common stock, par value $3.50 per share                                                                                       |  |                   | 9,974      |   |                   |   | 9,968      |  
|Capital surplus                                                                                                               |  |                   | 25,844     |   |                   |   | 25,803     |  
|Warrant                                                                                                                       |  |                   | 878        |   |                   |   | 878        |  
|Retained earnings                                                                                                             |  |                   | 30,144     |   |                   |   | 29,555     |  
|Accumulated other comprehensive income                                                                                        |  |                   | 3,546      |   |                   |   | 1,049      |  
|                                                                                                                              |  |                   |            |   |                   |   |            |  
|Total shareholders equity                                                                                                    |  |                   | 87,632     |   |                   |   | 84,375     |  
|                                                                                                                              |  |                   |            |   |                   |   |            |  
|Total                                                                                                                         |  | $                 | 932,209    |   |                   | $ | 888,720    |  
|                                                                                                                              |  |                   |            |   |                   |   |            |  
|                                                                                                                              |  |                  
|Common shares outstanding                                                                                                     |  |                   | 2,849,841  |   |                   |   | 2,847,881  |  
|Common shares authorized                                                                                                      |  |                   | 10,000,000 |   |                   |   | 10,000,000 |  
|Preferred shares outstanding                                                                                                  |  |                   | 17,949     |   |                   |   | 17,949     |  
|Preferred shares authorized                                                                                                   |  |                   | 2,000,000  |   |                   |   | 2,000,000  |  



|* | Derived from audited consolidated financial statements.
|- | -------------------------------------------------------



3



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ECB BANCORP, INC. AND SUBSIDIARY

Consolidated Income Statements

For the three and nine months ended
September 30, 2010 and 2009

(Dollars in thousands, except per share data)



|                                                                          |  |                                  |           |   |                                 |   |           |             |  |   |             |  |  |   |           |  
|------------------------------------------------------------------------- |  | -------------------------------- | --------- | - | ------------------------------- | - | --------- | ----------- |  | - | ----------- |  |  | - | --------- | -
|                                                                          |  | Three months ended September 30, |           |   | Nine months ended September 30, |  
|                                                                          |  | 2010                             |           |   | 2009                            |   |           | 2010        |  |   | 2009        | 
|                                                                          |  | (unaudited)                      |           |   | (unaudited)                     |   |           | (unaudited) |  |   | (unaudited) | 
|Interest income:                                                          |  |                                  |           |   |                                 |   |           |             |  |   |             |  |  |   |           |  
|Interest and fees on loans                                                |  | $                                | 7,640     |   |                                 | $ | 7,807     |             |  | $ | 23,062      |  |  | $ | 22,820    |  
|Interest on investment securities:                                        |  |                                  |           |   |                                 |   |           |             |  |   |             |  |  |   |           |  
|Interest exempt from federal income taxes                                 |  |                                  | 385       |   |                                 |   | 354       |             |  |   | 1,337       |  |  |   | 1,005     |  
|Taxable interest income                                                   |  |                                  | 1,949     |   |                                 |   | 2,122     |             |  |   | 5,519       |  |  |   | 6,959     |  
|Dividend income                                                           |  |                                  | 6         |   |                                 |   | 37        |             |  |   | 40          |  |  |   | 67        |  
|Other interest income                                                     |  |                                  | 2         |   |                                 |   |          |             |  |   | 9           |  |  |   | 3         |  
|                                                                          |  |                                  |           |   |                                 |   |           |             |  |   |             |  |  |   |           |  
|Total interest income                                                     |  |                                  | 9,982     |   |                                 |   | 10,320    |             |  |   | 29,967      |  |  |   | 30,854    |  
|                                                                          |  |                                  |           |   |                                 |   |           |             |  |   |             |  |  |   |           |  
|Interest expense:                                                         |  |                                  |           |   |                                 |   |           |             |  |   |             |  |  |   |           |  
|Deposits:                                                                 |  |                                  |           |   |                                 |   |           |             |  |   |             |  |  |   |           |  
|Demand accounts                                                           |  |                                  | 406       |   |                                 |   | 224       |             |  |   | 1,045       |  |  |   | 609       |  
|Savings                                                                   |  |                                  | 25        |   |                                 |   | 12        |             |  |   | 52          |  |  |   | 34        |  
|Time                                                                      |  |                                  | 2,347     |   |                                 |   | 2,742     |             |  |   | 7,248       |  |  |   | 9,510     |  
|Short-term borrowings                                                     |  |                                  | 66        |   |                                 |   | 95        |             |  |   | 183         |  |  |   | 403       |  
|Long-term obligations                                                     |  |                                  | 161       |   |                                 |   | 171       |             |  |   | 434         |  |  |   | 538       |  
|Other interest expense                                                    |  |                                  |          |   |                                 |   |          |             |  |   |            |  |  |   | 30        |  
|                                                                          |  |                                  |           |   |                                 |   |           |             |  |   |             |  |  |   |           |  
|Total interest expense                                                    |  |                                  | 3,005     |   |                                 |   | 3,244     |             |  |   | 8,962       |  |  |   | 11,124    |  
|                                                                          |  |                                  |           |   |                                 |   |           |             |  |   |             |  |  |   |           |  
|                                                                          |  |                                  |           |  
|Net interest income                                                       |  |                                  | 6,977     |   |                                 |   | 7,076     |             |  |   | 21,005      |  |  |   | 19,730    |  
|Provision for loan losses                                                 |  |                                  | 3,863     |   |                                 |   | 2,675     |             |  |   | 8,643       |  |  |   | 5,425     |  
|                                                                          |  |                                  |           |   |                                 |   |           |             |  |   |             |  |  |   |           |  
|Net interest income after provision for loan losses                       |  |                                  | 3,114     |   |                                 |   | 4,401     |             |  |   | 12,362      |  |  |   | 14,305    |  
|                                                                          |  |                                  |           |   |                                 |   |           |             |  |   |             |  |  |   |           |  
|                                                                          |  |                                  |           |  
|Noninterest income:                                                       |  |                                  |           |   |                                 |   |           |             |  |   |             |  |  |   |           |  
|Service charges on deposit accounts                                       |  |                                  | 842       |   |                                 |   | 932       |             |  |   | 2,558       |  |  |   | 2,724     |  
|Other service charges and fees                                            |  |                                  | 470       |   |                                 |   | 330       |             |  |   | 1,168       |  |  |   | 947       |  
|Mortgage origination brokerage fees                                       |  |                                  | 351       |   |                                 |   | 153       |             |  |   | 856         |  |  |   | 680       |  
|Net gain on sale of securities                                            |  |                                  | 2,030     |   |                                 |   | 444       |             |  |   | 3,471       |  |  |   | 1,032     |  
|Income from bank owned life insurance                                     |  |                                  | 75        |   |                                 |   | 82        |             |  |   | 223         |  |  |   | 246       |  
|Other operating income                                                    |  |                                  | 32        |   |                                 |   | (15       | )           |  |   | 58          |  |  |   | (4        | )
|                                                                          |  |                                  |           |   |                                 |   |           |             |  |   |             |  |  |   |           |  
|Total noninterest income                                                  |  |                                  | 3,800     |   |                                 |   | 1,926     |             |  |   | 8,334       |  |  |   | 5,625     |  
|                                                                          |  |                                  |           |   |                                 |   |           |             |  |   |             |  |  |   |           |  
|                                                                          |  |                                  |           |  
|Noninterest expenses:                                                     |  |                                  |           |   |                                 |   |           |             |  |   |             |  |  |   |           |  
|Salaries                                                                  |  |                                  | 2,548     |   |                                 |   | 2,061     |             |  |   | 7,193       |  |  |   | 6,135     |  
|Retirement and other employee benefits                                    |  |                                  | 740       |   |                                 |   | 416       |             |  |   | 2,182       |  |  |   | 1,869     |  
|Occupancy                                                                 |  |                                  | 480       |   |                                 |   | 474       |             |  |   | 1,384       |  |  |   | 1,403     |  
|Equipment                                                                 |  |                                  | 589       |   |                                 |   | 465       |             |  |   | 1,542       |  |  |   | 1,284     |  
|Professional fees                                                         |  |                                  | 187       |   |                                 |   | 123       |             |  |   | 686         |  |  |   | 522       |  
|Supplies                                                                  |  |                                  | 45        |   |                                 |   | 53        |             |  |   | 165         |  |  |   | 164       |  
|Telephone                                                                 |  |                                  | 147       |   |                                 |   | 168       |             |  |   | 487         |  |  |   | 458       |  
|FDIC insurance                                                            |  |                                  | 355       |   |                                 |   | 306       |             |  |   | 1,033       |  |  |   | 1,216     |  
|Other outside services                                                    |  |                                  | 123       |   |                                 |   | 98        |             |  |   | 351         |  |  |   | 338       |  
|Net cost of real estate and repossessions acquired in settlement of loans |  |                                  | 112       |   |                                 |   | 1,081     |             |  |   | 493         |  |  |   | 1,187     |  
|Other operating expenses                                                  |  |                                  | 1,053     |   |                                 |   | 890       |             |  |   | 3,017       |  |  |   | 2,459     |  
|                                                                          |  |                                  |           |   |                                 |   |           |             |  |   |             |  |  |   |           |  
|Total noninterest expenses                                                |  |                                  | 6,379     |   |                                 |   | 6,135     |             |  |   | 18,533      |  |  |   | 17,035    |  
|                                                                          |  |                                  |           |   |                                 |   |           |             |  |   |             |  |  |   |           |  
|Income before income taxes                                                |  |                                  | 535       |   |                                 |   | 192       |             |  |   | 2,163       |  |  |   | 2,895     |  
|Income tax expense (benefit)                                              |  |                                  | (5        | ) |                                 |   | (154      | )           |  |   | 179         |  |  |   | 496       |  
|                                                                          |  |                                  |           |   |                                 |   |           |             |  |   |             |  |  |   |           |  
|Net income                                                                |  |                                  | 540       |   |                                 |   | 346       |             |  |   | 1,984       |  |  |   | 2,399     |  
|                                                                          |  |                                  |           |   |                                 |   |           |             |  |   |             |  |  |   |           |  
|Preferred stock dividends                                                 |  |                                  | 225       |   |                                 |   | 224       |             |  |   | 673         |  |  |   | 630       |  
|Accretion of discount                                                     |  |                                  | 42        |   |                                 |   | 39        |             |  |   | 124         |  |  |   | 108       |  
|                                                                          |  |                                  |           |   |                                 |   |           |             |  |   |             |  |  |   |           |  
|Income available to common shareholders                                   |  | $                                | 273       |   |                                 | $ | 83        |             |  | $ | 1,187       |  |  | $ | 1,661     |  
|                                                                          |  |                                  |           |   |                                 |   |           |             |  |   |             |  |  |   |           |  
|                                                                          |  |                                  |           |  
|Net income per share - basic                                              |  | $                                | 0.10      |   |                                 | $ | 0.03      |             |  | $ | 0.42        |  |  | $ | 0.58      |  
|                                                                          |  |                                  |           |   |                                 |   |           |             |  |   |             |  |  |   |           |  
|Net income per share - diluted                                            |  | $                                | 0.10      |   |                                 | $ | 0.03      |             |  | $ | 0.42        |  |  | $ | 0.58      |  
|                                                                          |  |                                  |           |   |                                 |   |           |             |  |   |             |  |  |   |           |  
|Weighted average shares outstanding - basic                               |  |                                  | 2,849,841 |   |                                 |   | 2,845,343 |             |  |   | 2,849,511   |  |  |   | 2,843,962 |  
|                                                                          |  |                                  |           |   |                                 |   |           |             |  |   |             |  |  |   |           |  
|Weighted average shares outstanding - diluted                             |  |                                  | 2,849,841 |   |                                 |   | 2,847,053 |             |  |   | 2,849,554   |  |  |   | 2,845,630 |  
|                                                                          |  |                                  |           |   |                                 |   |           |             |  |   |             |  |  |   |           |  



4



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##### Table of Contents



ECB BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Changes in Shareholders Equity

Nine months ended
September 30, 2010 and 2009

(Dollars in thousands, except per share data)



|                                                                                                            |  |                         |        |   |              |  |           |                    |  |   |                |  |  |                  |     |   |                                     |   |        |                     |  |   |        |   |  |   |       |  |  |   |       |  |  |   |        |  
|----------------------------------------------------------------------------------------------------------- |  | ----------------------- | ------ | - | ------------ |  | --------- | ------------------ |  | - | -------------- |  |  | ---------------- | --- | - | ----------------------------------- | - | ------ | ------------------- |  | - | ------ | - |  | - | ----- |  |  | - | ----- |  |  | - | ------ | -
|                                                                                                            |  | Preferredstock,Series
A |        |   | Common Stock |  |           | Commonstockwarrant |  |   | Capitalsurplus |  |  | Retainedearnings |     |   | Accumulatedothercomprehensiveincome |   |        | Comprehensiveincome |  |   | Total  |  
|                                                                                                            |  |                         |        |   |              |  |          
|                                                                                                            |  | Number                  |        |   | Amount       |  |           |                    |  |   |                | 
|Balance January 1, 2009                                                                                     |  | $                       |       |   |              |  | 2,844,489 |                    |  | $ | 9,956          |  |  |                  |    |   |                                     | $ | 25,707 |                     |  | $ | 31,026 |   |  | $ | 1,254 |  |  |   |       |  |  | $ | 67,943 |  
|                                                                                                            |  |                         |        |   |              |  |           |                    | 
|Unrealized loss, net of income tax expense of $1,080                                                        |  |                         |        |   |              |  |           |                    |  |   |                |  |  |                  |     |   |                                     |   |        |                     |  |   |        |   |  |   | 1,726 |  |  | $ | 1,726 |  |  |   | 1,726  |  
|                                                                                                            |  |                         |        |   |              |  |           |                    | 
|Net income                                                                                                  |  |                         |        |   |              |  |           |                    |  |   |                |  |  |                  |     |   |                                     |   |        |                     |  |   | 2,399  |   |  |   |       |  |  |   | 2,399 |  |  |   | 2,399  |  
|                                                                                                            |  |                         |        |   |              |  |           |                    |  |   |                |  |  |                  |     |   |                                     |   |        |                     |  |   |        |   |  |   |       |  |  |   |       |  |  |   |        |  
|                                                                                                            |  |                         |        |   |              |  |           |                    | 
|Total comprehensive income                                                                                  |  |                         |        |   |              |  |           |                    |  |   |                |  |  |                  |     |   |                                     |   |        |                     |  |   |        |   |  |   |       |  |  | $ | 4,125 |  |  |   |        |  
|                                                                                                            |  |                         |        |   |              |  |           |                    |  |   |                |  |  |                  |     |   |                                     |   |        |                     |  |   |        |   |  |   |       |  |  |   |       |  |  |   |        |  
|                                                                                                            |  |                         |        |   |              |  |           |                    | 
|Issuance of preferred stock in connection with Capital Purchase Program, net of discount on preferred stock |  |                         | 17,067 |   |              |  |           |                    |  |   |                |  |  |                  |     |   |                                     |   |        |                     |  |   |        |   |  |   |       |  |  |   |       |  |  |   | 17,067 |  
|                                                                                                            |  |                         |        |   |              |  |           |                    | 
|Issuance of common stock warrants in connection with Capital Purchase Program                               |  |                         |        |   |              |  |           |                    |  |   |                |  |  |                  | 882 |   |                                     |   |        |                     |  |   |        |   |  |   |       |  |  |   |       |  |  |   | 882    |  
|                                                                                                            |  |                         |        |   |              |  |           |                    | 
|Costs associated with issuance of preferred stock and common warrants                                       |  |                         | (95    | ) |              |  |           |                    |  |   |                |  |  |                  | (4  | ) |                                     |   |        |                     |  |   |        |   |  |   |       |  |  |   |       |  |  |   | (99    | )
|                                                                                                            |  |                         |        |   |              |  |           |                    | 
|Stock based compensation                                                                                    |  |                         |        |   |              |  |           |                    |  |   |                |  |  |                  |     |   |                                     |   | 50     |                     |  |   |        |   |  |   |       |  |  |   |       |  |  |   | 50     |  
|                                                                                                            |  |                         |        |   |              |  |           |                    | 
|Stock options exercised                                                                                     |  |                         |        |   |              |  | 1,892     |                    |  |   | 7              |  |  |                  |     |   |                                     |   | 16     |                     |  |   |        |   |  |   |       |  |  |   |       |  |  |   | 23     |  
|                                                                                                            |  |                         |        |   |              |  |           |                    | 
|Issuance of restricted stock                                                                                |  |                         |        |   |              |  | 1,500     |                    |  |   | 5              |  |  |                  |     |   |                                     |   | 19     |                     |  |   |        |   |  |   |       |  |  |   |       |  |  |   | 24     |  
|                                                                                                            |  |                         |        |   |              |  |           |                    | 
|Preferred stock accretion                                                                                   |  |                         | 108    |   |              |  |           |                    |  |   |                |  |  |                  |     |   |                                     |   |        |                     |  |   | (108   | ) |  |   |       |  |  |   |       |  |  |   |       |  
|                                                                                                            |  |                         |        |   |              |  |           |                    | 
|Cash dividends on preferred stock                                                                           |  |                         |        |   |              |  |           |                    |  |   |                |  |  |                  |     |   |                                     |   |        |                     |  |   | (521   | ) |  |   |       |  |  |   |       |  |  |   | (521   | )
|                                                                                                            |  |                         |        |   |              |  |           |                    | 
|Cash dividends ($0.5475 per share)                                                                          |  |                         |        |   |              |  |           |                    |  |   |                |  |  |                  |     |   |                                     |   |        |                     |  |   | (1,558 | ) |  |   |       |  |  |   |       |  |  |   | (1,558 | )
|                                                                                                            |  |                         |        |   |              |  |           |                    |  |   |                |  |  |                  |     |   |                                     |   |        |                     |  |   |        |   |  |   |       |  |  |   |       |  |  |   |        |  
|Balance September 30, 2009                                                                                  |  | $                       | 17,080 |   |              |  | 2,847,881 |                    |  | $ | 9,968          |  |  | $                | 878 |   |                                     | $ | 25,792 |                     |  | $ | 31,238 |   |  | $ | 2,980 |  |  |   |       |  |  | $ | 87,936 |  
|                                                                                                            |  |                         |        |   |              |  |           |                    |  |   |                |  |  |                  |     |   |                                     |   |        |                     |  |   |        |   |  |   |       |  |  |   |       |  |  |   |        |  
|                                                                                                            |  |                         |        |   |              |  |           |                   
|                                                                                                            |  | Preferredstock,Series A |        |   |              |  |           | Commonstockwarrant |  |   | Capitalsurplus |  |  | Retainedearnings |     |   | Accumulatedothercomprehensiveincome |   |        | Comprehensiveincome |  |   | Total  |  
|                                                                                                            |  | Common Stock            |        |   |              |  |           |                    | 
|                                                                                                            |  | Number                  |        |   | Amount       |  |           |                    |  |   |                | 
|Balance January 1, 2010                                                                                     |  | $                       | 17,122 |   |              |  | 2,847,881 |                    |  | $ | 9,968          |  |  | $                | 878 |   |                                     | $ | 25,803 |                     |  | $ | 29,555 |   |  | $ | 1,049 |  |  |   |       |  |  | $ | 84,375 |  
|                                                                                                            |  |                         |        |   |              |  |           |                    | 
|Unrealized gain, net of income tax expense of $ 1,563                                                       |  |                         |        |   |              |  |           |                    |  |   |                |  |  |                  |     |   |                                     |   |        |                     |  |   |        |   |  |   | 2,497 |  |  | $ | 2,497 |  |  |   | 2,497  |  
|                                                                                                            |  |                         |        |   |              |  |           |                    | 
|Net income                                                                                                  |  |                         |        |   |              |  |           |                    |  |   |                |  |  |                  |     |   |                                     |   |        |                     |  |   | 1,984  |   |  |   |       |  |  |   | 1,984 |  |  |   | 1,984  |  
|                                                                                                            |  |                         |        |   |              |  |           |                    |  |   |                |  |  |                  |     |   |                                     |   |        |                     |  |   |        |   |  |   |       |  |  |   |       |  |  |   |        |  
|                                                                                                            |  |                         |        |   |              |  |           |                    | 
|Total comprehensive income                                                                                  |  |                         |        |   |              |  |           |                    |  |   |                |  |  |                  |     |   |                                     |   |        |                     |  |   |        |   |  |   |       |  |  | $ | 4,481 |  |  |   |        |  
|                                                                                                            |  |                         |        |   |              |  |           |                    |  |   |                |  |  |                  |     |   |                                     |   |        |                     |  |   |        |   |  |   |       |  |  |   |       |  |  |   |        |  
|                                                                                                            |  |                         |        |   |              |  |           |                    | 
|Stock based compensation                                                                                    |  |                         |        |   |              |  |           |                    |  |   |                |  |  |                  |     |   |                                     |   | 28     |                     |  |   |        |   |  |   |       |  |  |   |       |  |  |   | 28     |  
|                                                                                                            |  |                         |        |   |              |  |           |                    | 
|Stock options exercised                                                                                     |  |                         |        |   |              |  | 1,960     |                    |  |   | 6              |  |  |                  |     |   |                                     |   | 13     |                     |  |   |        |   |  |   |       |  |  |   |       |  |  |   | 19     |  
|                                                                                                            |  |                         |        |   |              |  |           |                    | 
|Preferred stock accretion                                                                                   |  |                         | 124    |   |              |  |           |                    |  |   |                |  |  |                  |     |   |                                     |   |        |                     |  |   | (124   | ) |  |   |       |  |  |   |       |  |  |   |       |  
|                                                                                                            |  |                         |        |   |              |  |           |                    | 
|Cash dividends on preferred stock                                                                           |  |                         |        |   |              |  |           |                    |  |   |                |  |  |                  |     |   |                                     |   |        |                     |  |   | (673   | ) |  |   |       |  |  |   |       |  |  |   | (673   | )
|                                                                                                            |  |                         |        |   |              |  |           |                    | 
|Cash dividends ($0.21 per share)                                                                            |  |                         |        |   |              |  |           |                    |  |   |                |  |  |                  |     |   |                                     |   |        |                     |  |   | (598   | ) |  |   |       |  |  |   |       |  |  |   | (598   | )
|                                                                                                            |  |                         |        |   |              |  |           |                    |  |   |                |  |  |                  |     |   |                                     |   |        |                     |  |   |        |   |  |   |       |  |  |   |       |  |  |   |        |  
|Balance September 30, 2010                                                                                  |  | $                       | 17,246 |   |              |  | 2,849,841 |                    |  | $ | 9,974          |  |  | $                | 878 |   |                                     | $ | 25,844 |                     |  | $ | 30,144 |   |  | $ | 3,546 |  |  |   |       |  |  | $ | 87,632 |  
|                                                                                                            |  |                         |        |   |              |  |           |                    |  |   |                |  |  |                  |     |   |                                     |   |        |                     |  |   |        |   |  |   |       |  |  |   |       |  |  |   |        |  



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ECB BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Cash Flows

Nine months ended September 30, 2010
and 2009

(Dollar amounts in thousands)



|                                                                                                                      |  |                                |          |   |      |   |          |  
|--------------------------------------------------------------------------------------------------------------------- |  | ------------------------------ | -------- | - | ---- | - | -------- | -
|                                                                                                                      |  | Nine months endedSeptember 30, |         
|                                                                                                                      |  | 2010                           |          |   | 2009 |  
|Cash flows from operating activities:                                                                                 |  |                                |          |   |      |   |          |  
|Net income                                                                                                            |  | $                              | 1,984    |   |      | $ | 2,399    |  
|Adjustments to reconcile net income to net cash provided by operating activities:                                     |  |                                |          |   |      |   |          |  
|Depreciation                                                                                                          |  |                                | 999      |   |      |   | 1,022    |  
|Amortization of premium on investment securities, net                                                                 |  |                                | 1,284    |   |      |   | 725      |  
|Provision for loan losses                                                                                             |  |                                | 8,643    |   |      |   | 5,425    |  
|Gain on sale of securities                                                                                            |  |                                | (3,471   | ) |      |   | (1,032   | )
|Stock based compensation                                                                                              |  |                                | 28       |   |      |   | 74       |  
|Impairment on equity investment                                                                                       |  |                                |         |   |      |   | 37       |  
|Increase in accrued interest receivable                                                                               |  |                                | (209     | ) |      |   | (419     | )
|Loss on disposal of premises and equipment                                                                            |  |                                |         |   |      |   | 15       |  
|Loss on sale of real estate and repossessions acquired in settlement of loans                                         |  |                                | 478      |   |      |   | 1,052    |  
|Income from Bank owned life insurance                                                                                 |  |                                | (223     | ) |      |   | (246     | )
|Origination of loans held for sale                                                                                    |  |                                | (18,485  | ) |      |   |         |  
|Proceeds from sale of loans held for sale                                                                             |  |                                | 16,382   |   |      |   |         |  
|Decrease (increase) in other assets                                                                                   |  |                                | 266      |   |      |   | (1,412   | )
|Decrease in accrued interest payable                                                                                  |  |                                | (139     | ) |      |   | (1,423   | )
|Decrease in other liabilities, net                                                                                    |  |                                | (859     | ) |      |   | (1,092   | )
|                                                                                                                      |  |                                |          |   |      |   |          |  
|Net cash provided by operating activities                                                                             |  |                                | 6,678    |   |      |   | 5,125    |  
|                                                                                                                      |  |                                |          |   |      |   |          |  
|                                                                                                                      |  |                               
|Cash flows from investing activities:                                                                                 |  |                                |          |   |      |   |          |  
|Proceeds from sales of investment securities classified as available-for-sale                                         |  |                                | 96,858   |   |      |   | 67,850   |  
|Proceeds from maturities of investment securities classified as available-for-sale                                    |  |                                | 36,981   |   |      |   | 45,508   |  
|Purchases of investment securities classified as available-for-sale                                                   |  |                                | (152,456 | ) |      |   | (142,553 | )
|Redemption (purchase) of Federal Home Loan Bank common stock                                                          |  |                                | 367      |   |      |   | (1,257   | )
|Proceeds from disposal of premises and equipment                                                                      |  |                                |         |   |      |   | 11       |  
|Purchases of premises and equipment                                                                                   |  |                                | (1,169   | ) |      |   | (711     | )
|Proceeds from disposal of real estate and repossessions acquired in settlement of loans and real estate held for
sale |  |                                | 2,357    |   |      |   | 1,297    |  
|Net loan originations                                                                                                 |  |                                | (5,436   | ) |      |   | (43,221  | )
|                                                                                                                      |  |                                |          |   |      |   |          |  
|Net cash (used) by investing activities                                                                               |  |                                | (22,498  | ) |      |   | (73,076  | )
|                                                                                                                      |  |                                |          |   |      |   |          |  
|                                                                                                                      |  |                               
|Cash flows from financing activities:                                                                                 |  |                                |          |   |      |   |          |  
|Net increase in deposits                                                                                              |  |                                | 35,862   |   |      |   | 67,481   |  
|Net increase (decrease) in borrowings                                                                                 |  |                                | 4,124    |   |      |   | (15,727  | )
|Dividends paid to common shareholders                                                                                 |  |                                | (917     | ) |      |   | (1,558   | )
|Dividends paid on preferred stock                                                                                     |  |                                | (673     | ) |      |   | (521     | )
|Net proceeds from issuance of common stock                                                                            |  |                                | 19       |   |      |   | 23       |  
|Net proceeds from issuance of preferred stock                                                                         |  |                                |         |   |      |   | 17,850   |  
|Repurchase of common stock                                                                                            |  |                                |         |   |      |   |         |  
|                                                                                                                      |  |                                |          |   |      |   |          |  
|Net cash provided by financing activities                                                                             |  |                                | 38,415   |   |      |   | 67,548   |  
|                                                                                                                      |  |                                |          |   |      |   |          |  
|                                                                                                                      |  |                               
|Increase (decrease) in cash and cash equivalents                                                                      |  |                                | 22,595   |   |      |   | (403     | )
|Cash and cash equivalents at beginning of period                                                                      |  |                                | 17,811   |   |      |   | 16,799   |  
|                                                                                                                      |  |                                |          |   |      |   |          |  
|Cash and cash equivalents at end of period                                                                            |  | $                              | 40,406   |   |      | $ | 16,396   |  
|                                                                                                                      |  |                                |          |   |      |   |          |  
|                                                                                                                      |  |                               
|Cash paid during the period:                                                                                          |  |                                |          |   |      |   |          |  
|Interest                                                                                                              |  | $                              | 9,101    |   |      | $ | 12,547   |  
|Taxes                                                                                                                 |  |                                | 746      |   |      |   | 2,583    |  
|Supplemental disclosures of noncash financing and investing activities:                                               |  |                                |          |   |      |   |          |  
|Cash dividends declared but not paid                                                                                  |  | $                              | 199      |   |      | $ | 519      |  
|Unrealized gains on available-for-sale securities, net of deferred taxes                                              |  |                                | 2,497    |   |      |   | 1,726    |  
|Transfer from loans to real estate and repossessions acquired in settlement of loans                                  |  |                                | 3,043    |   |      |   | 916      |  
|Transfer from long-term to short-term borrowings                                                                      |  |                                | 6,500    |   |      |   | 5,000    |  
|Payable, settlement for securities purchased                                                                          |  |                                |         |   |      |   | 53,000   |  
|Transfer from investments to other assets                                                                             |  |                                | 250      |   |      |   |         |  
|Transfer from real estate and repossessions acquired in settlement of loans to bank premises and equipment            |  |                                | 398      |   |      |   |         |  

See accompanying notes
to consolidated financial statements.



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ECB BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

(1) Basis of Presentation

The consolidated financial statements include
the accounts of ECB Bancorp, Inc. (Bancorp) and its wholly-owned subsidiary, The East Carolina Bank (the Bank) (Bancorp and the Bank are collectively referred to hereafter as the Company). The Bank has one
wholly-owned subsidiary, ECB Financial Services, Inc., which formerly provided courier services to the Bank but is currently inactive. All intercompany transactions and balances are eliminated in consolidation. The preparation of the 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 reported amounts of assets and liabilities, disclosure of contingent
assets and liabilities as of the date of the balance sheets, and the reported amounts of income and expenses for the periods presented. Actual results could differ from those estimates.

Material estimates that are particularly susceptible to significant change in the near-term relate to the determination of the allowance
for loan losses and retirement plan costs. In connection with the determination of the allowance for loan losses, management obtains independent appraisals for significant properties held as collateral for loans. The Companys retirement plans
and other post-retirement benefit costs are actuarially determined based on assumptions of the discount rate, estimated future return on plan assets and the health care cost trend rate.

All adjustments considered necessary for a fair presentation of the results for the interim periods presented have been included (such
adjustments are normal and recurring in nature). The notes to consolidated financial statements in Bancorps annual report on Form 10-K should be referenced when reading these unaudited interim consolidated financial statements. Operating
results for the period ended September 30, 2010, are not necessarily indicative of the results that may be expected for the year ending December 31, 2010.

Reclassification

Certain reclassifications have been made to the
prior periods financial statements to place them on a comparable basis with the current year. Net income and shareholders equity previously reported were not affected by these reclassifications.

Subsequent Events

In preparing these financial statements, the Company has evaluated events and transactions for potential recognition or disclosure through
the date the consolidated financial statements were issued.

ECB announced on August 12, 2010, that it has signed an
extensive agreement with InfoTech Alliance Bank Services to implement the FIS integrated HORIZON banking system. HORIZON is a highly flexible core banking solution featuring open architecture and advanced technology that involves minimal risk and
disruption to business operations and customers.

InfoTech Alliance currently provides item processing services for ECB. After
conducting a complete evaluation of its core systems, the Bank decided to extend its relationship with InfoTech Alliance to include HORIZON core account processing services and a host of other integrated technology solutions.

As a result of this decision, it has been determined that several existing multi year support and maintenance agreements with current
vendors will be terminated early resulting in early termination fees that will be expensed once contract termination agreements have been entered into with the current third party service providers. While the exact dollar amount of these fees have
not been agreed upon by both parties at this time, it is expected to range from $1.1 million to $1.3 million.

Although this
termination expense will be recognized in the fourth quarter 2010, our agreement with Info Tech Alliance includes discounts to their standard fees for services that will begin in May of 2011 when the conversion is implemented. These discounted fees
for their services will occur and be recognized over the entire length of the contract with estimated total savings representing approximately $1.3 million.



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(2) Net Income Per Share

Basic net income per share is calculated by dividing income available to common shareholders by the weighted average
number of common shares outstanding during the period. For purposes of basic net income per share, restricted stock is considered contingently issuable and is not included in the weighted average number of common shares outstanding.

Diluted net income per share is computed by assuming the issuance of common shares for all dilutive potential common shares
outstanding during the reporting period. Restricted stock is considered outstanding for purposes of diluted net income per share. The amount of compensation cost attributed to future services and not yet recognized is considered proceeds
using the treasury stock method. Restricted stock had no dilutive effect on earnings per share for the nine- or three-month periods ended September 30, 2010 and September 30, 2009.

In computing diluted net income per share, it is assumed that all dilutive stock options are exercised during the reporting period at
their respective exercise prices, with the proceeds from the exercises used by the Company to buy back stock in the open market at the average market price in effect during the reporting period. The difference between the number of shares assumed to
be exercised and the number of shares bought back is added to the number of weighted average common shares outstanding during the period. The sum is used as the denominator to calculate diluted net income per share for the Company. For the nine
months ended September 30, 2010 and 2009, diluted weighted average shares outstanding increased by 43 and 1,668, respectively, due to the dilutive impact of options. Stock options had no impact on diluted weighted average shares for the three
months ended September 30, 2010. Stock options increased diluted weighted average shares by 1,710 for the three months ended September 30, 2009. There were 28,513 and 53,675 anti-dilutive (not in the money) options outstanding for the
nine months ended September 30, 2010 and 2009, respectively. There were 28,513 and 53,675 anti-dilutive (not in the money) options outstanding for the three months ended September 30, 2010 and 2009, respectively. As of September 30,
2010 and 2009 the warrant, consisting of 144,984 shares issued to the U.S. Treasury Department was not included in the computation of net income per share for either the nine or three-month period because its exercise price exceeded the market price
of the Companys stock on that date.

The following is a reconciliation of the numerators and denominators used in
computing Basic and Diluted Net Income Per Share for the nine months ended September 30.



|                              |  |                                                                                    |       |  |                     |  |           |                |  |   |      | 
|----------------------------- |  | ---------------------------------------------------------------------------------- | ----- |  | ------------------- |  | --------- | -------------- |  | - | ---- | 
|                              |  | Nine months ended September 30, 2010(Dollars in thousands, except per share data)  |      
|                              |  |                                                                                    |      
|                              |  | Income(Numerator)                                                                  |       |  | Shares(Denominator) |  |           | PerShareAmount | 
|                              |  |                                                                                    |      
|Basic net income              |  | $                                                                                  | 1,187 |  |                     |  | 2,849,511 |                |  | $ | 0.42 | 
|                              |  |                                                                                    |       |  |                     |  |           |                |  |   |      | 
|                              |  |                                                                                    |      
|Effect of dilutive securities |  |                                                                                    |      |  |                     |  | 43        |                |  |   |      | 
|                              |  |                                                                                    |       |  |                     |  |           |                |  |   |      | 
|                              |  |                                                                                    |      
|Diluted net income            |  | $                                                                                  | 1,187 |  |                     |  | 2,849,554 |                |  | $ | 0.42 | 
|                              |  |                                                                                    |       |  |                     |  |           |                |  |   |      | 
|                              | 
|                              |  | Nine months ended September 30, 2009
(Dollars in thousands, except per share data) |      
|                              |  |                                                                                    |      
|                              |  | Income(Numerator)                                                                  |       |  | Shares(Denominator) |  |           | PerShareAmount | 
|                              |  |                                                                                    |      
|Basic net income              |  | $                                                                                  | 1,661 |  |                     |  | 2,843,962 |                |  | $ | 0.58 | 
|                              |  |                                                                                    |       |  |                     |  |           |                |  |   |      | 
|                              |  |                                                                                    |      
|Effect of dilutive securities |  |                                                                                    |      |  |                     |  | 1,668     |                |  |   |      | 
|                              |  |                                                                                    |       |  |                     |  |           |                |  |   |      | 
|                              |  |                                                                                    |      
|Diluted net income            |  | $                                                                                  | 1,661 |  |                     |  | 2,845,630 |                |  | $ | 0.58 | 
|                              |  |                                                                                    |       |  |                     |  |           |                |  |   |      | 



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The following is a
reconciliation of the numerators and denominators used in computing Basic and Diluted Net Income Per Share for the three months ended September 30.



|                              |  |                                                                                     |     |  |                     |  |           |                |  |   |      | 
|----------------------------- |  | ----------------------------------------------------------------------------------- | --- |  | ------------------- |  | --------- | -------------- |  | - | ---- | 
|                              |  | Three months ended September 30, 2010
(Dollars in thousands, except per share data) |    
|                              |  |                                                                                     |    
|                              |  | Income(Numerator)                                                                   |     |  | Shares(Denominator) |  |           | PerShareAmount | 
|                              |  |                                                                                     |    
|Basic net income              |  | $                                                                                   | 273 |  |                     |  | 2,849,841 |                |  | $ | 0.10 | 
|                              |  |                                                                                     |     |  |                     |  |           |                |  |   |      | 
|                              |  |                                                                                     |    
|Effect of dilutive securities |  |                                                                                     |    |  |                     |  |          |                |  |   |      | 
|                              |  |                                                                                     |     |  |                     |  |           |                |  |   |      | 
|                              |  |                                                                                     |    
|Diluted net income            |  | $                                                                                   | 273 |  |                     |  | 2,849,841 |                |  | $ | 0.10 | 
|                              |  |                                                                                     |     |  |                     |  |           |                |  |   |      | 
|                              | 
|                              |  | Three months ended September 30, 2009
(Dollars in thousands, except per share data) |    
|                              |  |                                                                                     |    
|                              |  | Income(Numerator)                                                                   |     |  | Shares(Denominator) |  |           | PerShareAmount | 
|                              |  |                                                                                     |    
|Basic net income              |  | $                                                                                   | 83  |  |                     |  | 2,845,343 |                |  | $ | 0.03 | 
|                              |  |                                                                                     |     |  |                     |  |           |                |  |   |      | 
|                              |  |                                                                                     |    
|Effect of dilutive securities |  |                                                                                     |    |  |                     |  | 1,710     |                |  |   |      | 
|                              |  |                                                                                     |     |  |                     |  |           |                |  |   |      | 
|                              |  |                                                                                     |    
|Diluted net income            |  | $                                                                                   | 83  |  |                     |  | 2,847,053 |                |  | $ | 0.03 | 
|                              |  |                                                                                     |     |  |                     |  |           |                |  |   |      | 

(3) Stock Compensation Plan

During 2008, the Company adopted the 2008 Omnibus Equity Plan (the Plan) which replaced the expired 1998 Omnibus Stock Ownership and Long-Term Incentive Plan. The Plan provides for the
issuance of up to an aggregate of 200,000 shares of common stock of the Company in the form of stock options, restricted stock awards and performance share awards.

Stock based compensation is accounted for in accordance with FASB ASC Topic 718. Compensation cost charged to income was approximately $28 thousand and $74 thousand for the nine months ended
September 30, 2010 and 2009, respectively. Compensation cost charged to income was approximately $8 thousand and $35 thousand for the three months ended September 30, 2010 and 2009, respectively. No income tax benefit was recognized for
stock based compensation, as the Company does not have any outstanding nonqualified stock options.

Stock Options

Under the Plan, stock options may be issued to employees as incentive stock options which qualify for special tax treatment under the
Internal Revenue Code, or as nonqualified stock options. The terms and exercise prices of options, and the dates or schedules on which options vest or become exercisable, are established at the time the options are granted and may be different for
each option. However, the term of an option may not exceed ten years, and the exercise price of each option may not be less than the fair market value of a share of common stock on the date the option is granted. It is the Companys policy to
issue new shares of stock to satisfy option exercises.

The weighted-average fair value of each stock option grant is
estimated on the date of grant using the Black-Scholes option-pricing model. The weighted-average estimated fair values of stock option grants and the



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assumptions that were used in calculating such fair values are based on estimates at the date of grant. There were no options granted during the nine-month period ending September 30, 2010
and September 30, 2009.

A summary of option activity under the Plan as of September 30, 2010, and changes during
the nine-month period ended September 30, 2010 is presented below:



|                                  |  |                                               |        |  |                              |   |       |                                 |  |  |                         |  |  |   |   | 
|--------------------------------- |  | --------------------------------------------- | ------ |  | ---------------------------- | - | ----- | ------------------------------- |  |  | ----------------------- |  |  | - | - | 
|                                  |  | OptionsOutstanding                            |        |  | WeightedAverageExercisePrice |   |       | AverageRemainingContractualTerm |  |  | AggregateIntrinsicValue | 
|                                  | 
|                                  |  | (Dollars in thousands, except per share data) |       
|                                  |  |                                               |        | 
|Outstanding at December 31, 2009  |  |                                               | 57,335 |  |                              | $ | 28.31 |                                 |  |  |                         |  |  |   |   | 
|                                  |  |                                               |        | 
|Granted                           |  |                                               |       |  |                              | $ |      |                                 |  |  |                         |  |  |   |   | 
|                                  |  |                                               |        | 
|Forfeited                         |  |                                               |       |  |                              | $ |      |                                 |  |  |                         |  |  |   |   | 
|                                  |  |                                               |        | 
|Expired                           |  |                                               | 26,862 |  |                              | $ | 30.04 |                                 |  |  |                         |  |  |   |   | 
|                                  |  |                                               |        | 
|Exercised                         |  |                                               | 1,960  |  |                              | $ | 10.00 |                                 |  |  |                         |  |  |   |   | 
|                                  |  |                                               |        |  |                              |   |       |                                 |  |  |                         |  |  |   |   | 
|                                  |  |                                               |        | 
|Outstanding at September 30, 2010 |  |                                               | 28,513 |  |                              | $ | 27.94 |                                 |  |  | 5.73 years              |  |  | $ |  | 
|                                  |  |                                               |        |  |                              |   |       |                                 |  |  |                         |  |  |   |   | 
|                                  |  |                                               |        | 
|Exercisable at September 30, 2010 |  |                                               | 15,149 |  |                              | $ | 27.69 |                                 |  |  | 4.77 years              |  |  | $ |  | 
|                                  |  |                                               |        |  |                              |   |       |                                 |  |  |                         |  |  |   |   | 

1,960 options were exercised during the first nine months of 2010. Cash received for options exercised in
2010 was $19 thousand with an intrinsic value of $3 thousand. There were 1,892 shares exercised during the nine-month period ended September 30, 2009. The intrinsic value of options exercised during the nine months ended September 30, 2009
was $9 thousand and $23 thousand was received for options exercised. There were 26,862 options that expired in 2010.

Restricted Stock
Awards

Restricted stock awards are subject to restrictions and the risk of forfeiture if conditions stated in the
award agreement are not satisfied at the end of a restriction period. During the restriction period, restricted stock covered by the award will be held by the Company. If the conditions stated in the award agreement are satisfied at the end of the
restriction period, the restricted stock will become unrestricted and the certificate evidencing the stock will be delivered to the employee.

There were no shares of non-vested restricted stock as of September 30, 2010 or December 31, 2009.

Unrecognized Compensation Cost

Anticipated total unrecognized
compensation cost related to outstanding non-vested stock options will be recognized over the following periods:



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|                              |  |                        |    | 
|----------------------------- |  | ---------------------- | -- | 
|                              |  | StockOptions           |   
|                              | 
|                              |  | (Dollars in thousands) |   
|                              | 
|October 1  December 31, 2010 |  | $                      | 7  | 
|                              | 
|2011                          |  |                        | 21 | 
|                              | 
|2012                          |  |                        | 8  | 
|                              | 
|2013                          |  |                        | 2  | 
|                              |  |                        |    | 
|                              | 
|Total                         |  | $                      | 38 | 

(4) Postretirement Benefits

The Company has a postretirement benefit plan whereby the Company pays postretirement health care benefits for certain of
its retirees that have met minimum age and service requirements. Net periodic postretirement benefit cost for the nine- and three-month periods ended September 30, 2010 and 2009 includes the following components.



|                                         |  |                                                        |    |   |      |   |    |  
|---------------------------------------- |  | ------------------------------------------------------ | -- | - | ---- | - | -- | -
|                                         |  | Nine months ended September 30,(Dollars in thousands)  |   
|                                         |  | 2010                                                   |    |   | 2009 |  
|Components of net periodic cost:         |  |                                                        |    |   |      |   |    |  
|Service cost                             |  | $                                                      | 3  |   |      | $ | 3  |  
|Interest cost                            |  |                                                        | 32 |   |      |   | 36 |  
|Prior service cost                       |  |                                                        | (6 | ) |      |   | (6 | )
|                                         |  |                                                        |    |   |      |   |    |  
|Net periodic postretirement benefit cost |  | $                                                      | 29 |   |      | $ | 33 |  
|                                         |  |                                                        |    |   |      |   |    |  
|                                         | 
|                                         |  | Three months
ended September 30,(Dollars in thousands) |   
|                                         |  | 2010                                                   |    |   | 2009 |  
|Components of net periodic cost:         |  |                                                        |    |   |      |   |    |  
|Service cost                             |  | $                                                      | 1  |   |      | $ | 1  |  
|Interest cost                            |  |                                                        | 11 |   |      |   | 12 |  
|Prior service cost                       |  |                                                        | (2 | ) |      |   | (2 | )
|                                         |  |                                                        |    |   |      |   |    |  
|Net periodic postretirement benefit cost |  | $                                                      | 10 |   |      | $ | 11 |  
|                                         |  |                                                        |    |   |      |   |    |  

The Company expects to contribute $38 thousand to its postretirement benefit plan in 2010. No contributions
were made in the first nine months of 2010. For additional information related to the plan, refer to the Companys Form 10-K for the year ended December 31, 2009.



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(5) Investment Securities

The following is a summary of the securities portfolio by major classification:



|                                                 |  |                        |         |  |                      |   |       |                       |  |   |            |   |  |   |         | 
|------------------------------------------------ |  | ---------------------- | ------- |  | -------------------- | - | ----- | --------------------- |  | - | ---------- | - |  | - | ------- | 
|                                                 |  | September 30, 2010     |        
|                                                 |  | AmortizedCost          |         |  | GrossUnrealizedGains |   |       | GrossUnrealizedLosses |  |   | FairValue  |  
|                                                 | 
|                                                 |  | (Dollars in thousands) |        
|                                                 |  |                        |         | 
|Securities available-for-sale:                   |  |                        |         |  |                      |   |       |                       |  |   |            |   |  |   |         | 
|                                                 |  |                        |         | 
|Government-sponsored enterprises and FFCB bonds  |  | $                      | 23,539  |  |                      | $ | 1,255 |                       |  | $ |           |   |  | $ | 24,794  | 
|                                                 |  |                        |         | 
|Obligations of states and political subdivisions |  |                        | 21,685  |  |                      |   | 1,226 |                       |  |   |           |   |  |   | 22,911  | 
|                                                 |  |                        |         | 
|Mortgage-backed securities                       |  |                        | 150,625 |  |                      |   | 2,625 |                       |  |   | (174       | ) |  |   | 153,076 | 
|                                                 |  |                        |         | 
|SBA backed securities                            |  |                        | 46,324  |  |                      |   | 842   |                       |  |   | (3         | ) |  |   | 47,163  | 
|                                                 |  |                        |         | 
|Corporate Bonds                                  |  |                        | 15,975  |  |                      |   | 226   |                       |  |   | (199       | ) |  |   | 16,002  | 
|                                                 |  |                        |         |  |                      |   |       |                       |  |   |            |   |  |   |         | 
|                                                 |  | $                      | 258,148 |  |                      | $ | 6,174 |                       |  | $ | (376       | ) |  | $ | 263,946 | 
|                                                 |  |                        |         |  |                      |   |       |                       |  |   |            |   |  |   |         | 
|                                                 | 
|                                                 |  | December 31, 2009      |        
|                                                 |  | AmortizedCost          |         |  | GrossUnrealizedGains |   |       | GrossUnrealizedLosses |  |   | Fair Value |  
|                                                 | 
|                                                 |  | (Dollars in thousands) |        
|                                                 | 
|Securities available-for-sale:                   |  |                        |         | 
|                                                 |  |                        |         | 
|Government-sponsored enterprises and FFCB bonds  |  | $                      | 36,141  |  |                      | $ | 69    |                       |  | $ | (367       | ) |  | $ | 35,843  | 
|                                                 |  |                        |         | 
|Obligations of states and political subdivisions |  |                        | 45,242  |  |                      |   | 997   |                       |  |   | (217       | ) |  |   | 46,022  | 
|                                                 |  |                        |         | 
|Mortgage-backed securities                       |  |                        | 116,829 |  |                      |   | 1,844 |                       |  |   | (537       | ) |  |   | 118,136 | 
|                                                 |  |                        |         | 
|SBA backed securities                            |  |                        | 32,338  |  |                      |   | 359   |                       |  |   | (32        | ) |  |   | 32,665  | 
|                                                 |  |                        |         | 
|Corporate Bonds                                  |  |                        | 6,044   |  |                      |   |      |                       |  |   | (184       | ) |  |   | 5,860   | 
|                                                 |  |                        |         | 
|Equity securities                                |  |                        | 1,000   |  |                      |   |      |                       |  |   | (194       | ) |  |   | 806     | 
|                                                 |  |                        |         |  |                      |   |       |                       |  |   |            |   |  |   |         | 
|                                                 |  | $                      | 237,594 |  |                      | $ | 3,269 |                       |  | $ | (1,531     | ) |  | $ | 239,332 | 
|                                                 |  |                        |         |  |                      |   |       |                       |  |   |            |   |  |   |         | 

Gross realized gains and losses on sales of securities for the three- and nine-month periods ended
September 30, 2010 and September 30, 2009 were as follows:



|                      |  |                                                       |       |   |      |   |       |  
|--------------------- |  | ----------------------------------------------------- | ----- | - | ---- | - | ----- | -
|                      |  | Nine months endedSeptember 30,
(Dollars in thousands) |      
|                      |  |                                                      
|                      |  | 2010                                                  |       |   | 2009 |  
|                      |  |                                                      
|Gross realized gains  |  | $                                                     | 3,519 |   |      | $ | 1,045 |  
|                      |  |                                                      
|Gross realized losses |  |                                                       | (48   | ) |      |   | (13   | )
|                      |  |                                                       |       |   |      |   |       |  
|                      |  |                                                      
|Net realized gains    |  | $                                                     | 3,471 |   |      | $ | 1,032 |  
|                      |  |                                                       |       |   |      |   |       |  



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|                      |  |                                                        |       |   |      |   |     |  
|--------------------- |  | ------------------------------------------------------ | ----- | - | ---- | - | --- | -
|                      |  | Three months endedSeptember 30,
(Dollars in thousands) |      
|                      |  |                                                       
|                      |  | 2010                                                   |       |   | 2009 |  
|Gross realized gains  |  | $                                                      | 2,062 |   |      | $ | 444 |  
|                      |  |                                                       
|Gross realized losses |  |                                                        | (32   | ) |      |   | (0  | )
|                      |  |                                                       
|                      |  |                                                        |       |   |      |   |     |  
|Net realized gains    |  | $                                                      | 2,030 |   |      | $ | 444 |  
|                      |  |                                                        |       |   |      |   |     |  

Analysis of Certain Investments in Debt and Equity Securities for Other Than Temporary Impairment

The following table sets forth the amount of unrealized losses (that is, the amount by which cost or amortized cost exceeds fair value),
and the related fair value of investments with unrealized losses, none of which are considered to be other than temporarily impaired. The table is segregated into investments that have been in continuous unrealized-loss position for less than 12
months from those that have been in a continuous unrealized-loss position for more than 12 months, as of September 30, 2010 and December 31, 2009:

September 30, 2010



|                           |  |                        |        |  |                     |   |     |           |  |   |                  |  |  |           |     |  |                  |   |        |  |  |   |     | 
|-------------------------- |  | ---------------------- | ------ |  | ------------------- | - | --- | --------- |  | - | ---------------- |  |  | --------- | --- |  | ---------------- | - | ------ |  |  | - | --- | 
|                           |  | Less Than 12 Months    |        |  | 12 Months or longer |   |     | Total     | 
|                           |  | FairValue              |        |  | UnrealizedLosses    |   |     | FairValue |  |   | UnrealizedLosses |  |  | FairValue |     |  | UnrealizedLosses |  
|                           | 
|                           |  | (Dollars in thousands) |       
|                           |  |                        |        |  |                     |  
|Mortgage-backed securities |  | $                      | 23,736 |  |                     | $ | 174 |           |  | $ |                 |  |  | $         |    |  |                  | $ | 23,736 |  |  | $ | 174 | 
|                           |  |                        |        |  |                     |  
|SBA backed securities      |  |                        | 905    |  |                     |   | 3   |           |  |   |                 |  |  |           |    |  |                  |   | 905    |  |  |   | 3   | 
|                           |  |                        |        |  |                     |  
|Corporate bonds            |  |                        |       |  |                     |   |    |           |  |   | 1,801            |  |  |           | 199 |  |                  |   | 1,801  |  |  |   | 199 | 
|                           |  |                        |        |  |                     |   |     |           |  |   |                  |  |  |           |     |  |                  |   |        |  |  |   |     | 
|                           |  |                        |        |  |                     |  
|Total                      |  | $                      | 24,641 |  |                     | $ | 177 |           |  | $ | 1,801            |  |  | $         | 199 |  |                  | $ | 26,442 |  |  | $ | 376 | 
|                           |  |                        |        |  |                     |   |     |           |  |   |                  |  |  |           |     |  |                  |   |        |  |  |   |     | 

December 31, 2009



|                                                 |  |                        |        |  |                     |   |     |           |  |   |                  |  |  |           |     |  |                  |   |        |  |  |   |     | 
|------------------------------------------------ |  | ---------------------- | ------ |  | ------------------- | - | --- | --------- |  | - | ---------------- |  |  | --------- | --- |  | ---------------- | - | ------ |  |  | - | --- | 
|                                                 |  | Less Than 12 Months    |        |  | 12 Months or longer |   |     | Total     | 
|                                                 |  | FairValue              |        |  | UnrealizedLosses    |   |     | FairValue |  |   | UnrealizedLosses |  |  | FairValue |     |  | UnrealizedLosses |  
|                                                 | 
|                                                 |  | (Dollars in thousands) |       
|                                                 |  |                        |        |  |                     |  
|Government-sponsored enterprises and FFCB bonds  |  | $                      | 18,431 |  |                     | $ | 367 |           |  | $ |                 |  |  | $         |    |  |                  | $ | 18,431 |  |  | $ | 367 | 
|                                                 |  |                        |        |  |                     |  
|Obligations of states and political subdivisions |  |                        | 7,315  |  |                     |   | 96  |           |  |   | 3,118            |  |  |           | 121 |  |                  |   | 10,433 |  |  |   | 217 | 
|                                                 |  |                        |        |  |                     |  
|Mortgage-backed securities                       |  |                        | 46,771 |  |                     |   | 536 |           |  |   | 102              |  |  |           | 1   |  |                  |   | 46,873 |  |  |   | 537 | 
|                                                 |  |                        |        |  |                     |  
|SBA backed securities                            |  |                        | 9,688  |  |                     |   | 32  |           |  |   |                 |  |  |           |    |  |                  |   | 9,688  |  |  |   | 32  | 
|                                                 |  |                        |        |  |                     |  
|Corporate bonds                                  |  |                        | 3,354  |  |                     |   | 154 |           |  |   | 2,505            |  |  |           | 30  |  |                  |   | 5,859  |  |  |   | 184 | 
|                                                 |  |                        |        |  |                     |  
|Equity securities                                |  |                        |       |  |                     |   |    |           |  |   | 806              |  |  |           | 194 |  |                  |   | 806    |  |  |   | 194 | 
|                                                 |  |                        |        |  |                     |   |     |           |  |   |                  |  |  |           |     |  |                  |   |        |  |  |   |     | 



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|      |  |                     |        |  |                     |   |       |           |  |   |                  |  |  |           |     |  |                  |   |        |  |  |   |       | 
|----- |  | ------------------- | ------ |  | ------------------- | - | ----- | --------- |  | - | ---------------- |  |  | --------- | --- |  | ---------------- | - | ------ |  |  | - | ----- | 
|      |  | Less Than 12 Months |        |  | 12 Months or longer |   |       | Total     | 
|      |  | FairValue           |        |  | UnrealizedLosses    |   |       | FairValue |  |   | UnrealizedLosses |  |  | FairValue |     |  | UnrealizedLosses |  
|      |  |                     |        |  |                     |  
|Total |  | $                   | 85,559 |  |                     | $ | 1,185 |           |  | $ | 6,531            |  |  | $         | 346 |  |                  | $ | 92,090 |  |  | $ | 1,531 | 
|      |  |                     |        |  |                     |   |       |           |  |   |                  |  |  |           |     |  |                  |   |        |  |  |   |       | 

As of September 30, 2010 and December 31, 2009, management concluded that the unrealized losses
presented above are temporary in nature since they are not related to the underlying credit quality of the issuers, and the Company has the intent and ability to hold these investments for a time necessary to recover their cost. The losses above,
except for equity securities, are on debt securities that have contractual maturity dates and are primarily related to market interest rates. Municipal losses as of December 31, 2009 were also related to lack of liquidity and demand in the
general investment market. All unrealized losses on investment securities are not considered to be other-than-temporary, because they are related to changes in interest rates, lack of liquidity and demand in the general investment market and do not
affect the expected cash flows of the underlying collateral or the issuer. The Banks mortgage-backed securities are all backed by government sponsored enterprises or agencies. The Bank does not own any private label mortgage-backed securities.

At September 30, 2010 and December 31, 2009, the balance of Federal Home Loan Bank (FHLB) of Atlanta
stock held by the Company was $4.7 million and $5.1 million, respectively. The FHLB paid a dividend for the second quarter of 2010 with an annualized rate of 0.44%. The dividend rate was equal to average three month LIBOR for the period of
April 1, 2010 to June 30, 2010, and was applicable to capital stock held during that period. Management believes that its investment in FHLB stock was not other-than-temporarily impaired as of September 30, 2010 or December 31,
2009. However, there can be no assurance that the impact of recent or future legislation on the Federal Home Loan Banks will not also cause a decrease in the value of the FHLB stock held by the Company.

The aggregate amortized cost and fair value of the available-for-sale securities portfolio at September 30, 2010 by remaining
contractual maturity are as follows:



|                                                  |  |                        |         |  |           |   |         | 
|------------------------------------------------- |  | ---------------------- | ------- |  | --------- | - | ------- | 
|                                                  |  | AmortizedCost          |         |  | FairValue |  
|                                                  | 
|                                                  |  | (Dollars in thousands) |        
|                                                  |  |                       
|Government-sponsored enterprises and FFCB bonds:  |  |                        |         |  |           |   |         | 
|                                                  |  |                       
|Due in one through five years                     |  | $                      | 2,480   |  |           | $ | 2,489   | 
|                                                  |  |                       
|Due in five through ten years                     |  |                        | 18,955  |  |           |   | 20,040  | 
|                                                  |  |                       
|Due after ten years                               |  |                        | 2,104   |  |           |   | 2,265   | 
|                                                  |  |                       
|Obligations of states and political subdivisions: |  |                        |         |  |           |   |         | 
|                                                  |  |                       
|Due in one year or less                           |  |                        | 977     |  |           |   | 994     | 
|                                                  |  |                       
|Due in one through five years                     |  |                        | 3,878   |  |           |   | 4,096   | 
|                                                  |  |                       
|Due in five through ten years                     |  |                        | 9,294   |  |           |   | 9,827   | 
|                                                  |  |                       
|Due after ten years                               |  |                        | 7,536   |  |           |   | 7,994   | 
|                                                  |  |                       
|Mortgage-backed securities:                       |  |                        |         |  |           |   |         | 
|                                                  |  |                       
|Due in five through ten years                     |  |                        | 4,811   |  |           |   | 5,097   | 
|                                                  |  |                       
|Due after ten years                               |  |                        | 145,814 |  |           |   | 147,979 | 



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|                              |  |               |         |  |           |   |         | 
|----------------------------- |  | ------------- | ------- |  | --------- | - | ------- | 
|                              |  | AmortizedCost |         |  | FairValue |  
|                              |  |              
|SBA backed securities:        |  |               |         |  |           |   |         | 
|                              |  |              
|Due in five through ten years |  |               | 8,157   |  |           |   | 8,232   | 
|                              |  |              
|Due after ten years           |  |               | 38,167  |  |           |   | 38,931  | 
|                              |  |              
|Corporate Bonds:              |  |               |         |  |           |   |         | 
|                              |  |              
|Due in one through five years |  |               | 6,084   |  |           |   | 6,128   | 
|                              |  |              
|Due in five through ten years |  |               | 9,891   |  |           |   | 9,874   | 
|                              |  |               |         |  |           |   |         | 
|                              |  |              
|Total securities              |  | $             | 258,148 |  |           | $ | 263,946 | 
|                              |  |               |         |  |           |   |         | 

Securities with an amortized cost of $162.7 million at September 30, 2010 are pledged as collateral. Of
this total, amortized cost of $29.4 million and fair value of $29.8 million are pledged as collateral for FHLB advances.

The
aggregate amortized cost and fair value of the available-for-sale securities portfolio at December 31, 2009 by remaining contractual maturity are as follows:



|                                                  |  |                        |         |  |           |   |         | 
|------------------------------------------------- |  | ---------------------- | ------- |  | --------- | - | ------- | 
|                                                  |  | AmortizedCost          |         |  | FairValue |  
|                                                  | 
|                                                  |  | (Dollars in thousands) |        
|                                                  |  |                       
|Government-sponsored enterprises and FFCB bonds:  |  |                        |         |  |           |   |         | 
|                                                  |  |                       
|Due in one through five years                     |  | $                      | 7,152   |  |           | $ | 7,166   | 
|                                                  |  |                       
|Due in five through ten years                     |  |                        | 20,610  |  |           |   | 20,392  | 
|                                                  |  |                       
|Due after ten years                               |  |                        | 8,379   |  |           |   | 8,285   | 
|                                                  |  |                       
|Obligations of states and political subdivisions: |  |                        |         |  |           |   |         | 
|                                                  |  |                       
|Due in one year or less                           |  |                        | 870     |  |           |   | 876     | 
|                                                  |  |                       
|Due in one through five years                     |  |                        | 7,006   |  |           |   | 7,343   | 
|                                                  |  |                       
|Due in five through ten years                     |  |                        | 17,997  |  |           |   | 18,448  | 
|                                                  |  |                       
|Due after ten years                               |  |                        | 19,369  |  |           |   | 19,355  | 
|                                                  |  |                       
|Mortgage-backed securities:                       |  |                        |         |  |           |   |         | 
|                                                  |  |                       
|Due in five through ten years                     |  |                        | 7,942   |  |           |   | 8,296   | 
|                                                  |  |                       
|Due after ten years                               |  |                        | 108,887 |  |           |   | 109,840 | 
|                                                  |  |                       
|SBA backed securities:                            |  |                        |         |  |           |   |         | 
|                                                  |  |                       
|Due in five through ten years                     |  |                        | 6,505   |  |           |   | 6,506   | 
|                                                  |  |                       
|Due after ten years                               |  |                        | 25,833  |  |           |   | 26,159  | 
|                                                  |  |                       
|Corporate Bonds:                                  |  |                        |         |  |           |   |         | 
|                                                  |  |                       
|Due in five through ten years                     |  |                        | 6,044   |  |           |   | 5,860   | 



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|                   |  |               |         |  |           |   |         | 
|------------------ |  | ------------- | ------- |  | --------- | - | ------- | 
|                   |  | AmortizedCost |         |  | FairValue |  
|                   |  |              
|Equity securities: |  |               | 1,000   |  |           |   | 806     | 
|                   |  |               |         |  |           |   |         | 
|                   |  |              
|Total securities   |  | $             | 237,594 |  |           | $ | 239,332 | 
|                   |  |               |         |  |           |   |         | 

Securities with an amortized cost of $142.4 million at December 31, 2009 were pledged as collateral. Of
this total, amortized cost of $55.6 million and fair value of $56.6 million were pledged as collateral for FHLB advances.

(6)
Comprehensive Income (Loss)

A summary of comprehensive income (loss) is as follows:



|                                           |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|------------------------------------------ |  | ------------------------------- | ------ | - | ------------------------------ | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                           |  | Three months
endedSeptember 30, |        |   | Nine months
endedSeptember 30, |  
|                                           |  | 2010                            |        |   | 2009                           |   |        | 2010 |  |   | 2009   |  
|                                           |  | (Dollars in thousands)          |       
|                                           |  |                                 |        |  
|Net income                                 |  | $                               | 540    |   |                                | $ | 346    |      |  | $ | 1,984  |   |  | $ | 2,399  |  
|                                           |  |                                 |        |  
|Other comprehensive income:                |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|                                           |  |                                 |        |  
|Unrealized gains arising during the period |  |                                 | 2,990  |   |                                |   | 4,483  |      |  |   | 7,531  |   |  |   | 3,837  |  
|                                           |  |                                 |        |  
|Tax expense                                |  |                                 | (1,150 | ) |                                |   | (1,727 | )    |  |   | (2,899 | ) |  |   | (1,478 | )
|                                           |  |                                 |        |  
|Reclassification to realized gains         |  |                                 | (2,030 | ) |                                |   | (444   | )    |  |   | (3,471 | ) |  |   | (1,032 | )
|                                           |  |                                 |        |  
|Tax expense                                |  |                                 | 780    |   |                                |   | 173    |      |  |   | 1,336  |   |  |   | 399    |  
|                                           |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|                                           |  |                                 |        |  
|Other comprehensive income                 |  |                                 | 590    |   |                                |   | 2,485  |      |  |   | 2,497  |   |  |   | 1,726  |  
|                                           |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|                                           |  |                                 |        |  
|Total comprehensive income                 |  | $                               | 1,130  |   |                                | $ | 2,831  |      |  | $ | 4,481  |   |  | $ | 4,125  |  
|                                           |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  

(7) Recent Accounting Pronouncements

The following is a summary of recent authoritative pronouncements that could impact the accounting, reporting, and/or disclosure of financial information by the Company.

In March 2010, guidance related to derivatives and hedging was amended to exempt embedded credit derivative features related to the
transfer of credit risk from potential bifurcation and separate accounting. Embedded features related to other types of risk and other embedded credit derivative features are not exempt from potential bifurcation and separate accounting. The
amendments were effective for the Company on July 1, 2010. These amendments will have no impact on the financial statements.

In July 2010, the Receivables topic of the ASC was amended to require expanded disclosures related to a companys allowance for credit losses and the credit quality of its financing receivables. The
amendments will require the allowance disclosures to be provided on a disaggregated basis. The Company is required to begin to comply with the disclosures in its financial statements for the year ended December 31, 2010.

On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the
Dodd-Frank Act), which significantly changes the regulation of financial institutions and the financial services industry. The Dodd-Frank Act includes several provisions that will affect how community banks, thrifts, and small bank
and thrift holding companies will be regulated in the future. Among other things, these



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provisions abolish the Office of Thrift Supervision and transfer its functions to the other federal banking agencies, relax rules regarding interstate branching, allow financial institutions to
pay interest on business checking accounts, change the scope of federal deposit insurance coverage, and impose new capital requirements on bank and thrift holding companies. The Dodd-Frank Act also establishes the Bureau of Consumer Financial
Protection as an independent entity within the Federal Reserve, which will be given the authority to promulgate consumer protection regulations applicable to all entities offering consumer financial services or products, including
banks. Additionally, the Dodd-Frank Act includes a series of provisions covering mortgage loan origination standards affecting originator compensation, minimum repayment standards, and pre-payments. Management is actively reviewing the
provisions of the Dodd-Frank Act and assessing its probable impact on our business, financial condition, and results of operations.

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on the Companys financial position, results of
operations and cash flows.

(8) Fair Value of Financial Instruments

Fair value estimates are made by management at a specific point in time, based on relevant information about the financial instrument and
the market. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Companys entire holdings of a particular financial instrument nor are potential taxes and other expenses that would be
incurred in an actual sale considered. 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 and/or the methodology used could significantly affect the estimates disclosed. Similarly,
the fair values disclosed could vary significantly from amounts realized in actual transactions.

The following table presents
the carrying values and estimated fair values of the Companys financial instruments at September 30, 2010 and December 31, 2009:



|                            |  |                        |         |  |                     |   |         |               |  |   |                     |  |  |   |         | 
|--------------------------- |  | ---------------------- | ------- |  | ------------------- | - | ------- | ------------- |  | - | ------------------- |  |  | - | ------- | 
|                            |  | September 30, 2010     |         |  | December 31, 2009   |  
|                            |  | CarryingValue          |         |  | Estimated FairValue |   |         | CarryingValue |  |   | Estimated FairValue | 
|                            | 
|                            |  | (Dollars in thousands) |        
|                            |  |                        |         | 
|Financial assets:           |  |                        |         |  |                     |   |         |               |  |   |                     |  |  |   |         | 
|                            |  |                        |         | 
|Cash and cash equivalents   |  | $                      | 40,406  |  |                     | $ | 40,406  |               |  | $ | 17,811              |  |  | $ | 17,811  | 
|                            |  |                        |         | 
|Investment securities       |  |                        | 263,946 |  |                     |   | 263,946 |               |  |   | 239,332             |  |  |   | 239,332 | 
|                            |  |                        |         | 
|FHLB stock                  |  |                        | 4,749   |  |                     |   | 4,749   |               |  |   | 5,116               |  |  |   | 5,116   | 
|                            |  |                        |         | 
|Accrued interest receivable |  |                        | 5,176   |  |                     |   | 5,176   |               |  |   | 4,967               |  |  |   | 4,967   | 
|                            |  |                        |         | 
|Net loans                   |  |                        | 561,816 |  |                     |   | 557,939 |               |  |   | 568,066             |  |  |   | 565,178 | 
|                            |  |                        |         | 
|Loans held for sale         |  |                        | 2,103   |  |                     |   | 2,103   |               |  |   |                    |  |  |   |        | 
|                            |  |                        |         | 
|Financial liabilities:      |  |                        |         |  |                     |   |         |               |  |   |                     |  |  |   |         | 
|                            |  |                        |         | 
|Deposits                    |  | $                      | 790,592 |  |                     | $ | 794,486 |               |  | $ | 754,730             |  |  | $ | 759,647 | 
|                            |  |                        |         | 
|Short-term borrowings       |  |                        | 13,534  |  |                     |   | 13,534  |               |  |   | 22,910              |  |  |   | 22,910  | 
|                            |  |                        |         | 
|Accrued interest payable    |  |                        | 982     |  |                     |   | 982     |               |  |   | 1,121               |  |  |   | 1,121   | 
|                            |  |                        |         | 
|Long-term obligations       |  |                        | 34,500  |  |                     |   | 35,721  |               |  |   | 21,000              |  |  |   | 21,210  | 



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The estimated fair
values of net loans, deposits and long-term obligations are based on estimated cash flows discounted at market interest rates. The fair value of off-balance sheet financial instruments is considered immaterial. These off-balance sheet financial
instruments are commitments to extend credit and are either short-term in nature or subject to immediate repricing.

Fair Value
Hierarchy

The Company groups assets and liabilities at fair value in three levels, based on the markets in which the
assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:



|        |  |                                                                                                                                                                                                                                                                                                                                                                                   
|------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Level 1 |  | Valuation is based upon quoted prices for identical instruments traded in active markets.                                                                                                                                                                                                                                                                                         
|        | 
|Level 2 |  | Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar
instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.                                                                                                      
|        | 
|Level 3 |  | Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market.
These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar
techniques.

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. Additionally, 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, loans held for investment and certain other assets. These nonrecurring fair value adjustments typically involve application of lower of cost or market accounting or write-downs of individual assets.

There were no changes to the techniques used to measure fair value during the period.

Following is a description of valuation methodologies used for assets 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 the 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, 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 and corporate debt securities. Securities classified as Level 3 include asset-backed securities in less liquid markets.

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 individually impaired, management measures impairment using one of several methods, including collateral value, market
price 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. At September 30, 2010, the
majority of impaired loans were evaluated based on the fair value of the collateral. Impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of
the collateral is based on an observable market price or a current appraised value, the Company records the impaired loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is
further



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impaired below the appraised value and there is no observable market price, the Company records the impaired loan as nonrecurring Level 3.

Real Estate and Repossessions Acquired in Settlement of Loans

Foreclosed assets are adjusted to fair value upon transfer of the loans to other real estate owned. Real estate acquired in settlement of loans is recorded initially at estimated fair value of the
property less estimated selling costs at the date of foreclosure. The initial recorded value may be subsequently reduced by additional allowances, which are charged to earnings if the estimated fair value of the property less estimated selling costs
declines below the initial recorded value. Fair value is based upon independent market prices, appraised values of the collateral or managements estimation of the value of the collateral. When the fair value of the collateral is based on an
observable market price or a current appraised value, the Company records the foreclosed asset as nonrecurring Level 2. When an appraised value is not available 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 foreclosed asset as nonrecurring Level 3.

Assets
recorded at fair value on a recurring basis



|                                                 |  |                        |         |  |         |   |        |         |  |   |         |  |  |   |       | 
|------------------------------------------------ |  | ---------------------- | ------- |  | ------- | - | ------ | ------- |  | - | ------- |  |  | - | ----- | 
|September 30, 2010                               |  | Total                  |         |  | Level 1 |   |        | Level 2 |  |   | Level 3 | 
|                                                 | 
|                                                 |  | (Dollars in thousands) |        
|                                                 |  |                        |         | 
|Investment Securities Available-for-Sale         |  |                        |         |  |         |   |        |         |  |   |         |  |  |   |       | 
|                                                 |  |                        |         | 
|Government-sponsored enterprises and FFCB bonds  |  | $                      | 24,794  |  |         | $ |       |         |  | $ | 24,794  |  |  | $ |      | 
|                                                 |  |                        |         | 
|Obligations of states and political subdivisions |  |                        | 22,911  |  |         |   |       |         |  |   | 22,911  |  |  |   |      | 
|                                                 |  |                        |         | 
|Mortgage-backed securities                       |  |                        | 153,076 |  |         |   |       |         |  |   | 153,076 |  |  |   |      | 
|                                                 |  |                        |         | 
|SBA backed securities                            |  |                        | 47,163  |  |         |   | 42,883 |         |  |   | 4,280   |  |  |   |      | 
|                                                 |  |                        |         | 
|Corporate bonds                                  |  |                        | 16,002  |  |         |   |       |         |  |   | 14,201  |  |  |   | 1,801 | 
|                                                 |  |                        |         | 
|Total Securities                                 |  | $                      | 263,946 |  |         | $ | 42,883 |         |  | $ | 219,262 |  |  | $ | 1,801 | 
|                                                 |  |                        |         | 
|Total assets at fair value                       |  | $                      | 263,946 |  |         | $ | 42,883 |         |  | $ | 219,262 |  |  | $ | 1,801 | 



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|                                                 |  |                        |         |  |         |   |        |         |  |   |         |  |  |   |       | 
|------------------------------------------------ |  | ---------------------- | ------- |  | ------- | - | ------ | ------- |  | - | ------- |  |  | - | ----- | 
|December 31, 2009                                |  | Total                  |         |  | Level 1 |   |        | Level 2 |  |   | Level 3 | 
|                                                 | 
|                                                 |  | (Dollars in thousands) |        
|Investment Securities Available-for-Sale         |  |                        |         |  |         |   |        |         |  |   |         |  |  |   |       | 
|                                                 |  |                        |         | 
|Government-sponsored enterprises and FFCB bonds  |  | $                      | 35,843  |  |         | $ | 8,626  |         |  | $ | 24,737  |  |  | $ | 2,480 | 
|                                                 |  |                        |         | 
|Obligations of states and political subdivisions |  |                        | 46,022  |  |         |   | 4,506  |         |  |   | 41,516  |  |  |   |      | 
|                                                 |  |                        |         | 
|Mortgage-backed securities                       |  |                        | 118,136 |  |         |   | 9,361  |         |  |   | 108,775 |  |  |   |      | 
|                                                 |  |                        |         | 
|SBA backed securities                            |  |                        | 32,665  |  |         |   | 26,363 |         |  |   | 6,302   |  |  |   |      | 
|                                                 |  |                        |         | 
|Corporate bonds                                  |  |                        | 5,860   |  |         |   |       |         |  |   | 3,989   |  |  |   | 1,871 | 
|                                                 |  |                        |         | 
|Equity securities                                |  |                        | 806     |  |         |   | 806    |         |  |   |        |  |  |   |      | 
|                                                 |  |                        |         | 
|Total Securities                                 |  | $                      | 239,332 |  |         | $ | 49,662 |         |  | $ | 185,319 |  |  | $ | 4,351 | 
|                                                 |  |                        |         | 
|Total assets at fair value                       |  | $                      | 239,332 |  |         | $ | 49,662 |         |  | $ | 185,319 |  |  | $ | 4,351 | 

Assets recorded at fair value
on a nonrecurring basis



|                                                                    |  |                        |        |  |         |   |     |         |  |   |         |  |  |   |       | 
|------------------------------------------------------------------- |  | ---------------------- | ------ |  | ------- | - | --- | ------- |  | - | ------- |  |  | - | ----- | 
|September 30, 2010                                                  |  | Total                  |        |  | Level 1 |   |     | Level 2 |  |   | Level 3 | 
|                                                                    | 
|                                                                    |  | (Dollars in thousands) |       
|                                                                    | 
|Impaired Loans                                                      |  |                        |        | 
|                                                                    |  |                        |        | 
|Real estateconstruction and land development                       |  | $                      | 8,990  |  |         | $ |    |         |  | $ | 6,558   |  |  | $ | 2,432 | 
|                                                                    |  |                        |        | 
|Real estatecommercial, residential and other                       |  |                        | 4,676  |  |         |   |    |         |  |   | 4,113   |  |  |   | 563   | 
|                                                                    |  |                        |        | 
|Commercial and all other loans                                      |  |                        | 67     |  |         |   |    |         |  |   |        |  |  |   | 67    | 
|                                                                    |  |                        |        | 
|Total impaired loans                                                |  | $                      | 13,733 |  |         | $ |    |         |  | $ | 10,671  |  |  | $ | 3,062 | 
|                                                                    |  |                        |        | 
|Real estate and repossessions acquired in settlement of loans       |  |                        |        |  |         |   |     |         |  |   |         |  |  |   |       | 
|                                                                    |  |                        |        | 
|Total real estate and repossessions acquired in settlement of loans |  | $                      | 5,253  |  |         | $ |    |         |  | $ | 1,644   |  |  | $ | 3,609 | 
|                                                                    |  |                        |        | 
|Total assets at fair value                                          |  | $                      | 18,986 |  |         | $ |    |         |  | $ | 12,315  |  |  | $ | 6,671 | 
|                                                                    |  |                        |        | 
|December 31, 2009 (Dollars in thousands)                            |  | Total                  |        |  | Level 1 |   |     | Level 2 |  |   | Level 3 | 
|                                                                    | 
|                                                                    |  | (Dollars in thousands) |       
|                                                                    | 
|Impaired Loans                                                      |  |                        |        | 
|                                                                    |  |                        |        | 
|Real estateconstruction and land development                       |  | $                      | 6,882  |  |         | $ |    |         |  | $ | 5,510   |  |  | $ | 1,372 | 
|                                                                    |  |                        |        | 
|Real estatecommercial, residential and other                       |  |                        | 3,389  |  |         |   |    |         |  |   | 2,205   |  |  |   | 1,184 | 
|                                                                    |  |                        |        | 
|Commercial and all other loans                                      |  |                        | 2,304  |  |         |   |    |         |  |   |        |  |  |   | 2,304 | 
|                                                                    |  |                        |        | 
|Total impaired loans                                                |  | $                      | 12,575 |  |         | $ |    |         |  | $ | 7,715   |  |  | $ | 4,860 | 
|                                                                    |  |                        |        | 
|Real estate and repossessions acquired in settlement of loans       |  |                        |        |  |         |   |     |         |  |   |         |  |  |   |       | 
|                                                                    |  |                        |        | 
|Real estate and repossessions acquired in settlement of loans       |  | $                      | 5,438  |  |         | $ | 606 |         |  | $ | 1,657   |  |  | $ | 3,175 | 
|                                                                    |  |                        |        | 
|Total assets at fair value                                          |  | $                      | 18,013 |  |         | $ | 606 |         |  | $ | 9,372   |  |  | $ | 8,035 | 



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As of
September 30, 2010 there were $14.7 million of Level 2 investment securities available for sale that were reported as Level 1 as of December 31, 2009. The bonds were transferred from Level 1 to Level 2 during the first nine months of 2010
because the December 31, 2009 pricing was based on the Companys actual trades for the securities at initial purchase while the September 30, 2010 pricing was through a pricing system. The table below presents a reconciliation for all
assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during 2010 and 2009.



|                                             |  |                                               |        |   |                |   |       |                                  |  |   |        |  
|-------------------------------------------- |  | --------------------------------------------- | ------ | - | -------------- | - | ----- | -------------------------------- |  | - | ------ | -
|                                             |  | Government-sponsoredenterprises andFFCB bonds |        |   | CorporateBonds |   |       | Available-forSale DebtSecurities | 
|                                             | 
|                                             |  | (Dollars in thousands)                        |       
|                                             |  |                                               |       
|Balance, December 31, 2009                   |  | $                                             | 2,480  |   |                | $ | 1,871 |                                  |  | $ | 4,351  |  
|                                             |  |                                               |       
|Total gains or losses (realized/unrealized): |  |                                               |        |   |                |   |       |                                  |  |   |        |  
|                                             |  |                                               |       
|Included in earnings                         |  |                                               |       |   |                |   |      |                                  |  |   |       |  
|                                             |  |                                               |       
|Included in other comprehensive income       |  |                                               |       |   |                |   | (70   | )                                |  |   | (70    | )
|                                             |  |                                               |       
|Purchases, issuances, and settlements        |  |                                               |       |   |                |   |      |                                  |  |   |       |  
|                                             |  |                                               |       
|Transfers in to/out of Level 3               |  |                                               | (2,480 | ) |                |   |      |                                  |  |   | (2,480 | )
|                                             |  |                                               |       
|Balance, September 30, 2010                  |  | $                                             |       |   |                | $ | 1,801 |                                  |  | $ | 1,801  |  



|                                             |  |                                               |      |   |                           |   |        |                |  |   |                                  |   |  |   |        |  
|-------------------------------------------- |  | --------------------------------------------- | ---- | - | ------------------------- | - | ------ | -------------- |  | - | -------------------------------- | - |  | - | ------ | -
|                                             |  | Obligations ofstates andpoliticalsubdivisions |      |   | Mortgage-backedsecurities |   |        | CorporateBonds |  |   | Available-forSale DebtSecurities |  
|                                             | 
|                                             |  | (Dollars in thousands)                        |     
|                                             |  |                                               |      |  
|Balance, December 31, 2008                   |  | $                                             | 698  |   |                           | $ | 8,374  |                |  | $ | 2,000                            |   |  | $ | 11,072 |  
|                                             |  |                                               |      |  
|Total gains or losses (realized/unrealized): |  |                                               |      |   |                           |   |        |                |  |   |                                  |   |  |   |        |  
|                                             |  |                                               |      |  
|Included in earnings                         |  |                                               |     |   |                           |   |       |                |  |   |                                 |   |  |   |       |  
|                                             |  |                                               |      |  
|Included in other comprehensive income       |  |                                               |     |   |                           |   |       |                |  |   | (162                             | ) |  |   | (162   | )
|                                             |  |                                               |      |  
|Purchases, issuances, and settlements        |  |                                               |     |   |                           |   |       |                |  |   |                                 |   |  |   |       |  
|                                             |  |                                               |      |  
|Transfers in to/out of Level 3               |  |                                               | (698 | ) |                           |   | (8,374 | )              |  |   |                                 |   |  |   | (9,072 | )
|                                             |  |                                               |      |  
|Balance, September 30, 2009                  |  | $                                             |     |   |                           | $ |       |                |  | $ | 1,838                            |   |  | $ | 1,838  |  

(9) U.S. Treasurys
Troubled Asset Relief Program (TARP) Capital Purchase Program

On January 16, 2009, the Company issued Series A
Preferred Stock in the amount of $17,949,000 and a warrant to purchase 144,984 shares of common stock with an exercise price of $18.57 to the U.S. Treasury as a participant in the TARP Capital Purchase Program. The Series A Preferred Stock qualifies
as Tier 1 capital for purposes of regulatory capital requirements and will pay cumulative dividends at a rate of 5% per annum for the first five years and 9% per annum thereafter. Prior to January 16, 2012, unless the Company has
redeemed all of this preferred stock or the U.S. Treasury has transferred all of this preferred stock to a third party, the consent of the U.S.



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Treasury will be required to, among other things, increase common stock dividend above $0.1825 per share or repurchase common stock except in limited circumstances. In addition, until the U.S.
Treasury ceases to own these securities sold under the TARP Capital Purchase Program, the compensation arrangements for senior executive officers must comply in all respects with the U.S. Emergency Economic Stabilization Act of 2008 and the rules
and regulations thereunder.

ITEM 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations

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 within the meaning of the Private Securities Litigation Reform Act of 1995, 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, risk factors discussed in our Annual Report on Form 10-K and in other documents we file with the Securities and Exchange Commission from time to time. Copies of those reports are available through our Internet
website at www.myecb.comor directly through the Commissions website at www.sec.gov.Forward-looking statements in this Report 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 our management about future events. Factors that could influence the accuracy of those forward-looking statements include,
but are not limited to, (a) pressures on our earnings, capital and liquidity resulting from current and future conditions in the credit and equity markets, (b) continued or unexpected increases in credit losses in our loan portfolio,
(c) continued adverse conditions in the economy and in the real estate market in our banking markets (particularly those conditions that affect our loan portfolio, the abilities of our borrowers to repay their loans, and the values of
collateral that secures our loans), (d) the financial success or changing strategies of our customers, (e) actions of government regulators, or changes in laws, regulations or accounting standards, that adversely affect our business,
(f) changes in the interest rate environment and the level of market interest rates that reduce our net interest margins and/or the values of loans we make and securities we hold, (g) changes in competitive pressures among depository and
other financial institutions or in our ability to compete effectively against other financial institutions in our banking markets; (h) weather and similar conditions, particularly the effect of hurricanes on our banking and operations
facilities and on our customers and the communities in which we do business; and (i) other developments or changes in our business that we do not expect. Although we believe that the expectations reflected in the forward-looking statements in
this Report are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. All forward-looking statements attributable to us are expressly qualified in their entirety by the cautionary statements in this
paragraph. We have no obligation, and we do not intend, to update these forward-looking statements.

Executive Summary

ECB Bancorp, Inc. is a bank holding company headquartered in Engelhard, North Carolina. Our wholly owned subsidiary, The East Carolina
Bank (the Bank), is a state-chartered community bank that was founded in 1919. For the purpose of this discussion, we, us and our refers to the Bank and the bank holding company as a single,
consolidated entity unless the context otherwise indicates.

As of September 30, 2010, we had consolidated assets of
approximately $932.2 million, total loans of approximately $575.0 million, total deposits of approximately $790.6 million and shareholders equity of approximately $87.6 million. For the three months ended September 30, 2010, we had income
available to common shareholders of $273 thousand or $0.10 basic and diluted earnings per share, compared to income available to common shareholders of $83 thousand or $0.03 basic and diluted earnings per share for the three months ended
September 30, 2009. For the nine months ended September 30, 2010, we had income available to common shareholders of $1.2 million or $0.42 basic and diluted earnings per share, compared to income available to common



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shareholders of $1.7 million or $0.58 basic and diluted earnings per share for the nine months ended September 30, 2009.

Critical Accounting Policies

The Companys significant accounting
policies are set forth in Note 1 to the Consolidated Financial Statements contained in the Form 10-K Annual Report for the fiscal year ended December 31, 2009. Of these significant accounting policies, the Company considers its policy regarding
the allowance for loan losses to be its most critical accounting policy, because it requires managements most subjective and complex judgments. In addition, changes in economic conditions can have a significant impact on the allowance for loan
losses and therefore the provision for loan losses and results of operations. The Company has developed appropriate policies and procedures for assessing the adequacy of the allowance for loan losses, recognizing that this process requires a number
of assumptions and estimates with respect to its loan portfolio. The Companys assessments may be impacted in future periods by changes in economic conditions, the results of regulatory examinations, and the discovery of information with
respect to borrowers that is not known to management at the time of the issuance of the consolidated financial statements. For additional discussion concerning the Companys allowance for loan losses and related matters, see Asset
Quality.

We also consider our determination of retirement plans and other postretirement benefit cost to be a critical
accounting estimate as it requires the use of estimates and judgments related to the amount and timing of expected future cash out-flows for benefit payments and cash in-flows for maturities and return on plan assets. Our retirement plans and other
post-retirement benefit costs are actuarially determined based on assumptions on the discount rate, estimated future return on plan assets and the health care cost trend rate. Changes in estimates and assumptions related to mortality rates and
future health care costs could have a material impact on our financial condition or results of operations. The discount rate is used to determine the present value of future benefit obligations and the net periodic benefit cost. The discount rate
used to value the future benefit obligation as of each year-end is the rate used to determine the periodic benefit cost in the following year. For additional discussion concerning our retirement plans and other postretirement benefits refer to Note
8 to the Consolidated Financial Statements contained in our Form 10-K Annual Report for the fiscal year ended December 31, 2009.

Comparison of the Results of Operations for the Three- and Nine-Month Periods Ended September 30, 2010 and 2009

Results of Operations

The following table summarizes components of income
and expense and the changes in those components for the three- and nine-month periods ended September 30, 2010 as compared to the same periods in 2009.

Condensed Consolidated Statements of Income



|                          |  |                                            |        |  |                            |   |        |                                           |  |        |                            |   |   |   |        |  |  |   |        |   |  |  |       |  
|------------------------- |  | ------------------------------------------ | ------ |  | -------------------------- | - | ------ | ----------------------------------------- |  | ------ | -------------------------- | - | - | - | ------ |  |  | - | ------ | - |  |  | ----- | -
|                          |  | For the
ThreeMonths EndedSeptember 30,2010 |        |  | Changes from thePrior
Year |   |        | For the
NineMonths EndedSeptember 30,2010 |  |        | Changes from thePrior
Year |  
|                          |  |                                            |        | 
|                          |  |                                            | Amount |  |                            | % |        |                                           |  | Amount |                            |   | % |  
|                          |  | (Dollars in thousands)                     |       
|Total interest income     |  | $                                          | 9,982  |  |                            | $ | (338   | )                                         |  |        | (3.3                       | ) |   | $ | 29,967 |  |  | $ | (887   | ) |  |  | (2.9  | )
|Total interest expense    |  |                                            | 3,005  |  |                            |   | (239   | )                                         |  |        | (7.4                       | ) |   |   | 8,962  |  |  |   | (2,162 | ) |  |  | (19.4 | )
|                          |  |                                            |        |  |                            |   |        |                                           |  |        |                            |   |   |   |        |  |  |   |        |   |  |  |       |  
|                          |  |                                            |        |  |                            |  
|Net interest income       |  |                                            | 6,977  |  |                            |   | (99    | )                                         |  |        | (1.4                       | ) |   |   | 21,005 |  |  |   | 1,275  |   |  |  | 6.5   |  
|Provision for loan losses |  |                                            | 3,863  |  |                            |   | 1,188  |                                           |  |        | 44.4                       |   |   |   | 8,643  |  |  |   | 3,218  |   |  |  | 59.3  |  
|                          |  |                                            |        |  |                            |   |        |                                           |  |        |                            |   |   |   |        |  |  |   |        |   |  |  |       |  
|Net interest income after |  |                                            |        |  |                            |   |        |                                           |  |        |                            |   |   |   |        |  |  |   |        |   |  |  |       |  
|Provision for loan losses |  |                                            | 3,114  |  |                            |   | (1,287 | )                                         |  |        | (29.2                      | ) |   |   | 12,362 |  |  |   | (1,943 | ) |  |  | (13.6 | )



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|                                                   |  |   |       |   |  |   |       |  |  |  |       |  |  |   |        |  |  |   |       |   |  |  |       |  
|-------------------------------------------------- |  | - | ----- | - |  | - | ----- |  |  |  | ----- |  |  | - | ------ |  |  | - | ----- | - |  |  | ----- | -
|Noninterest income                                 |  |   | 3,800 |   |  |   | 1,874 |  |  |  | 97.3  |  |  |   | 8,334  |  |  |   | 2,709 |   |  |  | 48.2  |  
|Noninterest expense                                |  |   | 6,379 |   |  |   | 244   |  |  |  | 4.0   |  |  |   | 18,533 |  |  |   | 1,498 |   |  |  | 8.8   |  
|                                                   |  |   |       |   |  |   |       |  |  |  |       |  |  |   |        |  |  |   |       |   |  |  |       |  
|                                                   |  |   |       |   |  |  
|Income before income taxes                         |  |   | 535   |   |  |   | 343   |  |  |  | 178.6 |  |  |   | 2,163  |  |  |   | (732  | ) |  |  | (25.3 | )
|Income tax provision                               |  |   | (5    | ) |  |   | 149   |  |  |  | 96.7  |  |  |   | 179    |  |  |   | (317  | ) |  |  | (63.9 | )
|                                                   |  |   |       |   |  |   |       |  |  |  |       |  |  |   |        |  |  |   |       |   |  |  |       |  
|                                                   |  |   |       |   |  |  
|Net income                                         |  |   | 540   |   |  |   | 194   |  |  |  | 56.1  |  |  |   | 1,984  |  |  |   | (415  | ) |  |  | (17.3 | )
|                                                   |  |   |       |   |  |  
|Preferred stock dividend and accretion of discount |  |   | 267   |   |  |   | 4     |  |  |  | 1.5   |  |  |   | 797    |  |  |   | 59    |   |  |  | 8.0   |  
|                                                   |  |   |       |   |  |   |       |  |  |  |       |  |  |   |        |  |  |   |       |   |  |  |       |  
|                                                   |  |   |       |   |  |  
|Net income available to common shareholders        |  | $ | 273   |   |  | $ | 190   |  |  |  | 228.9 |  |  | $ | 1,187  |  |  | $ | (474  | ) |  |  | (28.5 | )
|                                                   |  |   |       |   |  |   |       |  |  |  |       |  |  |   |        |  |  |   |       |   |  |  |       |  

Net Interest Income

Net interest income (the difference between the interest earned on assets, such as loans and investment securities, and the interest paid on liabilities, such as deposits and other borrowings) is our
primary source of operating income. Net interest income for the three months ended September 30, 2010 was $7.0 million, a decrease of $99 thousand or 1.4% when compared to net interest income of $7.1 million for the three months ended
September 30, 2009. For the nine months ended September 30, 2010, net interest income was $21.0 million, an increase of $1.3 million or 6.5% when compared to net interest income of $19.7 million for the period in 2009.

The level of net interest income is determined primarily by the average balances (volume) of interest-earning assets and interest-bearing
liabilities and the various rate spreads between our interest-earning assets and our interest-bearing liabilities. Changes in net interest income from period to period result from increases or decreases in the volume of interest-earning assets and
interest-bearing liabilities, increases or decreases in the average interest rates earned and paid on such assets and liabilities, the ability to manage the interest-earning asset portfolio (which includes loans), and the availability of particular
sources of funds, such as non-interest-bearing deposits.

Interest income decreased $338 thousand or 3.3% for the three months
ended September 30, 2010 compared to the same three months of 2009. Interest income decreased $887 thousand or 2.9% for the nine months ended September 30, 2010 compared to the same nine months in 2009. The decreases for the three and nine
months ended September 30, 2010 are due to the decrease in the rates earned on our average earning assets which were partially offset by increases in the volume of these earning assets. The tax equivalent yield on average earning assets
decreased 50 basis points for the quarter ended September 30, 2010 to 4.69% from 5.19% for the same period in 2009. For the first nine months of 2010, the yield on average earning assets, on a tax-equivalent basis, decreased 31 basis points to
4.89% compared to 5.20% at September 30, 2009. Management attributes the decrease in the yield on our earning assets to the continued low level of short-term market interest rates. Yields on our taxable securities decreased approximately 99
basis points for the first nine months of 2010 as compared to the same period last year as securities sold, called or matured have been replaced with lower yielding securities

Our average cost of funds during the third quarter of 2010 was 1.64%, a decrease of 26 basis points when compared to 1.90% for the third quarter of 2009. Average rates paid on bank certificates of deposit
decreased 24 basis points from 2.31% for the quarter ended September 30, 2009 to 2.07% for the quarter ended September 30, 2010, while our average cost of borrowed funds increased 64 basis points during the third quarter of 2010 compared
to the same period in 2009. Total interest expense decreased $239 thousand or 7.4% during the third quarter of 2010 compared to the same period in 2009, primarily the result of decreased market rates paid on these liabilities. For the nine months
ended September 30, 2010, our cost of funds was 1.68% a decrease of 50 basis points when compared to 2.18% for the same period in 2009. Average rates paid on bank certificates of deposit decreased 62 basis points from 2.70% to 2.08% for the
first nine months of 2010, while our cost of borrowed funds increased 71 basis points compared to the same period a year ago. The increase in the average cost of borrowed funds for both the three- and nine- month periods is the result of a decrease
in the volume of lower cost short term borrowings. Total interest



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expense decreased $2.2 million or 19.4% during the first nine months of 2010 compared to the same period in 2009, primarily the result of decreased market rates paid on these liabilities. The
volume of average interest-bearing liabilities increased approximately $31.8 million for the first nine months of 2010 compared with the same period in 2009.

The banking industry uses two key ratios to measure profitability of net interest income: net interest rate spread and net interest margin. The net interest rate spread measures the difference between the
average yield on earning assets and the average rate paid on interest-bearing liabilities. The net interest rate spread does not consider the impact of non-interest-bearing deposits and gives a direct perspective on the effect of market interest
rate movements. The net interest margin is defined as net interest income as a percentage of total average earning assets and takes into account the positive effects of investing non-interest bearing deposits in earning assets.

Our annualized net interest margin, on a tax-equivalent basis, for the three months ended September 30, 2010 was 3.31% compared to
3.58% in the third quarter of 2009 while our net interest spread decreased 24 basis points during the same period. For the nine months ended September 30, 2010, our net interest margin, on a tax-equivalent basis, was 3.46% compared to 3.36% in
the first nine months of 2009 while our net interest spread increased 19 basis points.

Average interest-bearing liabilities,
as a percentage of interest-earning assets for the quarters ended September 30, 2010 and 2009 were 84.5% and 84.2%, respectively. For the nine months ended September 30, 2010, average interest-bearing liabilities as a percentage of
interest-earning assets were 85.2% compared to 84.7% for the nine months ended September 30, 2009.

Average
Consolidated Balance Sheets and Net Interest Analysis on Fully Tax Equivalent Basis

For the three months ended
September 30, 2010 and 2009



|                                     |  |                        |         |  |                     |  |      |                |  |   |                |  |  |                     |         |  |                |  |      |   |  |   |        | 
|------------------------------------ |  | ---------------------- | ------- |  | ------------------- |  | ---- | -------------- |  | - | -------------- |  |  | ------------------- | ------- |  | -------------- |  | ---- | - |  | - | ------ | 
|                                     |  | Average Balance        |         |  | 2010 Yield/ Rate(5) |  |      | Income/Expense |  |   | AverageBalance |  |  | 2009 Yield/ Rate(5) |         |  | Income/Expense | 
|                                     |  | (Dollars in thousands) |        
|Assets                               |  |                        |         |  |                     |  |      |                |  |   |                |  |  |                     |         |  |                |  |      |   |  |   |        | 
|Loans  net (1)                      |  | $                      | 564,526 |  |                     |  | 5.37 | %              |  | $ | 7,640          |  |  | $                   | 563,923 |  |                |  | 5.49 | % |  | $ | 7,807  | 
|Taxable securities                   |  |                        | 247,596 |  |                     |  | 3.13 | %              |  |   | 1,955          |  |  |                     | 189,796 |  |                |  | 4.51 | % |  |   | 2,159  | 
|Non-taxable securities (2)           |  |                        | 38,220  |  |                     |  | 6.06 | %              |  |   | 583            |  |  |                     | 37,044  |  |                |  | 5.74 | % |  |   | 536    | 
|Other investments                    |  |                        | 10,013  |  |                     |  | 0.08 | %              |  |   | 2              |  |  |                     | 12,791  |  |                |  |     | % |  |   |       | 
|                                     |  |                        |         |  |                     |  |      |                |  |   |                |  |  |                     |         |  |                |  |      |   |  |   |        | 
|Total interest- earning assets       |  |                        | 860,355 |  |                     |  | 4.69 | %              |  | $ | 10,180         |  |  |                     | 803,554 |  |                |  | 5.19 | % |  | $ | 10,502 | 
|Cash and due from banks              |  |                        | 11,955  |  |                     |  |      |                |  |   |                |  |  |                     | 11,459  |  |                |  |      |   |  |   |        | 
|                                     |  |                        |         |  |                     | 
|Bank premises and equipment, net     |  |                        | 25,622  |  |                     |  |      |                |  |   |                |  |  |                     | 25,490  |  |                |  |      |   |  |   |        | 
|Other assets                         |  |                        | 27,433  |  |                     |  |      |                |  |   |                |  |  |                     | 24,672  |  |                |  |      |   |  |   |        | 
|                                     |  |                        |         |  |                     |  |      |                |  |   |                |  |  |                     |         |  |                |  |      |   |  |   |        | 
|Total assets                         |  | $                      | 925,365 |  |                     |  |      |                |  |   |                |  |  | $                   | 865,175 |  |                |  |      |   |  |   |        | 
|                                     |  |                        |         |  |                     |  |      |                |  |   |                |  |  |                     |         |  |                |  |      |   |  |   |        | 
|                                     |  |                        |         |  |                     | 
|Liabilities and Shareholders Equity |  |                        |         |  |                     |  |      |                |  |   |                |  |  |                     |         |  |                |  |      |   |  |   |        | 
|Interest-bearing deposits            |  | $                      | 684,890 |  |                     |  | 1.61 | %              |  | $ | 2,778          |  |  | $                   | 606,512 |  |                |  | 1.95 | % |  | $ | 2,978  | 
|Short-term borrowings                |  |                        | 18,351  |  |                     |  | 1.43 | %              |  |   | 66             |  |  |                     | 49,343  |  |                |  | 0.76 | % |  |   | 95     | 
|Long-term obligations                |  |                        | 23,812  |  |                     |  | 2.68 | %              |  |   | 161            |  |  |                     | 21,000  |  |                |  | 3.23 | % |  |   | 171    | 
|                                     |  |                        |         |  |                     |  |      |                |  |   |                |  |  |                     |         |  |                |  |      |   |  |   |        | 
|Total interest- bearing liabilities  |  |                        | 727,052 |  |                     |  | 1.64 | %              |  |   | 3,005          |  |  |                     | 676,855 |  |                |  | 1.90 | % |  |   | 3,244  | 
|Non-interest-bearing deposits        |  |                        | 108,111 |  |                     |  |      |                |  |   |                |  |  |                     | 97,068  |  |                |  |      |   |  |   |        | 
|Other liabilities                    |  |                        | 1,792   |  |                     |  |      |                |  |   |                |  |  |                     | 4,014   |  |                |  |      |   |  |   |        | 



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|                                                      |  |   |         |  |  |  |      |   |  |   |       |  |  |   |         |  |  |  |      |   |  |   |       | 
|----------------------------------------------------- |  | - | ------- |  |  |  | ---- | - |  | - | ----- |  |  | - | ------- |  |  |  | ---- | - |  | - | ----- | 
|Shareholders equity                                  |  |   | 88,410  |  |  |  |      |   |  |   |       |  |  |   | 87,238  |  |  |  |      |   |  |   |       | 
|                                                      |  |   |         |  |  |  |      |   |  |   |       |  |  |   |         |  |  |  |      |   |  |   |       | 
|Total liabilities and Shareholders equity            |  | $ | 925,365 |  |  |  |      |   |  |   |       |  |  | $ | 865,175 |  |  |  |      |   |  |   |       | 
|                                                      |  |   |         |  |  |  |      |   |  |   |       |  |  |   |         |  |  |  |      |   |  |   |       | 
|Net interest income and net interest margin (FTE) (3) |  |   |         |  |  |  | 3.31 | % |  | $ | 7,175 |  |  |   |         |  |  |  | 3.58 | % |  | $ | 7,258 | 
|                                                      |  |   |         |  |  |  |      |   |  |   |       |  |  |   |         |  |  |  |      |   |  |   |       | 
|Interest rate spread (FTE) (4)                        |  |   |         |  |  |  | 3.05 | % |  |   |       |  |  |   |         |  |  |  | 3.29 | % |  |   |       | 
|                                                      |  |   |         |  |  |  |      |   |  |   |       |  |  |   |         |  |  |  |      |   |  |   |       | 



|(1) | Average loans include non-accruing loans, net of allowance for loan losses, and loans held for sale.
|--- | ----------------------------------------------------------------------------------------------------

|(2) | Yields on tax-exempt investments have been adjusted to a fully taxable-equivalent basis (FTE) using the federal income tax rate of 34%. The taxable equivalent
adjustment was $198 thousand and $182 thousand for periods ended September 30, 2010 and 2009, respectively.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Net interest margin is computed by dividing net interest income by total earning assets.
|--- | ----------------------------------------------------------------------------------------

|(4) | Interest rate spread equals the earning asset yield minus the interest-bearing liability rate.
|--- | ----------------------------------------------------------------------------------------------

|(5) | Annualized
|--- | ----------

For the nine
months ended September 30, 2010 and 2009



|                                           |  |                        |         |  |                   |  |      |                |  |   |                |  |  |                   |         |  |                |  |      |   |  |   |        | 
|------------------------------------------ |  | ---------------------- | ------- |  | ----------------- |  | ---- | -------------- |  | - | -------------- |  |  | ----------------- | ------- |  | -------------- |  | ---- | - |  | - | ------ | 
|                                           |  | AverageBalance         |         |  | 2010Yield/Rate(5) |  |      | Income/Expense |  |   | AverageBalance |  |  | 2009Yield/Rate(5) |         |  | Income/Expense | 
|                                           |  | (Dollars in thousands) |        
|Assets                                     |  |                        |         |  |                   |  |      |                |  |   |                |  |  |                   |         |  |                |  |      |   |  |   |        | 
|Loans  net (1)                            |  | $                      | 566,824 |  |                   |  | 5.44 | %              |  | $ | 23,062         |  |  | $                 | 552,479 |  |                |  | 5.52 | % |  | $ | 22,820 | 
|Taxable securities                         |  |                        | 213,564 |  |                   |  | 3.48 | %              |  |   | 5,559          |  |  |                   | 210,383 |  |                |  | 4.47 | % |  |   | 7,026  | 
|Non-taxable securities (2)                 |  |                        | 44,461  |  |                   |  | 6.09 | %              |  |   | 2,026          |  |  |                   | 35,280  |  |                |  | 5.77 | % |  |   | 1,523  | 
|Other investments                          |  |                        | 14,129  |  |                   |  | 0.09 | %              |  |   | 9              |  |  |                   | 8,024   |  |                |  | 0.05 | % |  |   | 3      | 
|                                           |  |                        |         |  |                   |  |      |                |  |   |                |  |  |                   |         |  |                |  |      |   |  |   |        | 
|Total interest- earning assets             |  |                        | 838,978 |  |                   |  | 4.89 | %              |  | $ | 30,656         |  |  |                   | 806,166 |  |                |  | 5.20 | % |  | $ | 31,372 | 
|Cash and due from banks                    |  |                        | 11,395  |  |                   |  |      |                |  |   |                |  |  |                   | 10,538  |  |                |  |      |   |  |   |        | 
|Bank premises and equipment, net           |  |                        | 25,321  |  |                   |  |      |                |  |   |                |  |  |                   | 25,528  |  |                |  |      |   |  |   |        | 
|Other assets                               |  |                        | 27,032  |  |                   |  |      |                |  |   |                |  |  |                   | 23,808  |  |                |  |      |   |  |   |        | 
|                                           |  |                        |         |  |                   |  |      |                |  |   |                |  |  |                   |         |  |                |  |      |   |  |   |        | 
|Total assets                               |  | $                      | 902,726 |  |                   |  |      |                |  |   |                |  |  | $                 | 866,040 |  |                |  |      |   |  |   |        | 
|                                           |  |                        |         |  |                   |  |      |                |  |   |                |  |  |                   |         |  |                |  |      |   |  |   |        | 
|                                           |  |                        |         |  |                   | 
|Liabilities and Shareholders Equity       |  |                        |         |  |                   |  |      |                |  |   |                |  |  |                   |         |  |                |  |      |   |  |   |        | 
|Interest-bearing deposits                  |  | $                      | 677,946 |  |                   |  | 1.65 | %              |  | $ | 8,345          |  |  | $                 | 598,681 |  |                |  | 2.27 | % |  | $ | 10,153 | 
|Short-term borrowings                      |  |                        | 17,113  |  |                   |  | 1.43 | %              |  |   | 183            |  |  |                   | 61,370  |  |                |  | 0.94 | % |  |   | 433    | 
|Long-term obligations                      |  |                        | 19,384  |  |                   |  | 2.99 | %              |  |   | 434            |  |  |                   | 22,630  |  |                |  | 3.18 | % |  |   | 538    | 
|                                           |  |                        |         |  |                   |  |      |                |  |   |                |  |  |                   |         |  |                |  |      |   |  |   |        | 
|Total interest- bearing liabilities        |  |                        | 714,443 |  |                   |  | 1.68 | %              |  |   | 8,962          |  |  |                   | 682,681 |  |                |  | 2.18 | % |  |   | 11,124 | 
|Non-interest-bearing deposits              |  |                        | 101,202 |  |                   |  |      |                |  |   |                |  |  |                   | 88,959  |  |                |  |      |   |  |   |        | 
|Other liabilities                          |  |                        | 708     |  |                   |  |      |                |  |   |                |  |  |                   | 8,175   |  |                |  |      |   |  |   |        | 
|Shareholders equity                       |  |                        | 86, 373 |  |                   |  |      |                |  |   |                |  |  |                   | 86, 225 |  |                |  |      |   |  |   |        | 
|                                           |  |                        |         |  |                   |  |      |                |  |   |                |  |  |                   |         |  |                |  |      |   |  |   |        | 
|Total liabilities and Shareholders equity |  | $                      | 902,726 |  |                   |  |      |                |  |   |                |  |  | $                 | 866,040 |  |                |  |      |   |  |   |        | 
|                                           |  |                        |         |  |                   |  |      |                |  |   |                |  |  |                   |         |  |                |  |      |   |  |   |        | 



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|                                                      |  |  |  |  |      |   |  |   |        |  |  |  |  |  |  |  |      |   |  |   |        | 
|----------------------------------------------------- |  |  |  |  | ---- | - |  | - | ------ |  |  |  |  |  |  |  | ---- | - |  | - | ------ | 
|Net interest income and net interest margin (FTE) (3) |  |  |  |  | 3.46 | % |  | $ | 21,694 |  |  |  |  |  |  |  | 3.36 | % |  | $ | 20,248 | 
|                                                      |  |  |  |  |      |   |  |   |        |  |  |  |  |  |  |  |      |   |  |   |        | 
|Interest rate spread (FTE) (4)                        |  |  |  |  | 3.21 | % |  |   |        |  |  |  |  |  |  |  | 3.02 | % |  |   |        | 
|                                                      |  |  |  |  |      |   |  |   |        |  |  |  |  |  |  |  |      |   |  |   |        | 



|(1) | Average loans include non-accruing loans, net of allowance for loan losses, and loans held for sale.
|--- | ----------------------------------------------------------------------------------------------------

|(2) | Yields on tax-exempt investments have been adjusted to a fully taxable-equivalent basis (FTE) using the federal income tax rate of 34%. The taxable equivalent
adjustment was $689 thousand and $518 thousand for periods ended September 30, 2010 and 2009, respectively.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Net interest margin is computed by dividing net interest income by total earning assets.
|--- | ----------------------------------------------------------------------------------------

|(4) | Interest rate spread equals the earning asset yield minus the interest-bearing liability rate.
|--- | ----------------------------------------------------------------------------------------------

|(5) | Annualized
|--- | ----------

The following table
presents the relative impact on net interest income of average outstanding balances (volume) of earning assets and interest-bearing liabilities and the rates earned and paid by us on such assets and liabilities. Variances resulting from a
combination of changes in rate and volume are allocated in proportion to the absolute dollar amount of the change in each category.

Change in Interest Income and Expense on Tax Equivalent Basis

For the
three months ended September 30, 2010 and 2009

Increase (Decrease) in interest income and expense due to
changes in:



|                           |  |                        |     |   |          |   |      |     |  |   |      |  
|-------------------------- |  | ---------------------- | --- | - | -------- | - | ---- | --- |  | - | ---- | -
|                           |  | 2010 compared to 2009  |    
|                           |  | Volume (1)             |     |   | Rate (1) |   |      | Net | 
|                           |  | (Dollars in thousands) |    
|Loans                      |  | $                      | 8   |   |          | $ | (175 | )   |  | $ | (167 | )
|Taxable securities         |  |                        | 557 |   |          |   | (761 | )   |  |   | (204 | )
|Non-taxable securities (2) |  |                        | 17  |   |          |   | 30   |     |  |   | 47   |  
|Other investments          |  |                        |    |   |          |   | 2    |     |  |   | 2    |  
|                           |  |                        |     |   |          |   |      |     |  |   |      |  
|Interest income            |  |                        | 582 |   |          |   | (904 | )   |  |   | (322 | )
|                           |  |                        |    
|Interest-bearing deposits  |  |                        | 351 |   |          |   | (551 | )   |  |   | (200 | )
|Short-term borrowings      |  |                        | (86 | ) |          |   | 57   |     |  |   | (29  | )
|Long-term obligations      |  |                        | 21  |   |          |   | (31  | )   |  |   | (10  | )
|                           |  |                        |     |   |          |   |      |     |  |   |      |  
|Interest expense           |  |                        | 286 |   |          |   | (525 | )   |  |   | (239 | )
|                           |  |                        |     |   |          |   |      |     |  |   |      |  
|Net interest income        |  | $                      | 296 |   |          | $ | (379 | )   |  | $ | (83  | )
|                           |  |                        |     |   |          |   |      |     |  |   |      |  



|(1) | The combined rate/volume variance for each category has been allocated equally between rate and volume variances.
|--- | -----------------------------------------------------------------------------------------------------------------

|(2) | Yields on tax-exempt investments have been adjusted to a fully taxable-equivalent basis (FTE) using the federal income tax rate of 34%. The taxable equivalent
adjustment was $198 thousand and $182 thousand for periods ended September 30, 2010 and 2009, respectively.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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For the nine months
ended September 30, 2010 and 2009

Increase (Decrease) in interest income and expense due to changes in:



|                           |  |                        |       |   |          |   |        |     |  |   |        |  
|-------------------------- |  | ---------------------- | ----- | - | -------- | - | ------ | --- |  | - | ------ | -
|                           |  | 2010 compared to 2009  |      
|                           |  | Volume (1)             |       |   | Rate (1) |   |        | Net | 
|                           |  | (Dollars in thousands) |      
|Loans                      |  | $                      | 588   |   |          | $ | (346   | )   |  | $ | 242    |  
|Taxable securities         |  |                        | 95    |   |          |   | (1,562 | )   |  |   | (1,467 | )
|Non-taxable securities (2) |  |                        | 407   |   |          |   | 96     |     |  |   | 503    |  
|Other investments          |  |                        | 3     |   |          |   | 3      |     |  |   | 6      |  
|                           |  |                        |       |   |          |   |        |     |  |   |        |  
|Interest income            |  |                        | 1,093 |   |          |   | (1,809 | )   |  |   | (716   | )
|                           |  |                        |      
|Interest-bearing deposits  |  |                        | 1,160 |   |          |   | (2,968 | )   |  |   | (1,808 | )
|Short-term borrowings      |  |                        | (393  | ) |          |   | 143    |     |  |   | (250   | )
|Long-term obligations      |  |                        | (75   | ) |          |   | (28    | )   |  |   | (103   | )
|                           |  |                        |       |   |          |   |        |     |  |   |        |  
|Interest expense           |  |                        | 692   |   |          |   | (2,853 | )   |  |   | (2,161 | )
|                           |  |                        |       |   |          |   |        |     |  |   |        |  
|Net interest income        |  | $                      | 401   |   |          | $ | 1,044  |     |  | $ | 1,445  |  
|                           |  |                        |       |   |          |   |        |     |  |   |        |  



|(1) | The combined rate/volume variance for each category has been allocated equally between rate and volume variances.
|--- | -----------------------------------------------------------------------------------------------------------------

|(2) | Yields on tax-exempt investments have been adjusted to a fully taxable-equivalent basis (FTE) using the federal income tax rate of 34%. The taxable equivalent
adjustment was $689 thousand and $518 thousand for periods ended September 30, 2010 and 2009, respectively.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Provision
for Loan Losses

The provision for loan losses charged to operations during the three and nine months ended
September 30, 2010 was $3.9 million and $8.6 million, respectively. The provision for loan losses charged to operations during the three and nine months ended September 30, 2009 was $2.7 million and $5.4 million, respectively. The increase
reflects higher historical loss rates, additional impaired loans and managements response to the current economic environment. The Bank had net charge-offs of $1.1 million for the quarter ended September 30, 2010 compared to net
charge-offs of $663 thousand during the third quarter of 2009. For the nine-month periods ended September 30, 2010 and 2009, the Bank had net charge-offs of $5.2 million and $3.6 million, respectively.

We use the results of our allowance for loan loss model to estimate the dollar amount of provision expense needed to maintain the
adequacy of our allowance for loan losses. Our management analyzes the adequacy of the allowance on a monthly basis and adjustments to the provision expense are made as necessary. Additional information regarding our allowance for loan losses is
contained in this discussion under the caption Asset Quality.

Noninterest Income

Noninterest income, principally charges and fees assessed for the use of our services, is a significant contributor to net income. The
following table presents the components of noninterest income for the three- and nine-month periods ended September 30, 2010 and 2009.



|                                      |  |                                            |       |  |                            |   |       |                                           |        |  |                            |   |  |   |       |  |  |   |       |   |  |  |       |  
|------------------------------------- |  | ------------------------------------------ | ----- |  | -------------------------- | - | ----- | ----------------------------------------- | ------ |  | -------------------------- | - |  | - | ----- |  |  | - | ----- | - |  |  | ----- | -
|                                      |  | For the ThreeMonths EndedSeptember 30,2010 |       |  | Changes from thePrior
Year |   |       | For the
NineMonths EndedSeptember 30,2010 |        |  | Changes from thePrior
Year |  
|                                      |  | Amount                                     |       |  | %                          |   |       |                                           | Amount |  |                            | % | 
|                                      |  | (Dollars in thousands)                     |      
|                                      |  |                                            |       |  |                            |  
|Service charges on deposit accounts   |  | $                                          | 842   |  |                            | $ | (90   | )                                         |        |  | (9.7                       | ) |  | $ | 2,558 |  |  | $ | (166  | ) |  |  | (6.1  | )
|Other service charges and fees        |  |                                            | 470   |  |                            |   | 140   |                                           |        |  | 42.4                       |   |  |   | 1,168 |  |  |   | 221   |   |  |  | 23.3  |  
|Mortgage origination brokerage fees   |  |                                            | 351   |  |                            |   | 198   |                                           |        |  | 129.4                      |   |  |   | 856   |  |  |   | 176   |   |  |  | 25.9  |  
|Net gain on sale of securities        |  |                                            | 2,030 |  |                            |   | 1,586 |                                           |        |  | 357.2                      |   |  |   | 3,471 |  |  |   | 2,439 |   |  |  | 236.3 |  
|Income from bank owned life insurance |  |                                            | 75    |  |                            |   | (7    | )                                         |        |  | (8.5                       | ) |  |   | 223   |  |  |   | (23   | ) |  |  | (9.3  | )
|Other operating income                |  |                                            | 32    |  |                            |   | 47    |                                           |        |  | (313.3                     | ) |  |   | 58    |  |  |   | 62    |   |  |  | NM    |  
|                                      |  |                                            |       |  |                            |   |       |                                           |        |  |                            |   |  |   |       |  |  |   |       |   |  |  |       |  



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|                         |  |   |       |  |  |   |       |  |  |  |      |  |  |   |       |  |  |   |       |  |  |  |      | 
|------------------------ |  | - | ----- |  |  | - | ----- |  |  |  | ---- |  |  | - | ----- |  |  | - | ----- |  |  |  | ---- | 
|Total noninterest income |  | $ | 3,800 |  |  | $ | 1,874 |  |  |  | 97.3 |  |  | $ | 8,334 |  |  | $ | 2,709 |  |  |  | 48.2 | 
|                         |  |   |       |  |  |   |       |  |  |  |      |  |  |   |       |  |  |   |       |  |  |  |      | 

Noninterest income increased $1.9 million or 97.3% to $3.8 million for the third quarter of this year
compared to $1.9 million for the same period in 2009. For the nine months ended September 30, 2010 noninterest income increased $2.7 million or 48.2% to $8.3 million compared to $5.6 million for the same period in 2009. The increase in
noninterest income in the third quarter of 2010 is primarily due to an increase in gains on the sale of securities. The year to date increase in noninterest income is also the result of gains on the sale of securities of $3.5 million in the first
nine months of 2010 compared to $1.0 million in the nine-month period ended September 30, 2009. Service charges on deposit accounts decreased $90 thousand and $166 thousand, respectively, for the three and nine months ended September 30,
2010 as compared to the same periods in 2009 mainly due to a decrease in overdraft protection fees. Other service charges and fees increased $140 thousand and $221 thousand, respectively for the three and nine months ended September 30, 2010 as
compared to the same periods in 2009. The primary reason for the increase is that brokerage investment service fees were up during both periods. Mortgage loan origination brokerage fees increased $198 thousand compared to the previous year
three-month period and $176 thousand for the nine months ended September 30, 2010 as compared to the same period in 2009. Other operating income increased $47 thousand for the three-month period ended September 30, 2010 as compared to the
same period in 2009 mainly due to an increase of $36 thousand in SBIC income. Other operating income increased $62 thousand for the nine-month period ending September 30, 2010 due to a gain on mortgage loan commitments.

Noninterest Expense

Noninterest expense increased 4.0% and 8.8%, respectively for the three and nine months ended September 30, 2010, as compared to the
same periods in 2009. The following table presents the components of noninterest expense for the three and nine months ended September 30, 2010 and dollar and percentage changes from the prior year.



|                                                                          |  |                                           |        |  |                            |   |      |                                          |  |        |                            |   |   |   |        |  |  |   |       |   |  |  |       |  
|------------------------------------------------------------------------- |  | ----------------------------------------- | ------ |  | -------------------------- | - | ---- | ---------------------------------------- |  | ------ | -------------------------- | - | - | - | ------ |  |  | - | ----- | - |  |  | ----- | -
|                                                                          |  | For theThree
MonthsEndedSeptember 30,2010 |        |  | Changes from thePrior
Year |   |      | For theNine
MonthsEndedSeptember 30,2010 |  |        | Changes from thePrior
Year |  
|                                                                          |  |                                           | Amount |  |                            | % |      |                                          |  | Amount |                            |   | % |  
|                                                                          |  | (Dollars in thousands)                    |       
|Salaries                                                                  |  | $                                         | 2,548  |  |                            | $ | 487  |                                          |  |        | 23.6                       |   |   | $ | 7,193  |  |  | $ | 1,058 |   |  |  | 17.2  |  
|Retirement and other employee benefits                                    |  |                                           | 740    |  |                            |   | 324  |                                          |  |        | 77.9                       |   |   |   | 2,182  |  |  |   | 313   |   |  |  | 16.7  |  
|Occupancy                                                                 |  |                                           | 480    |  |                            |   | 6    |                                          |  |        | 1.3                        |   |   |   | 1,384  |  |  |   | (19   | ) |  |  | (1.4  | )
|Equipment                                                                 |  |                                           | 589    |  |                            |   | 124  |                                          |  |        | 26.7                       |   |   |   | 1,542  |  |  |   | 258   |   |  |  | 20.1  |  
|Professional fees                                                         |  |                                           | 187    |  |                            |   | 64   |                                          |  |        | 52.0                       |   |   |   | 686    |  |  |   | 164   |   |  |  | 31.4  |  
|Supplies                                                                  |  |                                           | 45     |  |                            |   | (8   | )                                        |  |        | (15.1                      | ) |   |   | 165    |  |  |   | 1     |   |  |  | 0.6   |  
|Telephone                                                                 |  |                                           | 147    |  |                            |   | (21  | )                                        |  |        | (12.5                      | ) |   |   | 487    |  |  |   | 29    |   |  |  | 6.3   |  
|FDIC deposit insurance                                                    |  |                                           | 355    |  |                            |   | 49   |                                          |  |        | 16.0                       |   |   |   | 1,033  |  |  |   | (183  | ) |  |  | (15.0 | )
|Other outside Services                                                    |  |                                           | 123    |  |                            |   | 25   |                                          |  |        | 25.5                       |   |   |   | 351    |  |  |   | 13    |   |  |  | 3.8   |  
|Net cost of real estate and repossessions acquired in settlement of loans |  |                                           | 112    |  |                            |   | (969 | )                                        |  |        | (89.6                      | ) |   |   | 493    |  |  |   | (694  | ) |  |  | (58.5 | )
|Other operating expenses                                                  |  |                                           | 1,053  |  |                            |   | 163  |                                          |  |        | 18.3                       |   |   |   | 3,017  |  |  |   | 558   |   |  |  | 22.7  |  
|                                                                          |  |                                           |        |  |                            |   |      |                                          |  |        |                            |   |   |   |        |  |  |   |       |   |  |  |       |  
|                                                                          |  |                                           |        |  |                            |  
|Total noninterest expenses                                                |  | $                                         | 6,379  |  |                            | $ | 244  |                                          |  |        | 4.0                        |   |   | $ | 18,533 |  |  | $ | 1,498 |   |  |  | 8.8   |  
|                                                                          |  |                                           |        |  |                            |   |      |                                          |  |        |                            |   |   |   |        |  |  |   |       |   |  |  |       |  

Salary expense for the three and nine months ended September 30, 2010 increased $487 thousand and $1.1
million, respectively, compared to the same prior year periods. The increase is primarily the result of additions made to senior management and other management positions during the past twelve months.



29



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Employee related
benefits expense for the three and nine months ended September 30, 2010 increased $324 thousand and $313 thousand, respectively, over the same prior year periods. The increase for the three months ended September 30, 2010 is primarily the
result of $200 thousand in employee incentive that was reversed out of the prior years third quarter because certain goals set by the board under the Companys incentive plan were not expected to be met. For the nine months ending
September 30, 2010 the increase is mainly the result of increased supplemental retirement benefit expense. As of September 30, 2010, we had 236 full time equivalent employees and operated 24 full service banking offices and one mortgage
loan origination office.

Equipment expense for the three and nine months ended September 30, 2010 increased $124
thousand and $258 thousand, respectively, compared to the same prior year periods. The three and nine month increase is primarily the result of an increase in equipment maintenance expense.

Professional fees, which include consulting, audit and legal fees, increased $64 thousand for the three months ended September 30,
2010 compared to the same period of 2009 and increased $164 thousand when compared on a year to date basis to the prior year period. Consulting expense during the third quarter increased $26 thousand and, on a year to date basis, consulting expense
increased $37 thousand in 2010 when compared to the same periods in 2009. Audit expense during the third quarter decreased $13 thousand and, on a year to date basis, audit expense decreased $28 thousand in 2010 when compared to the same periods in
2009. Legal expense during the third quarter increased $51 thousand and, on a year to date basis, legal expense increased $131 thousand in 2010 when compared to the same period in 2009.

FDIC deposit insurance expenses increased $49 thousand for the three months ended September 30, 2010 compared to the three months
ended September 30, 2009. For the nine-month period ended September 30, 2010, FDIC deposit insurance expense decreased $183 thousand over the nine-month period ended September 30, 2009. The decrease for the nine-month period is
related to the special assessment that was levied on all banks by the FDIC in 2009.

Income Taxes

Income tax benefit for the three months ended September 30, 2010 was $5 thousand compared to an income tax benefit of $154 thousand
for the three months ended September 30, 2009, resulting in effective tax rates of (0.9)% and (80.2)%, respectively. The effective tax rates for the quarters ended September 30, 2010 and September 30, 2009 were negative principally
due to a larger percentage of tax exempt income to taxable income during the periods. For the nine-month period ending September 30, 2010, tax expense was $179 thousand compared to $496 thousand for the same period of 2009, which resulted in
effective tax rates of 8.3% and 17.1%, respectively. The effective tax rates in both years differ from the federal statutory rate of 34.0% primarily due to tax-exempt interest income.

Balance Sheet

Our total assets were $932.2 million at September 30, 2010, $888.7 million at December 31, 2009 and $858.7 million at September 30, 2009. Deposit growth primarily funded our year-over-year
asset growth. For the twelve months ended September 30, 2010, we grew our loans $1.2 million or 0.2% while our deposits grew by approximately $94.0 million or 13.5%. Year-over-year, our earning assets grew by $77.5 million mainly through
additions to our available-for-sale investment securities portfolio. For the nine months ended September 30, 2010, loans decreased by $2.8 million while deposits increased by $35.9 million.

Loans

As of
September 30, 2010, total loans decreased to $575.0 million, down 0.5% from total loans of $577.8 million at December 31, 2009 and up 0.2% from total loans of $573.8 million at September 30, 2009. The decline in loans for the nine
months ending September 30, 2010 can be attributed to continued weak economic conditions.

Asset Quality

At September 30, 2010, our allowance for loan losses as a percentage of loans was 2.29%, up from 1.68% at December 31, 2009. The
increase from December 31, 2009 in part reflects the increase in our historical loss rate as



30



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##### Table of Contents

our charge-offs have increased during the past year. Also, the increase reflects the recognition of additional loans identified as being impaired. In evaluating the allowance for loan losses, we
prepare an analysis of our current loan portfolio in total through the use of historical loss rates, homogeneous risk analysis grouping to include probabilities for loss in each group by risk grade, estimation of years to impairment in each
homogeneous grouping, analysis of internal credit processes, past due loan portfolio performance and overall economic conditions, both regionally and nationally.

Historical loss calculations for each homogeneous risk group are based on a three year average loss ratio calculation with the most recent quarters loss history included in the model. The impact is
to more quickly recognize and increase the loss history in a respective grouping. For those groups with little or no loss history, management increases the historical factor through a positive adjustment to more accurately represent current economic
conditions and their potential impact on that particular loan group.

Homogeneous loan groups are assigned risk factors based
on their perceived loss potential, current economic conditions and on their respective risk ratings. The probability of loss is increased as the risk grade increases within each risk grouping to more accurately reflect the Banks exposure in
that particular group of loans. The Bank utilizes a system of eight possible risk ratings. The risk ratings are established based on perceived probability of loss. All loans risk rated substandard, doubtful and
loss are removed from their homogeneous group and individually analyzed for impairment. Other groups of loans based on loan size may be selected for impairment review. Loans are considered impaired if, based on current information and
events, it is probable that the Bank will be unable to collect the scheduled payments of principal and interest when due according to the contractual terms of the loan agreement. The measurement of impaired loans is based on either the fair value of
the underlying collateral, the present value of the future cash flows discounted at the historical effective interest rate stipulated in the loan agreement, or the estimated market value of the loan. In measuring the fair value of the collateral,
management uses a comparison to the recent selling price of similar assets, which is consistent with those that would be utilized by unrelated third parties.

A portion of the Banks allowance for loan losses is not allocated to any specific category of loans. This general portion of the allowance reflects the elements of imprecision and estimation risk
inherent in the calculation of the overall allowance. Due to the subjectivity involved in determining the overall allowance, including the unallocated portion, the portion of the allowance considered unallocated may fluctuate from period to period
based on managements evaluation of the factors affecting the assumptions used in calculating the allowance, including historical loss experience, current and expected economic conditions and geographic conditions. The Bank has identified an
acceptable range for this unallocated portion to be 5% to 15% of the total reserve. While we believe that our management uses the best information available to determine the allowance for loan losses, unforeseen market conditions could result in
adjustments to the allowance for loan losses, and net income could be significantly affected, if circumstances differ substantially from the assumptions used in making the final determination. Because these factors and managements assumptions
are subject to change, the allocation is not necessarily indicative of future loan portfolio performance.

Unsecured loans are
charged-off against the Banks allowance for loan losses as soon as the loan becomes uncollectible. Unsecured loans are considered uncollectible when no regularly scheduled monthly payment has been made within three months, the loan matured
over 90 days ago and has not been renewed or extended or the borrower files for bankruptcy. Secured loans are considered uncollectible when the liquidation of collateral is deemed to be the most likely source of repayment. Once secured loans reach
90 days past due, they are placed into non-accrual status. If the loan is deemed to be collateral dependent, the principal balance is written down immediately to reflect the current market valuation based on current independent appraisal. Included
in the write-down is the estimated expense to liquidate the property and typically an additional allowance for the foreclosure discount. Generally, if the loan is unsecured the loan must be charged-off in full while if it is secured the loan is
charged down to the net liquidation value of the collateral.

Net charge-offs for the first nine months of 2010 totaled $5.2
million compared to net charge-offs of $3.6 million during the first nine months of 2009. The provision for loan losses charged to operations for the nine months ended September 30, 2010 and 2009 was $8.6 million and $5.4 million, respectively.
The following table presents an analysis of the changes in the allowance for loan losses for the nine months ended September 30, 2010 and 2009.



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Analysis of Changes
in Allowance for Loan Losses



|                                                               |  |                                        |         |   |      |   |         |  
|-------------------------------------------------------------- |  | -------------------------------------- | ------- | - | ---- | - | ------- | -
|                                                               |  | For the nine monthsEnded September 30, |        
|                                                               |  | 2010                                   |         |   | 2009 |  
|                                                               |  | (Dollars in thousands)                 |        
|Total loans outstanding at end of period-gross                 |  | $                                      | 575,003 |   |      | $ | 573,837 |  
|                                                               |  |                                        |         |   |      |   |         |  
|Average loans outstanding-gross                                |  | $                                      | 576,497 |   |      | $ | 557,984 |  
|                                                               |  |                                        |         |   |      |   |         |  
|Allowance for loan losses at beginning of period               |  | $                                      | 9,725   |   |      | $ | 5,931   |  
|Loans charged off:                                             |  |                                        |         |   |      |   |         |  
|Real estate                                                    |  |                                        | (4,230  | ) |      |   | (3,395  | )
|Installment loans                                              |  |                                        | (37     | ) |      |   | (13     | )
|Demand Deposit overdraft program                               |  |                                        | (165    | ) |      |   | (153    | )
|Commercial and all other loans                                 |  |                                        | (992    | ) |      |   | (158    | )
|                                                               |  |                                        |         |   |      |   |         |  
|Total charge-offs                                              |  |                                        | (5,424  | ) |      |   | (3,719  | )
|                                                               |  |                                        |         |   |      |   |         |  
|Recoveries of loans previously charged off:                    |  |                                        |         |   |      |   |         |  
|Real estate                                                    |  |                                        | 120     |   |      |   |        |  
|Installment loans                                              |  |                                        | 6       |   |      |   | 5       |  
|Credit cards and related plans                                 |  |                                        | 1       |   |      |   |        |  
|Demand Deposit overdraft program                               |  |                                        | 97      |   |      |   | 90      |  
|Commercial and all other loans                                 |  |                                        | 19      |   |      |   | 68      |  
|                                                               |  |                                        |         |   |      |   |         |  
|Total recoveries                                               |  |                                        | 243     |   |      |   | 163     |  
|                                                               |  |                                        |         |   |      |   |         |  
|Net charge-offs                                                |  |                                        | (5,181  | ) |      |   | (3,556  | )
|                                                               |  |                                        |         |   |      |   |         |  
|Provision for loan losses                                      |  |                                        | 8,643   |   |      |   | 5,425   |  
|                                                               |  |                                        |         |   |      |   |         |  
|Allowance for loan losses at end of period                     |  | $                                      | 13,187  |   |      | $ | 7,800   |  
|                                                               |  |                                        |         |   |      |   |         |  
|Ratios                                                         |  |                                        |         |   |      |   |         |  
|Annualized net charge-offs to average loans during the period  |  |                                        | 1.20    | % |      |   | 0.85    | %
|Allowance for loan losses to loans at period end               |  |                                        | 2.29    | % |      |   | 1.36    | %
|Allowance for loan losses to nonperforming loans at period end |  |                                        | 63.9    | % |      |   | 62.4    | %
|Allowance for loan losses to impaired loans at period end      |  |                                        | 37.9    | % |      |   | 34.5    | %

The ratio of annualized
net charge-offs to average loans increased to 1.20% at September 30, 2010 from 0.85% at September 30, 2009 mainly due to an increase in real estate and commercial related charge-offs. Declining economic conditions, particularly in our
southern coastal markets, resulted in an increased number of impaired collateral dependant loans which resulted in a portion of these loans being charged-off. The increase in the allowance for loan losses to loans to 2.29% at September 30, 2010
from 1.36% at September 30, 2009 reflects the increase in our historical loss rate as our charge-offs have increased during the past year. Also, the increase reflects the recognition of additional loans identified as being impaired. The ratio
of our allowance for loan losses to nonperforming loans increased slightly to 63.9% as of September 30, 2010 compared to 62.4% at September 30, 2009.

Construction, land and development (CLD) loans make up 17.1% of the Banks loan portfolio. This sector of the economy has been particularly impacted by declines in housing activity, and
has had a disproportionate impact on the credit quality of the Company. The table below shows trends of CLD loans, along with ratios relating to their relative credit quality.



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|                               |  |                        |        |   |                 |  |      |            |  |   |            |   |  |  |      |   |  |   |         |  
|------------------------------ |  | ---------------------- | ------ | - | --------------- |  | ---- | ---------- |  | - | ---------- | - |  |  | ---- | - |  | - | ------- | -
|                               |  | CLD Loans              |        |   | All Other Loans |  |      | TotalLoans | 
|                               |  | Balance                |        |   | % of Total      |  |      | Balance    |  |   | % of Total |   | 
|                               |  | (Dollars in thousands) |       
|Balances at September 30, 2010 |  | $                      | 98,608 |   |                 |  | 17.1 | %          |  | $ | 476,395    |   |  |  | 82.9 | % |  | $ | 575,003 |  
|                               |  |                        |        |   |                
|Impaired loans(1)              |  |                        | 18,187 |   |                 |  | 52.2 | %          |  |   | 16,639     |   |  |  | 47.8 | % |  |   | 34,826  |  
|Allocated Reserves             |  |                        | 7,379  |   |                 |  | 60.7 | %          |  |   | 4,782      |   |  |  | 39.3 | % |  |   | 12,161  |  
|YTD Net Charge-offs            |  |                        | 2,330  |   |                 |  | 45.0 | %          |  |   | 2,851      |   |  |  | 55.0 | % |  |   | 5,181   |  
|Nonperforming loans (NPL)      |  |                        | 12,805 |   |                 |  | 62.0 | %          |  |   | 7,842      |   |  |  | 38.0 | % |  |   | 20,647  |  
|NPL as % of loans              |  |                        | 13.0   | % |                 |  |      |            |  |   | 1.6        | % |  |  |      |   |  |   | 3.6     | %

|(1) | Impaired loans include nonperforming loans.
|--- | -------------------------------------------

While balances of CLD loans make up 17.1% of the Banks loan portfolio, they represent 52.2% and 45.0% of the Banks impaired loans and YTD net charge-offs, respectively. CLD loans represent
62.0% of the Banks nonperforming loans and 60.7% of the Banks allowance for loan loss is allocated to CLD loans.

Nonperforming
Assets

Nonperforming assets consist of loans not accruing interest, restructured debt and real estate acquired in
settlement of loans and other repossessed collateral. It is our policy to place loans on nonaccrual status when any portion of principal or interest becomes 90 days past due, or earlier if full collection of principal and interest becomes doubtful.
When loans are placed on nonaccrual status, interest receivable is reversed against interest income in the current period. Interest payments received thereafter are applied as a reduction to the remaining principal balance so long as doubt exists as
to the ultimate collection of the principal. Loans are removed from nonaccrual status when they become current as to both principal and interest and when the collectability of principal or interest is no longer doubtful. Nonperforming assets were
$25.9 million and $20.1 million, or 2.78% and 2.26% of total assets at September 30, 2010 and December 31, 2009, respectively. On September 30, 2010, our nonperforming loans (consisting of nonaccruing and restructured loans) amounted
to approximately $20.6 million compared to $14.7 million as of December 31, 2009. We had $5.3 million in other real estate owned and repossessions at September 30, 2010 compared to $5.4 million at December 31, 2009.

Loans Considered Impaired

We review our nonperforming loans and other groups of loans based on loan size or other factors for impairment. At September 30,
2010, we had loans totaling $34.8 million (which includes $20.6 million in nonperforming loans) which were considered to be impaired compared to $23.9 million at December 31, 2009. As discussed in Asset Quality, loans are considered impaired
if, based on current information, circumstances or events, it is probable that the Bank will not collect the scheduled payments of principal and interest when due according to the contractual terms of the loan agreement. However, treating a loan as
impaired does not necessarily mean that we expect to incur a loss on that loan, and our impaired loans include loans that currently are performing in accordance with their terms. For example, if we believe it is probable that a loan will be
collected, but not according to its original agreed upon payment schedule, we may treat that loan as impaired even though we expect that the loan will be repaid or collected in full. As indicated in the table below, when we believe a loss is
probable on a non-collateral dependent impaired loan, a portion of our reserve is allocated to that probable loss. If the loan is deemed to be collateral dependent, the principal balance is written down immediately to reflect the current market
valuation based on current independent appraisal.

The following table sets forth the number and volume of loans considered
impaired and their associated reserve allocation, if any, at September 30, 2010.



|                                             |  |                       |    |  |                         |   |      |                   |  |   |     | 
|-------------------------------------------- |  | --------------------- | -- |  | ----------------------- | - | ---- | ----------------- |  | - | --- | 
|                                             |  | Numberof Loans        |    |  | LoanBalancesOutstanding |   |      | AllocatedReserves | 
|                                             |  | (Dollars in millions) |   
|Non-accrual loans                            |  |                       | 55 |  |                         | $ | 16.5 |                   |  | $ | 1.9 | 
|Restructured loans                           |  |                       | 5  |  |                         |   | 4.1  |                   |  |   | 1.1 | 
|                                             |  |                       |    |  |                         |   |      |                   |  |   |     | 
|Total nonperforming loans                    |  |                       | 60 |  |                         | $ | 20.6 |                   |  | $ | 3.0 | 
|                                             |  |                       |    |  |                         |   |      |                   |  |   |     | 
|Other impaired loans with allocated reserves |  |                       | 19 |  |                         |   | 5.3  |                   |  |   | 2.2 | 



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|                                          |  |  |    |  |  |   |      |  |  |   |     | 
|----------------------------------------- |  |  | -- |  |  | - | ---- |  |  | - | --- | 
|Impaired loans without allocated reserves |  |  | 19 |  |  |   | 8.9  |  |  |   |    | 
|                                          |  |  |    |  |  |   |      |  |  |   |     | 
|Total impaired loans                      |  |  | 98 |  |  | $ | 34.8 |  |  | $ | 5.2 | 
|                                          |  |  |    |  |  |   |      |  |  |   |     | 

Investment Securities and Other Assets

The composition of our securities portfolio reflects our investment strategy of maintaining an appropriate level of liquidity while providing a relatively stable source of income. Our securities portfolio
also provides a balance to interest rate risk and credit risk in other categories of the balance sheet while providing a vehicle for investing available funds, furnishing liquidity and supplying securities to pledge as required collateral for
certain deposits and borrowed funds. We use two categories to classify our securities: held-to-maturity and available-for-sale. Currently, none of our investments are classified as held-to-maturity.

Our investment securities totaled $263.9 million at September 30, 2010, $239.3 million at December 31, 2009 and $218.6 million
at September 30, 2009. Additions to the investment securities portfolio depend to a large extent on the availability of investable funds that are not otherwise needed to satisfy loan demand. Investable funds not otherwise utilized are
temporarily invested as federal funds sold or as interest-bearing balances at other banks, the level of which is affected by such considerations as near-term loan demand and liquidity needs.

At September 30, 2010, the securities portfolio had unrealized net gains of approximately $5.8 million, which are reported in
accumulated other comprehensive income on the consolidated statement of shareholders equity, net of tax. Our securities portfolio at September 30, 2010 consisted of U.S. government sponsored agency securities, collateralized mortgage
obligations (CMOs), mortgage-backed securities (MBS), corporate bonds, and tax-exempt municipal securities.

We currently have
the ability to hold our available-for-sale investment securities to maturity. However, should conditions change, we may sell unpledged securities. We consider the overall quality of the securities portfolio to be high. As of September 30, 2010,
we owned securities from issuers in which the aggregate amortized cost from such issuers exceeded 10% of our common shareholders equity. As of September 30, 2010 the amortized cost and market value of the securities from such issuers were
as follows:



|                                         |  |                        |        |  |              |   |        | 
|---------------------------------------- |  | ---------------------- | ------ |  | ------------ | - | ------ | 
|                                         |  | Amortized Cost         |        |  | Market Value |  
|                                         |  | (Dollars in thousands) |       
|Federal National Mortgage Corporation    |  | $                      | 87,950 |  |              | $ | 89,252 | 
|Federal Home Loan Mortgage Corporation   |  |                        | 34,229 |  |              |   | 34,925 | 
|Federal Home Loan Banks                  |  |                        | 12,429 |  |              |   | 13,208 | 
|Government National Mortgage Association |  |                        | 35,530 |  |              |   | 36,165 | 
|Small Business Administration            |  |                        | 46,324 |  |              |   | 47,163 | 

At September 30,
2010, we held $8.9 million in bank owned life insurance, compared to $8.7 million at December 31, 2009 and $8.6 million at September 30, 2009.

Deposits and Other Borrowings

Deposits

Deposits totaled $790.6 million as of September 30, 2010 compared to deposits of $754.7 million at December 31, 2009 and $696.6
million at September 30, 2009, which reflects a year-over-year increase of 13.5%. We attribute our deposit growth during the nine months and twelve months ended September 30, 2010 mainly to an increase in public funds in money market
accounts and an increase in noninterest bearing demand accounts. We believe that we can improve our core deposit funding by improving our branching network and providing more convenient opportunities for customers to bank with us.

Other Borrowings



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Short-term
borrowings include sweep accounts, advances from the Federal Home Loan Bank of Atlanta (the FHLB) having maturities of one year or less, Federal Funds purchased and repurchase agreements. Our short-term borrowings totaled $13.5
million at September 30, 2010, compared to $22.9 million on December 31, 2009 and $47.0 million at September 30, 2009, a year-over-year decrease of $33.5 million.

The following table details the maturities and rates of our borrowings from the Federal Home Loan Bank of Atlanta (FHLB), as
of September 30, 2010.



|                       |  |                   |  |           |        |  |      |                 |      |  |      |          |  |                  
|---------------------- |  | ----------------- |  | --------- | ------ |  | ---- | --------------- | ---- |  | ---- | -------- |  | -----------------
|Borrow Date            |  | Type              |  | Principal |        |  | Term |                 | Rate |  |      | Maturity
|(Dollars in thousands)
|February 29, 2008      |  | Fixed rate        |  |           | 5,000  |  |      | 4 years         |      |  | 3.18 |          |  | February 29, 2012
|March 12, 2008         |  | Fixed rate        |  |           | 6,500  |  |      | 3 years         |      |  | 2.89 |          |  | March 14, 2011   
|March 12, 2008         |  | Fixed rate        |  |           | 2,000  |  |      | 4 years         |      |  | 3.25 |          |  | March 12, 2012   
|March 12, 2008         |  | Fixed rate        |  |           | 7,500  |  |      | 5 years         |      |  | 3.54 |          |  | March 12, 2013   
|August 17, 2010        |  | Fixed rate        |  |           | 3,000  |  |      | 4 years         |      |  | 1.49 |          |  | August 18, 2014  
|August 17, 2010        |  | Fixed rate        |  |           | 4,500  |  |      | 5 years         |      |  | 1.85 |          |  | August 17, 2015  
|August 17, 2010        |  | Fixed rate        |  |           | 2,500  |  |      | 6 years         |      |  | 2.21 |          |  | August 17, 2016  
|August 20, 2010        |  | Fixed rate        |  |           | 2,000  |  |      | 3 years         |      |  | 1.09 |          |  | August 20, 2013  
|August 20, 2010        |  | Fixed rate        |  |           | 3,000  |  |      | 4 years         |      |  | 1.48 |          |  | August 20, 2014  
|August 20, 2010        |  | Fixed rate        |  |           | 3,000  |  |      | 5 years         |      |  | 1.83 |          |  | August 20, 2015  
|August 31, 2010        |  | Fixed rate        |  |           | 1,500  |  |      | 1 years         |      |  | 0.36 |          |  | August 31, 2011  
|September 1, 2010      |  | Fixed rate        |  |           | 2,000  |  |      | 2 years         |      |  | 0.66 |          |  | September 4, 2012
|                       |  |                   |  |           |       
|                       |  | Total Borrowings: |  | $         | 42,500 |  |      | Composite rate: |      |  | 2.35 | %        |  |                  

Long-Term Obligations

Long-term obligations consist of advances from FHLB with maturities greater than one year. Our long-term borrowing from the FHLB totaled $34.5 million on September 30, 2010, compared to $21.0
million of FHLB advances on both December 31, 2009 and September 30, 2009. The increase of $13.5 million in long-term FHLB advances as of September 30, 2010, is the result of using long-term FHLB advances for funding of an earning
growth strategy that was completed in the third quarter of 2010.

Liquidity

Liquidity refers to our continuing ability to meet deposit withdrawals, fund loan and capital expenditure commitments, maintain reserve
requirements, pay operating expenses and provide funds for payment of dividends, debt service and other operational requirements. Liquidity is immediately available from five major sources: (a) cash on hand and on deposit at other banks;
(b) the outstanding balance of federal funds sold; (c) lines for the purchase of federal funds from other banks; (d) lines of credit established at the FHLB, less existing advances; and (e) our investment securities portfolio.
All our debt securities are of investment grade quality and, if the need arises, can be promptly liquidated on the open market or pledged as collateral for short-term borrowing.

Consistent with our general approach to liquidity management, loans and other assets of the Bank are funded primarily using a core of
local deposits, retail repurchase agreements and the Banks capital position. To date, these core funds, supplemented by FHLB advances and a modest amount of brokered deposits, have been adequate to fund loan demand in our market areas, while
maintaining the desired level of immediate liquidity and an investment securities portfolio available for both immediate and secondary liquidity purposes. It is anticipated that funding sources in the future will include continued use of brokered
deposits and, additionally, institutional deposits obtained through the Internet.

We are a member of the FHLB. Membership,
along with a blanket collateral commitment of our one-to-four family residential mortgage loan portfolio, as well as our commercial real estate loan portfolio, provided us the ability to draw up to $186.4 million, $177.7 million and $171.9 million
of advances from the FHLB at September 30,



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2010, December 31, 2009 and September 30, 2009, respectively. At September 30, 2010, we had outstanding FHLB advances totaling $42.5 million compared to $41.0 million and
$56.0 million at December 31, 2009 and September 30, 2009, respectively.

As a requirement for membership, we invest
in stock of the FHLB in the amount of 1% of our outstanding residential loans or 5% of our outstanding advances from the FHLB, whichever is greater. That stock is pledged as collateral for any FHLB advances drawn by us. At September 30, 2010,
we owned 47,494 shares of the FHLBs $100 par value capital stock, compared to 51,160 shares at both December 31, 2009 and September 30, 2009. No ready market exists for such stock, which is carried at cost.

We also had unsecured federal funds lines in the aggregate amount of $41 million available to us at September 30, 2010 under which
we can borrow funds to meet short-term liquidity needs. At September 30, 2010 we had no borrowings outstanding under these federal funds lines. Another source of funding is loan participations sold to other commercial banks (in which we retain
the servicing rights). We believe that our liquidity sources are adequate to meet our operating needs.

Net cash provided by
operations during the nine months ended September 30, 2010 totaled $6.7 million, compared to net cash provided by operations of $5.1 million for the same period in 2009. Net cash used in investing activities totaled $22.5 million for the nine
months ended September 30, 2010, as compared to $73.1 million for the same period in 2009. Net cash provided by financing activities was $38.4 million for the first nine months of 2010, compared to net cash provided of $67.5 million for the
same period in 2009. Cash and cash equivalents at September 30, 2010 were $40.4 million compared to $16.4 million at September 30, 2009.

Capital Resources

Shareholders Equity

As of September 30, 2010, our total shareholders equity was $87.6 million (consisting of common shareholders equity of
$70.4 million and preferred stock of $17.2 million) compared with total shareholders equity of $84.4 million as of December 31, 2009 (consisting of common shareholders equity of $67.3 million and preferred stock of $17.1 million).

Common shareholders equity increased by approximately $3.1 million to $70.4 million at September 30, 2010 from
$67.3 million at December 31, 2009. We generated net income of $2.0 million, experienced an increase in net unrealized gains on available-for-sale securities of $2.5 million and recognized stock based compensation of $28 thousand on incentive
stock awards. We declared cash dividends of $598 thousand on our common shares or $0.21 per share during the first nine months of 2010 and dividends and accretion of discount of $673 thousand on preferred shares.

We are subject to various regulatory capital requirements administered by our federal banking regulators. Failure to meet minimum capital
requirements can result in certain mandatory and possibly additional discretionary actions by these regulators that, if undertaken, could have a direct material effect on our financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, we must meet specific capital guidelines involving quantitative measures of our assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. Our capital amounts
and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

Quantitative measures established by the FDIC to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of Total and Tier 1 capital to risk-weighted
assets and of Tier 1 capital to average assets (each as defined in the regulations). As a bank holding company, we also are subject, on a consolidated basis, to the capital adequacy guidelines of the Federal Reserve Board. The capital requirements
of the Federal Reserve Board are similar to those of the FDIC governing the Bank. As of September 30, 2010, we and the Bank met all capital adequacy requirements to which we are subject.



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As of
September 30, 2010, we experienced a decrease in our capital ratios when compared to the periods ending December 31, 2009 and September 30, 2009. This decrease is primarily due to an increase in risk weighted assets and a reduction in
capital caused by an increase in disallowed deferred tax assets.

Based on the most recent notification from the FDIC, the
Bank is well-capitalized under the regulatory framework for prompt corrective action. To be categorized as well-capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table
below. There are no conditions or events since that notification that management believes have changed the Banks category.

Our and the Banks actual capital ratios are presented in the following table:



|                                         |  |                                                                    |       |   |                                                   |   |      |          |  |  |             |   |  |  |       |  
|---------------------------------------- |  | ------------------------------------------------------------------ | ----- | - | ------------------------------------------------- | - | ---- | -------- |  |  | ----------- | - |  |  | ----- | -
|                                         |  | To be well capitalizedunder promptcorrective actionprovisionsRatio |       |   | Minimum requiredfor capitaladequacypurposes Ratio |   |      | OurRatio |  |  | BanksRatio |  
|                                         |  |                                                                    |       |  
|As of September 30, 2010:                |  |                                                                    |       |   |                                                   |   |      |          |  |  |             |   |  |  |       |  
|                                         |  |                                                                    |       |  
|Tier 1 Capital (to Average Assets)       |  | 3                                                                  | 5.00  | % |                                                   | 3 | 3.00 | %        |  |  | 8.79        | % |  |  | 6.85  | %
|                                         |  |                                                                    |       |  
|Tier 1 Capital (to Risk Weighted Assets) |  | 3                                                                  | 6.00  | % |                                                   | 3 | 4.00 | %        |  |  | 12.38       |   |  |  | 9.65  |  
|                                         |  |                                                                    |       |  
|Total Capital (to Risk Weighted Assets)  |  | 3                                                                  | 10.00 | % |                                                   | 3 | 8.00 | %        |  |  | 13.64       |   |  |  | 10.91 |  
|                                         |  |                                                                    |       |  
|As of December 31, 2009:                 |  |                                                                    |       |   |                                                   |   |      |          |  |  |             |   |  |  |       |  
|                                         |  |                                                                    |       |  
|Tier 1 Capital (to Average Assets)       |  | 3                                                                  | 5.00  | % |                                                   | 3 | 3.00 | %        |  |  | 9.59        | % |  |  | 7.53  | %
|                                         |  |                                                                    |       |  
|Tier 1 Capital (to Risk Weighted Assets) |  | 3                                                                  | 6.00  | % |                                                   | 3 | 4.00 | %        |  |  | 12.77       |   |  |  | 10.03 |  
|                                         |  |                                                                    |       |  
|Total Capital (to Risk Weighted Assets)  |  | 3                                                                  | 10.00 | % |                                                   | 3 | 8.00 | %        |  |  | 14.02       |   |  |  | 11.28 |  
|                                         |  |                                                                    |       |  
|As of September 30, 2009:                |  |                                                                    |       |   |                                                   |   |      |          |  |  |             |   |  |  |       |  
|                                         |  |                                                                    |       |  
|Tier 1 Capital (to Average Assets)       |  | 3                                                                  | 5.00  | % |                                                   | 3 | 3.00 | %        |  |  | 9.81        | % |  |  | 7.74  | %
|                                         |  |                                                                    |       |  
|Tier 1 Capital (to Risk Weighted Assets) |  | 3                                                                  | 6.00  | % |                                                   | 3 | 4.00 | %        |  |  | 13.16       |   |  |  | 10.39 |  
|                                         |  |                                                                    |       |  
|Total Capital (to Risk Weighted Assets)  |  | 3                                                                  | 10.00 | % |                                                   | 3 | 8.00 | %        |  |  | 14.37       |   |  |  | 11.60 |  

Item 3. Quantitative and Qualitative Disclosures 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.

The
Companys market risk arises primarily from interest rate risk inherent in its lending and deposit-taking activities. The structure of the Companys loan and deposit portfolios is such that a significant decline in interest rates may
adversely impact net market values and net interest income. The Company does not maintain a trading account nor is the Company subject to currency exchange risk or commodity price risk. Interest rate risk is monitored as part of the Companys
asset/liability management function.

Management does not believe there has been any significant change in the overall
analysis of financial instruments considered market risk sensitive, as measured by the factors of contractual maturities, average interest rates and estimated fair values, since the analysis prepared and presented in conjunction with the Form 10-K
Annual Report for the fiscal year ended December 31, 2009.



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Item 4. Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures in
accordance with Rule 13a-15 of the Securities Exchange Act of 1934 (the Exchange Act). Based on their evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report,
our disclosure controls and procedures were effective to provide reasonable assurance that we are able to record, process, summarize and report in a timely manner the information required to be disclosed in reports we file under the Exchange Act.

We review our disclosure controls and procedures, including our internal control over financial reporting, on an ongoing
basis and may from time to time make changes aimed at enhancing their effectiveness. In connection with the above evaluation of our disclosure controls and procedures, no change in our internal control over financial reporting was identified that
occurred during the quarterly period ended September 30, 2010, and that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

None.

Item 1A. Risk Factors

The Dodd-Frank Act and related
regulations may adversely affect our business, financial condition, liquidity or results of operations.

The Dodd-Frank
Wall Street Reform and Consumer Protection Act of 2010 was enacted on July 21, 2010. The Dodd-Frank Act creates a new Consumer Financial Protection Bureau with power to promulgate and enforce consumer protection laws. Smaller depository
institutions (those with $10 billion or less in assets) will be subject to the Consumer Financial Protection Bureaus rule-writing authority, and existing depository institution regulatory agencies will retain examination and enforcement
authority for such institutions. The Dodd-Frank Act also establishes a Financial Stability Oversight Council chaired by the Secretary of the Treasury with authority to identify institutions and practices that might pose a systemic risk and, among
other things, includes provisions affecting (1) corporate governance and executive compensation of all companies whose securities are registered with the SEC, (2) FDIC insurance assessments, (3) interchange fees for debit cards, which
would be set by the Federal Reserve under a restrictive reasonable and proportional cost per transaction standard, (4) minimum capital levels for bank holding companies, subject to a grandfather clause for financial institutions
with less than $15 billion in assets, (5) derivative and proprietary trading by financial institutions, and (6) the resolution of large financial institutions.

At this time, it is difficult to predict the extent to which the Dodd-Frank Act or the resulting regulations may adversely impact us. However, compliance with these new laws and regulations may increase
our costs, limit our ability to pursue attractive business opportunities, cause us to modify our strategies and business operations and increase our capital requirements and constraints, any of which may have a material adverse impact on our
business, financial condition, liquidity or results of operations.

In addition to the risk factor mentioned above and other
information set forth in this report, you should carefully consider the factors discussed in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2009, which could materially affect our
business, financial condition or future results. The risks described in our Annual Report on Form 10-K and mentioned above are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently
deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.



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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults upon Senior Securities

None.

Item 4. Removed and Reserved

Item 5. Other Information

None.

Item 6. Exhibits

An Exhibit 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.



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SIGNATURES

In accordance with the requirements 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.



|                        |  |  |  |                   |  |                                 
|----------------------- |  |  |  | ----------------- |  | --------------------------------
|.                       |  |  |  | ECB BANCORP, INC.
|                        |  |  |  | (Registrant)     
|                        |  |  | 
|Date: November 12, 2010 |  |  |  | By:               |  | /s/    A. Dwight
Utz            
|                        |  |  |  |                   |  | A. Dwight Utz                   
|                        |  |  |  |                   |  | (President & CEO)               
|                        |  |  | 
|Date: November 12, 2010 |  |  |  | By:               |  | /s/    Thomas M.
Crowder        
|                        |  |  |  |                   |  | Thomas M. Crowder               
|                        |  |  |  |                   |  | (Executive Vice President & CFO)



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EXHIBIT INDEX



|               |  |                                                                            
|-------------- |  | ---------------------------------------------------------------------------
|Exhibit
Number |  | Description                                                                
|               | 
|31.01          |  | Certification of Chief Executive Officer required by Rule 13a-14(a)        
|               |  | (furnished herewith)                                                       
|               | 
|31.02          |  | Certification of Chief Financial Officer required by Rule 13a-14(a)        
|               |  | (furnished herewith)                                                       
|               | 
|32.01          |  | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350
|               |  | (furnished herewith)                                                       
|               | 
|32.02          |  | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350
|               |  | (furnished herewith)                                                       



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